Short-term debt as a percentage of long term debt grew by 25 per cent over the last fiscal year. What that means is that there is a heavy reliance on short-term debt as we have been hearing about.
It shows that there is almost a reversal in terms of new long-term debt coming into government versus short-term debt. Short term debt is needed so that the Government can finance current expenditure and pay it back out, money coming in and money going right back out into wages, but, more importantly, as soon as tax revenue comes in it’s not even enough.
Tax revenue is hardly on a monthly basis able to cover wages in Government so therefore guess where wages are paid from, Treasury issues.
Given that the Central Bank is the only domestic entity to have increased their holdings in Treasury Bills over the last fiscal year, while commercial banks and other financing agencies pulled back, including the National Insurance Scheme that we got so concerned about – it pulled back by about $130 million. It means there is a dangerous situation ahead of us.
Short-term debt does two things. It’s a very expensive form of debt, but also it means that you have no space to reinvest, on top of the fact that your interest costs are your highest costs to begin with.
It means you hardly have any cash resources to dedicate to anything really and you have to probably borrow again and continue to borrow just to finance activity on the ground. And given that Barbados has a very high social safety net, much celebrated in the Caribbean as amongst the highest, probably closely challenged by The Bahamas, you realise that that safety net situation will be severely challenged especially in the short term.
And remember, Government is trying to correct it by cutting wages, and grants and subsidies and transfers and all of that beautiful stuff, but not the interest costs, which really is the more dangerous thing.
I understand why Government is trying to borrow in the short run because ironically that controls the interest costs, but the problem is that you are seeing slowing but surely that there is preference for longer term debt instruments but short maturities.
The Credit Suisse loan for instance, which in my mind is a very expensive loan, and unlike what the Governor [of the Central Bank of Barbados Dr DeLisle Worrell] has said, I thought it was necessary considering the confidence within the country and confidence that the ratings agencies might have.
Government is relying more on this short term debt than its long-term debt but yet the likelihood of it being able to repay the short term debt without infringing on salaries, without being able to reconcile means that there are severe challenges in convincing not only the international ratings agencies but local investors as well as overseas investors that short term debt is not as desirable as it once was.
• Jeremy Stephen is president of the Barbados Economic Society.
