Wednesday, April 24, 2024

WHAT MATTERS MOST: Borrow or not?


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The foreign borrowing policy of the current administration is confusing. Not too long ago, it was announced that there was no need for further borrowing as foreign reserve adequacy was maintained. This was revealed in the April economic Press release of the Central Bank. Yet an announcement was made that approval was granted for the bank to borrow US$200 million.In the annual Estimates document, the public if it wishes is able to see the foreign debt that is to be paid by the Government. Some ten years ago, it would have been known that on June 15, 2010, a payment of US$100 million was to be made to Credit Suisse.The impression was conveyed that the foreign reserves were adequate enough to make the June 15 payment without any real harm. This was always an unbelievable impression to convey. However, a decision to raise double the amount required to make the payment gave the real impression.In recent weeks, the Government hurriedly convened both Houses to seek parliamentary approval to borrow US$100 million from Scotiabank. This unsecured bridging loan will be for a period of three months at an indicative interest rate of 4.65 per cent. There is a provision to roll over the loan for another three months.Therefore within six months, the Government would have to repay the loan and so the situation at June 15 is simply postponed until December 15, 2010. It is expected that by year-end, the Government would return to the market in search of the same loan that was rejected or delayed on grounds of the current turbulence in the international capital market.Apparently, the advice that raising a bond issue in these times would lead to an unacceptably high interest cost was accepted, and this is understandable. What is not understandable is the tremendous uncertainty with respect to whether or not to borrow.Furthermore, what circumstances are expected to change in the international capital market to permit the Government to borrow at rates which are far less onerous in December? There is gathering evidence of financial weakness not only in Greece but across other countries in Europe. It is very likely that the conditions which drove the Deutsche Bank’s advice in May may very well exist in December.If the circumstances do not change markedly over the next six months, the question is what is the Government’s plan B? These are the kinds of issues that should be engaging the attention of the Minister of Finance.The recent hurried session of Parliament may have been unnecessary, since Section 42 of the act allows the Central Bank to be banker and fiscal agent to the Government with the agreement of the Minister of Finance. This effectively allows the central bank to make temporary borrowings from foreign or local sources, without the matter having to go before Parliament until sometime later.What is clear is that the foreign reserves could take a serious lash by the end of this year. Not only is the collective foreign-exchange earning sector underperforming but the failure to raise the loan a second time around would have severe implications for the country’s foreign reserves position.In these circumstances, the expected economic recovery of mid-2011 would be further delayed. The major implication of this is its contribution to an already horrible fiscal position in which the Government finds itself. In addition the impact of CLICO is yet to be truly felt in the Barbados economy and its impact on the Eastern Caribbean is potentially devastating.The Government’s failure to raise the US$200 million bond, for whatever reason, should not be underestimated especially if nothing changes in the international capital market in the near future. In essence, failure to access the bond is one of several potential events that could conspire to threaten a second wave of economic recession, even if there is a temporary halt.
• Clyde Mascoll is a professional economist and former Government minister in the last Barbados Labour Party administration.   


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