By NEIL HARTNELL
Tribune Business Editor
The Government is preparing to increase its short-term borrowing threshold three-fold to 60 per cent, a key Ministry of Finance consultant yesterday conceding this was “a huge jump” for which there was little alternative.
Reforms to the Financial Administration and Audit Act, which have been tabled in the House of Assembly, plan to increase the Government’s “short-term debt limit to 60 per cent of average ordinary revenue”.
The previous limit, set in the pre-independence era by the Public Treasury Bills Act 1959, was “20 per cent or ordinary revenue”, the latter benchmark being an average of several preceding years’ revenue intakes or projections.
The magnitude of such an increase, which is three-fold in percentage terms, again illustrates the fiscal problems facing the Government, and its need for increased short-term borrowing to meet spending commitments already made - largely by the former Ingraham administration.
Michael Halkitis, minister of state for finance, did not return Tribune Business’s calls seeking comment despite a message being left on his cell phone.
However, James Smith, a former minister of state for finance and Central Bank governor, who is now a key adviser to the Ministry of Finance, told this newspaper that the amendments were likely a partial response, at least, to the fact the Government’s short-term credit facilities were still all “maxed out”.
“That is a huge jump. That is large,” Mr Smith said, when informed by this newspaper of the size of the threshold increase. “The question is: What’s the alternative?
“We need the authority to borrow, because the need is already there. In many cases, the expenditure is made or the commitment is made, and there is no other way to meet that unless the limit is increased. There’s no other way to do it, because you might be aggravating another rule.”
And he added: “You recall that all of the short-term facilities have been maxed out, which still remains the case, and the Government still has short-term funding needs.
“What was agreed between the bank and the Government on the overdraft was $100 million, but for the last several years the Government was getting permission to exceed that temporarily. It’s been running for so long that it’s almost a permanent feature.
“This kind of fall-off that we’ve been having over the last several years in terms of revenue performance was not contemplated by legislation. Normally, it would have dipped and corrected in a year or two, but this time it’s kept going year in, year out, and there’s been no automatic adjustment mechanism in there.”
Mr Smith said the Government’s short-term debt consisted of Treasury Bills with 30, 60, 90 and 180 days maturity, an overdraft facility with the Royal Bank of Canada and short-term advances from the Central Bank.
‘The Treasury Bills never work the way they were designed,” he told Tribune Business. “They were supposed to be in lieu of the overdraft, because the rate on the Treasury Bills was lower than the overdraft facility.
“The idea was to issue Treasury Bills at the end of the month to meet the salaries bill, retire them, then re-issue them. But, over the years, they’ve almost become part of permanent financing, as they’re seldom retired.”
Mr Smith said the threshold increase was designed to “provide some additional borrowing room”, and added: “You always need headroom.”
Worryingly, he suggested that some banks may also be reaching their country limits.
But, suggesting that the previous 20 per cent limit was outdated, given that it was set in 1959, Mr Smith said: “Although the size of the Bahamas and its needs have been growing year in, year out, that one has remained the same for a very long time.
“In my view, it should have been tied to GDP. It was a safeguard to tie the borrowing needs to the size of revenue intake.”
Mr Smith said the Government’s fiscal position was “particularly troublesome”, given that the economy was still in recession and that spending was continuing to outstrip revenue intake.
“We’ve got to wrestle with this thing until it’s dried up. It’s a very uncomfortable feeling that things need to be done, we want things to be undertaken, and we’re now relying on a funding flow that’s not coming in to meet those needs.”
Suggesting that the Bahamas’ fiscal woes were long-term and structural in nature, especially on the revenue front, Mr Smith said the Government also needed to more constrained and disciplined in its spending.
“But the real 800 pound gorilla is the tourist expenditure, and that has to be pumped up,”he added.