ECONOMIC VIEWPOINT: Barbados’ debt situation explained
THE Barbados Government is not borrowing too much, says Dr. Kevin Greenidge, Government’s Chief Economic Adviser.
He made the comments while responding to queries from Business Monday whether external borrowings are becoming excessive and if the economy will be in a position to earn sufficient foreign exchange to repay external loans.
Over the last two weeks, foreign loans amounting to approximately Bds$308 million were announced by the lenders, causing some speculation about the pickup in external borrowings.
One of those loans, however, is the $48 million in financing under the Barbados Economic Recovery and Transformation (BERT) programme Barbados has with the International Monetary Fund. The other two are from the European Investment Bank and the World Bank.
Putting the country’s debt situation in context, Dr. Greenidge recalled that prior to the onset of COVID-19, Barbados’ debt-to-GDP ratio was 176 per cent. It fell from that amount during the BERT to 117 per cent of GDP at March 2020.
“As you know, it has increased over the pandemic period to 153 per cent of GDP by March 2021,” he explained.
The Adviser remarked further that of the 36 percentage points increase in the ratio, only five percentage points can be related to an increase in the stock of debt or net new borrowings.
The remaining 31 percentage points came about from the decline of GDP.
The Government official pointed out that the recent loan of $200 million from the World Bank is to assist with the COVID impact and is about two percentage points of GDP.
“So it means that over the pandemic period, net government borrowing is about seven percentage points of GDP,” he maintained.
Dr. Greenidge said that the second thing to note is that all countries borrow to develop and to grow their economies. However, he reasoned that prudent policy behaviour requires that “you borrow at rates that would allow you to grow your economy and repay the debt without much stress”.
The Economist recalled that at the end of 2017 and up to the start of the BERT programme, Government was paying up to 13 per cent interest on borrowed debt whereas other countries were borrowing larger amounts at between one per cent and two per cent.
The average interest rate on borrowings under the BERT is between one per cent and two per cent. Indeed, all loans from the IMF were around one per cent or less and this recent loan from the World Bank is at one per cent.
“Economics 101 would tell you that once the economy grows at a rate equal to that of the interest rate on the debt, then you would have no issue repaying that debt,” he pointed out.
The Adviser went on, “This is why we must focus on getting economic growth. Remember that the debt-to-GDP ratio is literally the stock of debt divided by GDP (the size of the economy), so since the GDP contracted by almost Bds$2 billion during the pandemic, the debt-to-GDP ratio will automatically increase because the denominator is smaller.”
He indicated that it is important to understand this because “once we get growth going, the ratio will automatically decrease because the GDP will be increasing”.
So the stock of debt is not the problem. It went from $12,380 million at the end of March 2020 to $12,922 million at the end of March 2021, even though the GDP ratio went up 36 percentage points, so clearly growth is the problem.
“So I can tell you that at the end of May 2021, the stock of debt actually fell to $12,836 million because Government paid off some debt.
“So focus on getting economic growth and the ratio will take care of itself,” he added.