IN AN IDEAL WORLD, all of the Government debt ought to be purchased by the private sector. In this case, private sector savings would simply be converted into investment in Government debt. The reality is not that straightforward, even when the analysis is confined to local/domestic debt.
A look at the holders of Government debentures, savings bonds and treasury bills shows that the domestic debt is held by a variety of institutions. These include commercial banks, trust companies, the National Insurance Board and insurance companies, among others. This may suggest that the private institutions or citizens hold a significant share of the debt.
However, it must be noted that statutory boards, Government-owned companies and the Central Bank also hold their share of debt. In this sense, it cannot be argued that all domestic debt is purchased from private sector savings.
Typically, public debt in general reflects Government borrowing. These loans/funds have historically been invested in various projects with the major purpose of developing the country’s physical and human infrastructure. From an accounting perspective, these funds are accounted for as capital revenue in the Consolidated Fund.
According to a document entitled The Business Of The Treasury, the loans can be classified as short term and/or long term. The former includes: (a) temporary borrowings from the Central Bank which is the overdraft facility at the bank; b) treasury bills, that is, Government paper issued for three or six months.
Set by legislation
The Treasury’s overdraft facility at the Central Bank is “activated when the balances on the current account are insufficient to cover the total daily cashed payable orders. The maximum balance that can be carried on this account is set by legislation and should not exceed ten per cent of the projected annual current revenue [of the Government].
Interest is paid on this account when the balance on the account exceeds the balance on the Accountant General’s Special Deposit”.
The other short-term borrowing is treated as the Central Bank’s holdings of treasury bills. The rate is based on the rates tendered by prospective purchasers and the rate that is in the best interest of the Government is chosen. This really means the lowest rate given that the interest on treasury bills is paid from the Consolidated Fund.
Therefore, when the Central Bank bid down the treasury bill rate in the last quarter of 2014, the sole intention was to reduce the interest cost for the Government. The fact that the Central Bank incurred further loss of income was not important.
Attempt to boost income
Surely, this form of domestic debt held by the Central Bank is not owned by the private sector. Furthermore, where would a bank that is making losses get the money from to purchase almost $420 million in Government treasury bills? Prior to 2011, the bank never held more than an average of $20 million over the course of a year.
Over the years, the local long-term borrowing by the Government has taken the form of debentures, treasury notes and savings bonds. It took decades for the Central Bank to hold $75 million in Government debentures. This amount was held from 2009 to the first half of 2014.
By the end of March 2015, the bank was holding $260.7 million in debentures. In an attempt to boost its income going forward, it would not be surprising if the bank moves to hold less treasury bills and more debentures. Having succeeded in lowering the treasury bill rate last year and therefore reducing the Government’s cost on short term debt, it is in the bank’s interest to shore up its income, thus the switch. In addition, it will not just make a switch but it has to hold even more domestic debt in the form of debentures, given the increasing pressure to finance Government spending that is already in evidence.
As far back as September 2011, commercial banks expressed little or no appetite for debentures in light of their concerns about the future value of money. The issuing of more debentures can only mean that the Central Bank intends to purchase a significant amount. And given the offer of 5.5 per cent on the savings bonds, the long-term interest rate is not in danger of a reduction.
In time, the economic historians will reflect on the post-2008 world recession period in the context of severe policy failure, not just a fiscal perspective, but the role of the Central Bank in prolonging Barbados’ economic recession.
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: [email protected]
