Barbados’ Economy Continues to Grow
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DEBT CONCERN
Interest rates on international loans up by as much as 400 per cent
By Shawn Cumberbatch
shawncumberbatch@nationnews.comGovernment’s debt payments have increased by millions of dollars following a surge in international interest rates linked to loans secured during the COVID-19 pandemic.
It is a development that Prime Minister and Minister of Finance Mia Amor Mottley and Central Bank Governor Dr Kevin Greenidge find concerning, with both flagging the issue in recent days.
Barbados borrowed money from multilateral development banks including the International Monetary Fund (IMF), World Bank, Inter-American Development Bank (IDB), CAF the Development Bank of Latin America, and the Caribbean Development Bank as Government sought budget support when its revenue plummeted during the pandemic.
However, while the interest payments on these loans averaged one per cent, they have increased by between 200 per cent and 400 per cent in some cases, officials said.
The Central Bank revealed in its first quarter economic review that “for the fiscal year ending March 2023, interest payments were $150.3 million higher due to rising interest rates on external floatingrate loans and the step-up feature (higher interest payments at periodic intervals) of the restructured domestic bonds”.
The Prime Minister raised the issue during a recent Fireside Chat discussion hosted by The Rockefeller Foundation in the United
States.
“I was looking at my interest costs alone and last year for my loan for COVID, which I had to beg the World Bank for, and get it as exceptional access because I’m a middle income country whose income is too high, but China is a low-income country,. . . my interest rate on that loan has gone from 1.09 per cent to 5.48 per cent this year. Now, that’s a 400 per cent increase in one year,” Mottley said.
“My loans at the IMF have gone from 1.077 per cent to 3.916 per cent., my loans at the Latin American Development Bank have gone from 1.8 [to] 1.9 per cent to a range of 4.47 to 6.96 per cent, and not to be outdone, at the Caribbean Development Bank, they’ve gone from 3.3 to 4.9 per cent.
“I don’t believe that there’s anybody who has done this. . . increase of interest rates on existing loans as an act of wickedness, but they have done it unconsciously, and they have allowed us to have to face increases of two [hundred] to 400 per cent in interest rates, not on new loans but on existing loans, existing loans where the old interest rates were guaranteeing them a rate of return and profitability,” she lamented.
Greenidge, who said borrowing from multilateral banks rather than going to the international capital market generally was still the place “where you get the most bang for your buck”, also highlighted the higher interest rates challenge during his first review of the economy.
“Those [interest] rates can rise and the multilateral development banks have to be aware of the impact they have on the same countries they are trying to help. So for example, we had gotten money from
the World Bank [and] IDB to help with recovery. So you got money from IDB to help with our recovery during a crisis and you got them at one per cent average,” he said.
“Those are tied to LIBOR, the bank rate, and so as the [interest] rates in the market rise, we are finding that our [interest] rates are rising on the old debt that you borrowed in a time of crisis, which from a development point of view doesn’t make much sense.”
The Governor said there was a “need to start to think about how development banks and institutions would lend during crisis time, because you don’t want the same funds you lend to become an issue later, and that is something we will start flagging with the international community”.
Greenidge stressed that despite this challenge, Barbados’ debt was sustainable with the debt to GDP ratio falling to 119.6 per cent in 2022/2023 as the economy recovered.
The Central Bank’s latest data outlined that Government’s debt interest payments totalled $549.3 million in the recently-ended 2022/2023 financial year, compared with $398.9 million in the prior financial year.
Interest on domestic debt – $353.3 million was the largest component in the last financial year, with external interest payments, which are paid in foreign currency, totalling $196 million in the same period.
Source: Nation -
Is this concern REALLY about Debt? or is it more about the financial maturity that is needed to read and understand the contracts that we sign? …or is it competence that is of concern
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I congratulate our honourable government for this great economic growth and wish them well on May Day, the Barbados Liberal Party’s day of action.
Tron, Herald of the New Republic
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Dey laughing at weee.
“Interest payments were $150.3 million higher due to rising interest rates on external floating-rate loans and the step-up feature of the restructured domestic bonds”
The GoB CREATED the restructured Bonds? They had to know exactly WHEN and the COST of the step-up features. Hence to attribute higher payments, THAN COULD HAVE BEEN PROJECTED, is a bold faced misrepresentation.
I have stated elsewhere, the projections for the forthcoming year ’23-24 are TOO LOW in terms of Debt servicing costs. While I can appreciate getting caught off-guard by rising rates in ’22-23 (so did SVB and Republic Bank???), come Projections for the current year, one had to know rates were higher and STAYING THERE for the length of the projected period.
It is shocking, that after the CBB Quarterly review, 2 days later, the CBB posted an Outlook for the Barbados Economy
http://www.centralbank.org.bb/news/article/11257/outlook-for-the-barbados-economy
And NOWHERE therein, is the risk of higher interest rates even mentioned?
At the level of borrowing that can financially wipe out 50,000 tourist arrivals in one swoop?
Subsequently, can we expect NOT TO HEAR next year that interest rate hikes caused an “unprojected expense”? That they have been fully accounted for in ’23-24 projections.
Or are the projections being wilfully misprojected, such that computed outcomes are “consistent with BERT 2022″ to keep that fund line open?
Kudos at least, for publicly acknowledging the massive impact these interest hikes will, and have had. This is the flip side of getting nuff money at the ‘lowest possible rate”, when those rates double, triple and quadruple, and you have committed yourself to the variable rate regime. -
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Challenges ahead for the economy
by ANTHONY WOODON WEDNESDAY, April 26, Barbadians were treated to a very optimistic picture of the performance of the economy by Central Bank Governor Dr Kevin Greenidge, in his review for the first quarter of 2023. In his usual upbeat style, he noted that the economy had fully recovered from the pandemic slump and was poised for growth of between four and five per cent for 2023.
Recall that the impact of the COVID-19 pandemic was devastating on the economy. It shrunk by close to 20 per cent (or $2.5 billion in output) between March 31, 2020, and September 30, 2021. The treasured tourism sector was virtually decimated during that period with restrictions placed on overseas travel.
When the restrictions were lifted, it was expected that the pentup demand for travel would result in a resurgence of the tourism industry. This rebound in the sector would naturally lead to a reversal of the performance of the economy, given tourism’s strategic importance to the Barbadian economy. Indeed, the performance of the economy is inextricably linked to that of the tourism sector.
A review of the statistics from the Central Bank indicates that tourism arrivals declined from 712 946 in 2019 to 140 833 in 2021. The resurgence in the sector in 2022 saw visitor arrivals climbing to 442 576 during the year. In the case of in transit cruise arrivals, the decline was from 686 813 for 2019 to 69 999 for 2021 before rebounding to 250 527 last year.
Tourist arrivals double
As expected, the upward trend in tourism continued during the first quarter of 2023 (the peak period for the sector). As noted by Dr Greenidge, for Quarter 1, 2023, compared to Quarter 1, 2022, there was an increase of 92 000 tourist arrivals or a doubling. An important point to note, as alluded to by the Governor, is that despite the encouraging growth in the tourism sector during the last five quarters, arrivals have recovered to only 78 per cent of its peak pre-pandemic level in 2019.
This performance does not compare favourably with many of Barbados’ regional competitors, for example, Jamaica, Grenada, St Lucia and Antigua, which surpassed pre-pandemic levels of arrivals in 2022 and are enjoying new record levels in 2023. Thus, the challenge for the tourism planners in Barbados is to maintain the momentum in the industry in order to ensure the 2019 peak level of performance can be surpassed in the near future. This is a challenging objective given the excessive cost of airline tickets, challenges with airlift, low value of the pound relative to the US dollar, and the high (relative) cost of a vacation package in Barbados. It is extremely important that Barbados closes the gap in the performance of the tourism sector with our regional competitors.
Dr Greenidge rightly acknowledged that the growth in the nominal gross domestic product (GDP) was influenced by the inflationary conditions existing in the last two years. In periods of persistent high inflation, a more appropriate measure for comparative purposes is
real gross domestic output. Nominal GDP reached $11.4 billion in 2022 compared with the pre-pandemic level of $10.6 billion in 2019. However, when adjustments are made for price increases, the figures are $7.6 billion and $8 billion, respectively. Thus, despite the nominal growth in GDP of an estimated ten per cent in 2022, the economy was $400 million smaller compared to 2019 in real terms.
An aspect of Dr Greenidge’s presentation, which was received with some pessimism, was the revelation that the strong recovery in the economy (using nominal GDP rather than real GDP) is reflected in an unemployment rate of 7.2 per cent on December 31, 2022, the lowest official rate since September 2007.
He also noted that at the height of the pandemic, most people took between three months and a year to find a job, compared to now when most jobs are found within less than three months. The latter statement is rather vague and will be questioned by most Barbadians, given the plight of jobseekers and the paucity of employment opportunities to match the qualifications and expectations of some individuals.
As someone trained in economics and having a great appreciation for economic statistics, I must comment on this announced unemployment rate of 7.2 per cent. As mentioned above, the real GDP in 2022 was smaller compared to 2019, despite the nominal GDP being larger in 2022 compared to 2019. This means that the nominal GDP, which is the product of prices and quantity or output, was influenced more by price increases in 2022 compared to 2019.
It is accepted that the output variable in the nominal GDP calculation (rather than the price variable) should have correspondence with employment; that is, the output variable should have a positive relationship with employment. Thus, with the nominal GDP for 2022 being influenced more by price increases (rather than output increases) compared to 2019 and the tourism sector in 2022 recovering to only 78 per cent of the prepandemic peak performance in 2019, the 7.2 per cent rate in 2022 has to be questioned. Why is the unemployment rate in 2022 reflecting that thousands more workers were employed in 2022 compared to 2019? Where were these workers absorbed in the economy if not in the tourism sector? How is it possible that such a surge in employment occurred in 2022 when the number of persons seeking welfare assistance of varying types increased in 2022? How can the employment situation be so impressive when the reality on the ground is that there continues to be a worrying level of dispossession and poverty in the country? The answers to my questions might be found in the methodology used to determine the unemployment rate. Thus, it would be useful for Dr Greenidge to share the details of the methodology with the public, given the obvious scepticism surrounding the realism of the announced rate. While the continued growth in the economy is welcomed, we should examine the tradeoffs in achieving this improved macroeconomic performance. First is the continued accumulation
of debt mainly from external sources. Second is the widening current account deficit, which is financed partly through high external borrowing. Third is the deterioration in social conditions as the Government focuses on meeting the quantitative targets in the International Monetary Fund-supported Barbados Economic Recovery and Transformation (BERT) programme.
Not out the woods yet
Some informed commentators have noted that the Central Bank Governor should temper his excitement about the economy since we are not out of the woods yet. Their assessment of the situation is justified given that real GDP in 2022 is $400 million below the 2019 figure and the challenging external economic circumstances that continue to impact the Barbadian economy. Also, the recent retrenchment of about 3 000 workers from the two extended short-term Government programmes, plus the anticipated retrenchment of hundreds more from state-owned enterprises (SOEs), with the delayed implementation of the restructuring programme for the SOEs, will have a dampening impact on aggregate demand which will depress economic growth.
The policymakers will be challenged further with the pool of workers seeking employment boosted by the thousands of young people exiting secondary and post-secondary educational institutions in a few months. Also, measures in the second BERT programme, which are directed at the Government achieving its primary surplus targets, will have adverse social and economic implications.
While we welcome the “good news” about the performance of the economy, driven mainly by the resurgence of the tourism sector, the road ahead will be challenging.
Anthony Wood is a former minister of agriculture in a previous Barbados Labour Party administration. The above article was submitted as a letter to the Editor.Source: Nation
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HOW TO SOLVE THE 2 X 3 ISLAND MONKEY PROBLEM WHILST CUTTING DOWN ON MEAT BILL.
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Interest costs ‘may hinder growth’
Barbados’ increased debt payment following a surge in international interest rates is likely to have a significant impact on development plans over the next fiscal year.
Additionally, economist Professor Justin Robinson, said Government would be well advised to strike a better balance between its foreign and domestic financing.
“Interest costs were forecast at 15.70 per cent of total Government expenditure for the 2023/2024 financial year, up from a low of 8.80 per cent in 2019 after Barbados’ Sovereign Debt Restructuring exercise in 2018. Hence, the interest rate hikes impose a significant challenge for Barbados’ public finances as debt service draws funds away from other developmental expenditures,” Robinson said.
He also noted that the moral suasion argument put forward by Government was not likely to reverse current fortunes.
“The Government has spoken to the “immorality” of these rate increases on loans from developmental institutions as distinct from loans sourced on private capital markets, and the urgent need for relief to developing countries facing higher than expected debt service costs. This
is an interesting argument, and one wishes the Government well in this campaign as any relief from these high rates will be welcome. However, I fear this will be an exceedingly difficult battle to win,” he said.
The country was recently informed of a sharp increase in the interest costs to the tune of approximately $150 million, on Barbados’ foreign debt in this financial year.
It has since been explained that the rate increases were attributed to a raise in the London Inter-Bank Offer Rate (LIBOR).
This benchmark serves as a base rate for many loans in financial markets.
Robinson explained that the immediate cause of these sharp increases in interest rates was the attempt by major central banks around the world to reduce inflation by raising their own benchmark rates such as the Federal Funds Rate in the United States. The Federal Funds Rate currently stands at 5.08 per cent, after the latest hike by the US Central Bank on May 3, 2023, compared to 4.33 per cent at the same time in 2022 and 0.07 per cent in 2021. The Federal Funds rate last exceeded five per cent in 2006.
The economist argued that the shift in Barbados’
financing mix and debt profile over the last five years towards greater reliance on foreign debt means that the fluctuations in global benchmark rates such as LIBOR and Secured Overnight Financing Rate (SOFR), have more significant implications for Barbados and debt service costs than ever before.
“As is often said in Financial Economics there is no free lunch. Inflation has exploded, benchmark interest rates and the cost of funds for these multilaterals has also exploded. The cheap loans, while still the cheapest international money around, have gotten rather more expensive and must be serviced in foreign currency.
“The reality is that benchmark rates rise and fall. Foreign loans are indexed to these rates and over the long maturities of these loans, there will be many interest rates cycles. Some will be in our favour and some will not. Such are the vagaries of global financial markets and it underscores the need for a return to a normal domestic capital market and a re-balancing of the mix between domestic and foreign financing,” Robinson stressed. (CLM)
Source: Nation -
@ David
Any reason why you choose to always quote Robinson, rather than say Howard? …who has been saying this all along? (At least Howard did not expose his ineptness on so many high level Boards etc…)
…not to mention Bushie – whose basic household economics CLEARLY tell us that spending more than we are earning is a SURE PATH to poverty and serfdom.Only a jackass can seriously think that ‘developmental challenges’ can be solved by access to soft loans…
and only a brass bowl JA would borrow such funds on the HOPE that interest rates would remain low….What hinder what growth what??!!
Boss…
Our asses are effectively grassed…. -
@Bush Tea
The Blogmaster posted a Nation newspaper article. There are other occasions when other individuals are quoted.
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Boss…
Any opportunity to put some licks in a CaveHill economist’s (whatever the Hell THAT is) donkey – will be taken by the Bushman… LOLIf the Blogmaster finds himself in the way, then woe betide HIS burro…
Bushie does NOT judge by academic, mumbo -jumbo, shiite words written AFTER every Tom Dick and Mike have already publicly pontificated…. BUT by actual performance, .. when he was a ‘big-up’ at the Central Bank, NIS etc.
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Forgive me if I am wrong.
Mr Ralph Jemmott gave an excellent analysis of the “Missions” statement to nowhere, but I did not see it reproduced on BU.I am on standby to defend the blogmaster if he is being messed with. On the other hand if he is wearing his pink party panties …
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Straughn: Debt on the decline
BARBADOS’ DEBT, both local and international, is on a downward trajectory and most of the targets set for 2035 are still within reach, says Minister in the Ministry of Finance and Economic Affairs Ryan Straughn.
However, the country’s foreign reserves of $3.2 billion will take a slight hit later this year when most of the projected capital works projects pick up steam, the economist told the House of Assembly yesterday.
Straughn made the disclosures while piloting the Barbados Optional Savings Scheme (BOSS Plus) (Amendment) Bill, 2023. It embodies a clause within the issuance of the special bonds that protect the investment should Barbados have to deal with natural disasters such as a hurricane, earthquakes or even another public health pandemic.
Those bonds carry a five-year maturity with interest rates that are payable semi-annually or quarterly. The clause will give Government some leeway concerning the payment of the principal for two years.
Education
Straughn explained how Government was using the money it had borrowed on the international market since taking up office in 2018, noting that it was not just racking up debt, but it had been widely used to fund education at The University of the West Indies (UWI), build a new geriatric hospital,
continue the refurbishing and repair of roads across the island, and import buses and garbage trucks.
“We are not sleeping on the job,” the Christ Church East Central Member of Parliament told colleagues.
“Barbadians can see and feel the difference of this administration. It cannot be said that this group of people is sleeping on the job. We’ve sought every time to respond to the needs of the people.”
Straughn drew reference to the recent revelation that interest rates on international debt could go up by as much as 400 per cent in some instances. The move is expected to cost Government millions to service the debt which was incurred from loans sought during the COVID-19 pandemic.
Reality
He said everything was in hand. “The reality is that when the economy declined by 15 per cent, the Government put together a response package to help families in this country. Where did they think the money came from?” he asked, while noting that representatives of the opposition Democratic Labour Party were giving Barbadians the wrong impression about where the country stood. “Some people are behaving like COVID-19 never happened.”
Straughn noted that money borrowed over the long term had come in quite handy, and was used to stop sewage from flowing in the streets, restarting the payment of tuition fees for students of The UWI, importing a new fleet of electric buses and garbage trucks, and to even top-up the National
Insurance Scheme’s unemployment fund, which had been drained when 30 000 people lost their jobs during the pandemic.
“We had to be practical when it came to restructuring our debt. We know what we have signed. The debt makes a difference to the development of the country.”
Straughn noted that though the clauses in the BOSS Plus bonds were a necessity and it was better to be safe than sorry, he hoped no minister would ever have to trigger them after a serious climatic event in Barbados. (BA)Source: Nation
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Loans bearing fruit
THE FACT that Barbados’ debt is $4 billion less than it was five years ago shows that Government’s decision to originally default on its international debt but to borrow smartly on the international market post 2020, is bearing fruit.
That’s the feeling of Minister of Labour, Social Security and the Third Sector, Colin Jordan.
Jordan made the assertion in the House of Assembly yesterday, as MPs debated the tabling of the Barbados Optional Saving Scheme (BOSS Plus) Amendment Bill 2023, which introduced a special natural disaster clause aimed at providing Government some room to operate should the country be affected by a climatic event.
Jordan said the borrowing by Government in two time-frames, first before COVID-19 hit, then after the height of the pandemic, was proving to be a strategic developmental tool for a country that had been burdened by the non-performance in the economy brought on through mismanagement by the previous political administration.
“Our debt is still $4 billion less than what was left for us. Even after COVID-19, and paying for all those tests and vaccines, building almost a new hospital, building houses, cleaning up ash and paying for tuition fees at UWI,” the minister said.
Jordan, the MP for St Peter and a financial controller by profession, told the Lower House that debt was all about economic
management, and the current political administration had done so maturely and transparently.
Public knowledge
“These loans are all public knowledge. You don’t have to go on the radio and holler hard to get the information. But those in leadership of the Democratic Labour Party need to go to where the information is,” he said, drawing reference to some Opposition members who seemed unaware about the country’s financial positioning.
“Borrowing is something that is used strategically and in a developmental fashion and for the long term,” Jordan added. “We’ve grown up understanding there are times that you have to go to the bank or the credit union, in order to be able to obtain the things for qualitative movement forward.”
He said government was no different, and at stages would have to put itself in debt to aid national development.
“Countries borrow to move themselves forward, to develop their infrastructure. You need to be able to provide transportation, ports, for purposes of education and for health care. Between those two, people have to be looked after. You don’t take up bits of money to build a hospital. You outfit and out of your recurring expenditure you then service the debt,” Jordan argued.
According to Jordan, the Democratic Labour Party unfortunately gives Barbados the impression
that it is a stranger to debt, when such was far from the truth. “They were $18.1 billion familiar with debt. They were very familiar with it. They were paying wages and salaries with borrowed money. That is not an investment. That is not putting money into development that would allow for returns in the future,” he asserted.
He said it was impressive that since finding that $18.1 billion in debt, the current government had brought it down to $14 billion, while still dealing with the challenges Barbados has faced since 2018.
(BA)Source: Nation
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Wouldn’t touch those bonds even with your money 🤑🤑🤑
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