This Business of Public Debt - March 14, 2005

This Business of Public Debt

INTRODUCTION


An issue that you hear a lot about these days is debt, or if you wish to be more technical, “public debt”. The Government, it is said, is plunging the country deeper and deeper into debt. “This is a reckless Government”, is the frequent shout from some quarters.

There are bizarre twists to the alarm bells. An opposition supporter was heard to say “They should re-elect Kenny Anthony so he can pay back the money he borrowed”.

When citizens badly need a service or amenity, they throw caution to the wind and you hear the advice: If the Government doesn’t have the money, why can’t it borrow the money to do it?

In a sense, much of the talk about “debt” reflects the growing sophistication of the public.

It is true that in the past there were shouts that “Government was borrowing too much”, but these were mere shouts without serious debate. Now, we are on the borders of serious debate. Of course, such debates thrive only in a society where the Government encourages tolerance and free expression.

Some of the anxiety about debt also has to do with personal experiences. Some individuals have had difficult experiences with managing their liabilities, so naturally, they extend these experiences to the public domain.

HOW IS PUBLIC DEBT MEASURED?

To properly evaluate our situation, it is useful to understand how public debt is measured. Currently, two systems of measurement are used. The International Monetary Fund, popularly known as the IMF, presents data on the total debt of a country, that is to
say Central Government Debt, as well as other Public Sector Debt such as debt incurred by statutory agencies. On the other hand, the Eastern Caribbean Central Bank prefers to measure only Central Government Debt. In effect, debt figures published by the Central Bank tend to be lower than that of the IMF. Debt figures include both guarantees or contingent liabilities as well as actual borrowed money.

The next point to note is that debt is expressed as a ratio of a country’s Gross Domestic Product. In other words, a comparison would be made between total debt against the Gross Domestic Product. Simply put, the Gross Domestic Product means the total value of goods produced and services provided in a country in any one year. Presently, the Gross Domestic Product of Saint Lucia is EC$2.07 billion or EC$2,070 million. This is essentially the value of goods and services produced within St. Lucia between January and December 2004.

NOTHING TO HIDE

From time to time, journalists ask about the debt figures. But few bother to research the figures. Some actually believe that the Government - I guess, any Government - hides the debt figures, because it fears embarrassment. Nothing is further from the truth, not in Saint Lucia!

There are two authorative sources where the debt figures can be easily obtained. Debt figures are always reproduced in the Annual Estimates of Expenditure. A second source is the Economic and Social Review, presented by the Minister of Finance on the occasion of the Annual Budget Statement, which is freely available on the GIS Website at www.stlucia.gov.lc.

WHERE DOES ST. LUCIA STAND?

Quite recently, an aspiring politician suggested that our neighbours are laughing at us because we are going deeper and deeper into debt. Where does St. Lucia stand in the context of its regional neighbours?

The fact is, up to December 2004, Saint Lucia had the best Debt to GDP ratio among the Independent States of the Caribbean, except Trinidad and Tobago, whose economy is driven by its energy sector - and its abundant natural resource; oil. Let us look at the figures.

Up to December 2003, St. Vincent and the Grenadines had a Debt to GDP ratio of 74.9%, Barbados 84.1%, Grenada 116.7%, Dominica 127.3%, Jamaica 136.4%, Antigua and Barbuda 137.4%, St. Kitts and Nevis 162% and Guyana 189.5%. In the case of Saint Lucia, the Debt to GDP ratio, at December 31, 2003 stood at 62.8%. Surprised? If you are, then that is what happens when you accept, without questioning, the pronouncements of individuals with no known interest in the truth. If this Government has handled the debt portfolio so recklessly, why then, does St. Lucia enjoy the lowest Debt to GDP Ratio among Caricom States, save, as I stated earlier, with the exception of Trinidad and Tobago?

DEBT GDP RATIOS OF COMMONWEALTH CARIBBEAN STATES
 

THE GROWTH OF DEBT

Unquestionably, there has been a steady growth in Saint Lucia’s debt portfolio over the past fourteen years. Here are the figures:

 

In 1990 the Debt to GDP Ratio was 28.4%, in 1991 32.7%, in 1992 35.6%, in 1993 40.8%, in 1994 43.5%, in 1995 42.7%, in 1996 46.8%, in 1997 40.0%, in 1998 41.8%, in 1999 41.4%, in 2000 46.0%, in 2001 49.6%, in 2002 56.2% and in 2003 62.8%.

From these figures you will note that between 1990 and 1996 debt increased by 18.4 percentage points, and from 1996 to 2003 debt increased by 16.0 percentage points. In other words debt rose slightly more sharply between 1990 to 1996/97 when the Opposition was in office compared to the period that this administration has been in office. Indeed, in 1996/97, for example, the U.W.P. Government borrowed approximately EC$196.9 million dollars to finance its budget. Surprised again? After all, you have been told that this is a reckless Government. Watch it, you will be told next that these figures are wrong.

WHY THE INCREASE IN DEBT?

Why, then, has the public debt grown over the years. There are several reasons. Here are some:

Firstly, the amount of aid and grants which St. Lucia receives have steadily declined over the years. St. Lucia has had to replace the loss by borrowing to finance its development.

Secondly, we are simply not generating surpluses in sufficient amounts for re-investment in subsequent years. Relatively speaking, our surpluses are very low.

Thirdly, for years we have had to contend with budget deficits. Budget deficits refer to the amounts by which actual expenses exceed planned expenses. In effect, we actually spend more than we earn.

Fourthly, in some years, budget deficits can be larger than others. This may be due to excessive expenditure or a severe reduction in revenue from taxes. This occurred in 2002 and 2003 following the events of September 11, 2001 and the recession in the World economy.

This Government, as indeed most Caribbean Governments, had to borrow more heavily than usual, to maintain economic activity. Now, we are reaping the benefits of these measures. In 2003 the economy grew by 3.0%, in 2004 by 3.5% and in the last quarter by 5.4%.

ARE WE IN DANGER OF DEFAULTING

The question is frequently asked whether we are in danger of defaulting on our debts. In preparation to meet our debt commitments as and when they become due, we have established what is described as “Sinking Funds” Basically, these are accounts in which the Government deposits specified funds to meet debt payments in the future. As of now, for example, we have seven Sinking Funds, and to date, some $104 million dollars is available, to meet our payments.

Of course, an economy can be wiped out as happened in Grenada with Hurricane Ivan. In that event, problems can be encountered in meeting debt obligations, as indeed as happened in Grenada.

HOT AND COLD

It is understandable that Opposition Parties should feel that an incumbent Government is vulnerable on debt. But this is a subject laced with hypocrisy. The same politicians who shout that Government is not doing “x or y”, shout again when Government borrows to do the “x and y” they complain about. Have you noticed that politicians who complain most bitterly about debt say nothing condemnatory, absolutely nothing, when debt is incurred to finance projects in their constituencies? They suddenly become mute and supportive. The truth is, they can’t have their cake and eat it.

The stark fact is that if this Government had not borrowed there would be no Beausejour Cricket Stadium, no new west coast highway, no Poverty Reduction Fund, no loans to students pursuing higher education, no payment of the huge debt of the SLBGA, no new building for the Ministry of Communications and Works, no new roads for the Tourism Sector, no BERU to provide support to Banana Farmers, no new secondary schools, no new primary schools, no resolution of drainage problems in Castries and Anse La Raye, no Bordelais Correctional Facility to end the security problems we inherited. The list can go on but I will rest awhile.

Are any of these expenditures wasteful and extravagant? You judge.

Do have a great day. God Bless, until next week.

 

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