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WILD COOT: Local debt ‘no concern’

HARRY RUSSELL, [email protected]

WILD COOT: Local debt ‘no concern’

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BARBADIANS SHOULD BE concerned when a Central Bank officer states that “Barbados investment debt is not a problem”. That statement should not be inflicted on the public without a proper explanation. Certainly a local debt can be honoured by local Barbados dollars, but that does not mean that the debt is not a problem, unless you mean that the Central bank could always print money.

Such a statement compounds the apparent lack of understanding of what is happening. You can be borrowing from Peter to pay Paul. It depends on the debt. An understanding of the debt is of grave concern especially when there are problems as to the source of the repayment.

The situation is further compounded by Dr Clyde Mascoll’s article last Thursday, October 27. It is with good reason that the law limits the Central Bank’s accommodation of the Government by way of overdraft to ten per cent of the amount of Government’s expected revenue. Then the Central Bank should not be bypassing the cautionary rule by overuse of bonds and other means. A question arises if the bonds are being provided for on their maturity. More important still is the use of the savings of the country to be held at the disposal of Government.

This then is a part of local debt that the Central Bank should have as a concern. Since the Wild Coot is not an economist, he does not understand these things but as a banker, it deeply concerns him and should concern other bankers. What is happening is that commercial banks pay very little for savings, so that it is not a heavy expenditure.

The banks, however, are not lending but nevertheless have responsibility for the savings. In general, people have not withdrawn their savings from the banks. So the banks are stuck with the savings. (In fact, they make a profit by way of monthly commissions for some.) But more to the point, they put the savings into the Central Bank as against keeping these savings in cash in their vaults.

The Central Bank has these savings as a debt to the commercial banks. These are the savings that the Central Bank has loaned to the Government. The only way today the Government can repay is from taxes or borrowing from the same Central Bank that has facilitated the transfer to the Government in the first place. It is a merry-go-round.

Local debt is a concern if the Central Bank has floated bonds. If there is no or insufficient sinking funds to repay these bonds on maturity, then the debt can only be satisfied by bonds for bonds. I have warned often.

The Central Bank tells us that Government’s policy is to reduce the impact of Barbadian spending on the foreign reserves. The minister of finance specifically stated that it was the reason for the two per cent port tax and local production tax. This has occurred when increases in wages have not been coming for eight/nine years. This is the reason why our reserves are hovering around $900 million in spite of a better tourist season so far for the year and in spite of a lower oil price, the full benefits of which citizens do not see either at the pump or for cooking.

So we are caught in a vicious circle going nowhere and the statement of the representative of the Central Bank only adds fuel to the fire. The situation is also worrying to the commercial banks that are aware of the Government’s dilemma and perhaps are just as appalled at the statement of the Central Bank. They then have no comfort if they are to call on the Central Bank to repay their deposits, either those that are compulsorily as a bank or those that are resting there for lack of investment as loans.

While it has seldom happened in Barbados, the Wild Coot has on more than one occasion witnessed what is known as a “run” on a bank. Our laws guarantee insurance up to $100 000 on each deposit in a commercial bank. If the Government has impacted the savings because they have been used for general expenditure, are we not up the proverbial creek without a paddle?

The most worrying thing is the prospects of growth. Even the 1.3 per cent “tralya” that was held out as hope has now been decreased. In any case, the Wild Coot thinks that that was pie in the sky. Growth is a beacon to an investor. Growth is hope for the youth in the country that there is a future for them.

The statement of the Central Bank shows further that it has lost its rudder and that we are drifting. Of course, it will not answer the question posed as to the provision of a sinking fund for the repayment in 2020 of a US$300 million bond repayable in US dollars. But by then, all of the ministers might have demitted office and in receipt of a pension. 

• Harry Russell is a banker. email: [email protected]