IN THE PAST SEVEN YEARS, a tremendous amount of discussions have taken place in Barbados surrounding the issue of public debt, with the structure of that debt taking on particular significance both within the context of the overall fiscal deficit as well as in relation to the maintenance of the existing exchange rate parity with the United States dollar to which the local currency is pegged.
Of course, if the country continues to run a fiscal deficit, especially on the current side, the government would be left with no choice but to borrow to fill the fiscal gap. This leads to more debt. Higher fiscal deficits, within the context of the Barbadian economy, can also promote current account deficits on the balance of payments, which must be financed by activities on the capital and financial accounts.
Once again, public debt accumulates, only this time, to be financed from external sources. The additional factor in this scenario is that the exchange rate then comes into play. Larger current account deficits on the balance of payments put upward pressure on the exchange rate – pressure that can lead to a devaluation of the local currency if the Central Bank is unable to respond via monetary policy to remove the pressure.
Logically, any borrowing a government does to allow it to cope with rising fiscal deficits can only be done locally or from abroad. At the local level, a government resorts normally to borrowing from the Central Bank, National Insurance Scheme (NIS) and other entities such as commercial banks. In the case of Barbados, most of that borrowing has been concentrated in the first two institutions cited.
Many countries in and outside of the region tend to rely comparatively heavily on financing from their national insurance schemes as opposed to seeking loans from other sources including externally. But, does the fact that that sort of borrowing is pretty common make such practice a comfortable arrangement?
If, for a moment, we in Barbados accept all of the rhetoric coming from the Central Bank and Government, it would be a foregone conclusion that the disproportionate amount of borrowing from local sources, particularly the Central Bank and the NIS, should be embraced by all and sundry given that the main focus of Government’s macroeconomic policies is the protection of the value of the local currency. We already know that continuous borrowing from the Central Bank – a phenomenon known as printing money – has the potential to increase the exchange rate. But what problems or challenges might there be with respect to the unrelenting borrowing from the NIS?
Although not directly related, the answer to that second question can be extrapolated from a recent statement by the Minister of Finance who introduced the NIS to Grenada: “When, as minister of finance, I launched the NIS in April, 1983, after Cabinet’s authorisation, the objectives fell into two broad categories. The first was paramount: to provide for the entire population a financial system or institution which would ensure pensions as well as a wide range of other benefits for all Grenadians. The second objective was to generate a substantial pool of savings for investment within the economy, such that there would be greater GDP growth and employment creation than would be the case without these savings.”
I ask you, fellow Barbadians: are the goals of the NIS in Barbados different from those alluded to in the case of Grenada? If there is consistency in the objectives of both national insurance schemes, then, should the relatively high level of borrowing by the Government of Barbados from the local scheme be considered a matter of grave concern?