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$5bn National Debtnot Necessarily Hit By Latest Bond

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James Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday said the Government’s overdraft had come down to around $65 million, adding that its latest bond issue would not necessarily take the national debt beyond the $5 billion mark.

James Smith, a former minister of state for finance and Central Bank governor, said part of the latest $50 million Registered Stock Issue (BGRS), unveiled on Monday, was earmarked for repaying earlier debt.

As a result, Mr Smith, now a top adviser to the Ministry of Finance, said the net increase in the national debt from this BGRS issue might not be enough for the total national debt to breach the $5 billion mark.

Whether the Government has breached that mark already is open to question, as the prospectus issued to institutional and high net worth investors for the latest $50 million issue reveals that the national debt was already at $4.987 billion at year-end 2012.

This figure included the $592.116 million in contingent liabilities the Government has guaranteed on behalf of public Corporations and agencies, and shows the Bahamas - at least for the short-term- continues to experience a sharp upward trajectory in its fiscal deficits and national debt.

While the latest $50 million BGRS issue, if fully subscribed, would seemingly push the Bahamas well beyond the $5 billion national debt threshold, Mr Smith cautioned that the issue was not so clear-cut.

Pointing out that the issue was likely the first of two equal $50 million tranches, comprising the $100 million in extra borrowing that Parliament had recently given consent for, Mr Smith said part of the proceeds were intended to repay earlier debt.

He suggested some of the targeted $50 million was earmarked for further reducing the Government’s overdraft, which was running close to $200 million when the Christie administration took office in May 2012.

“Remember, the overdraft kicked up to $200 million, but the last time I looked it was down to about $65 million,” Mr Smith told Tribune Business.

If part of the proceeds from the current BGRS issue are designed to further reduce that overdraft, it indicates the Government is attempting to reschedule and reduce its debt servicing costs, replacing more expensive short-term borrowings with cheaper, long-term ones.

Mr Smith, meanwhile, acknowledged that the continued heavy recurrent deficits - with revenues exceeding fixed costs - was again likely to increase the Government’s overdraft.

And, “because we are still dealing with that gap”, the $5 billion national debt threshold would still be breached “in the short-term, the coming months”.

The $5 billion barrier, Mr Smith added, was less important than the continued rate of increase in the national debt and fiscal deficit.

“In the past it might have been psychological, in the sense that ‘Oh boy, $5 billion’, but in the scheme of things and looking at the trends, we know we’re headed that way,” Mr Smith told Tribune Business.

“$5 billion is a 55 per cent debt-to-GDP figure, which for the Bahamas is a worrisome figure, even though it’s below similar countries of a similar size. It’s the reversal of the trend that’s important in our context.”

The former finance minister said the upcoming 2013-2014 Budget was critical for the Government to lay out concrete plans for putting the national debt, and entire public finances, “on a more sustainable basis”.

Calling for “credible plans” to address the Bahamas’ fiscal crisis, Mr Smith said this nation wanted to avoid taking the path Jamaica has already paved.

The southern Caribbean nation’s public finances are in such disarray that 55 cents out of every $1 collected in government revenue is used for debt servicing, while another 25 cents is used to pay public service salaries. That left just 20 cents out of every $1 left for spending on social services, such as education.

“We don’t want to go down that road,” Mr Smith told Tribune Business. “If you increase the quantum of the debt, you also increase the funding of that debt.”

With debt servicing costs consuming more than $200 million of the Government’s annual Budget, that sum excluding principal repayments, Mr Smith said these costs were almost fixed until the size of the national debt was reduced.

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