COLUMN – Risky move
I’d like to thank those of you who read my first column and provided feedback. I will endeavour to answer some of your questions over the coming weeks. As I move around Barbados, I’m always pleased to engage people and welcome the opportunity to listen to your views and comments on things economic. Time may not always be in abundance but I do treasure these brief exchanges with John and Judy Public.
This week, I want to focus on a few issues related to debt. Having offered Barbados TODAY a brief comment on the news that savings bonds issued last week by the Central Bank were fully subscribed in three days, I felt it was sufficiently important to further explore some of the wider issues that might not immediately come to mind. Some of it is slightly technical in nature but bear with me and we shall arrive at the final conclusion on precisely the same page.
Some people have asked me why would anyone want to put $10 million in the Government’s hands right now? My answer may be interpreted as somewhat cryptic as I too am unclear except to say that we all have varying financial objectives which are driven by different risk appetites. The first thing I clarify is that the Government, via the Central Bank, only received $7,624,000 through the issuance of Savings Bonds Series GBSB 75/2015.
Notwithstanding its regular duties of maintaining the money supply in the economy, for me, this is still a lot of money to entrust to a Central Bank that just announced a financial loss in 2014 of some $7.3 million.
This loss meant that the Central Bank had to be bailed out to the tune of $7.8 million by the Government which is not dissimilar to the transfers and subsidies provided to state entities like the Transport Board, NCC and other poorly managed statutory corporations.
In case you are wondering about the closeness in the amounts of the funds raised by the bonds, the financial loss and the bailout money is somewhat of a coincidence.
Despite the coincidence, stop and think about this for a minute. Our Government, having already admitted its cash strapped position, has had to divert funds away from efforts to reduce the fiscal deficit or to improve the economy, perhaps through the provision of greater access to education and even health care, in order to provide financial support to its economic and financial adviser. Imagine that!
No offence to persons with disabilities but this is a sure case of the blind leading the blind. It would be excusable if the Bank had made appropriate investments in technological infrastructure to improve business transactions or some similar venture. No such investment was made and, if it was, then it would be amortized (spread evenly) over its economic life, thereby reducing its impact on current financial performance.
I deliberately go slightly off tangent to develop this next point. Throughout the CLICO financial fallout in Trinidad & Tobago, there is one statement that has become permanently etched or imprinted in my psyche. On February 13, 2009, Ewart Williams, then Governor of the Central Bank of Trinidad and Tobago, stated in a media address: “Based on the un-audited accounts for 2008, the Statutory Fund deficit (measured on the same basis as in the period 2004-2007) has ballooned to $5.1 billion. If this is correct, one interpretation would be that the premium income collected in 2008, and which should have been directed to the Statutory Fund, was otherwise utilized”. I interpret Governor Williams’ statement to mean that they took policyholders monies under false pretence. Why is this important?
Our Government has recently exhibited behaviours very similar to what Governor Williams was referring. I will cite three different examples.
1) As recent as March this year, the Ministry of Finance redirected funds acquired from ANSA Merchant Bank for the restructuring of the sugar industry and instead used such monies to pay the salaries, vacation pay and various other payments at the BAMC.
2) According to the Central Bank, the Government reportedly raised some $35.9 million from the introduction of the Municipal Solid Waste Tax, the proceeds of which, we were reliably told, were to pay SBRC for the operations at Vaucluse in St Thomas. This money has also, presumably, been redirected elsewhere by the Ministry of Finance.
3) Late last year, the Minister of Finance indicated that we are now using sinking funds to help finance the fiscal deficits. Some of you may not be aware of the existence of sinking funds and what they are, so permit me to explain. When any Government issues long term debt instruments (bonds, debentures, treasury notes etc.), the issuance is usually accompanied by the setting up of an account that the said Government would, on a half yearly basis or so, deposit monies for the purpose of repaying the principal in full.
Think of sinking funds like you would a meeting turn. We set aside money every week, fortnight, or month in order to get that lump sum down the road. Imagine it is your turn to receive that piece of change but the person organising the meeting turns says to you “Sorry, but I hosted a party last week and used your meeting turn for catering and entertainment.” The truth is that it doesn’t matter what excuse is given because you still wouldn’t receive what was due to you.
Using sinking funds (monies set aside) to finance Government’s current expenses brings Governor Williams’ statement to mind along with the ANSA loan and solid waste tax. Why is this important again? Just as in the case of CLICO when officials were saying the company is well run and managed and to continue paying your premiums, policyholders and others took that advice in good faith which turned out much to their detriment.
Sinking funds form part of the Consolidated Fund which is a statement of financial position for the Government of Barbados. The civil servants in the Treasury Department do a very good job of preparing monthly statements that show this information. You can go to www.treasury.gov.bb and view these financial statements. Whilst there, you will notice that no statement has been published since March 2013 at the time of writing this article.
For me personally, I believe the Government wouldn’t intentionally default on its obligations but these three examples I’ve cited do not fill me with confidence. The pragmatist in me wouldn’t allow the parting with my hard earned money and give it to a loss making central bank and a cash-strapped Government who don’t do the things they say they will. To make matters worse, there are no recent financial statements for me to consult to determine their creditworthiness.
Government, being cash-strapped, is desperately searching for anyone or anything to tax or borrow money from. The Central Bank, its economic and financial adviser, is in a similar position and recently announced that Government’s domestic debt is unsustainable. This is an incredible statement for a central bank to make and expect people to buy more securities issued by the Government, despite the catchy marketing campaign.
People should do their own due diligence when parting with cash.
Ryan Straughn is a UWI Cave Hill and Central Bank of Barbados trained economist.