The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Much of the $256.2m increase in the national debt during the six months to end-December was driven by the Government’s “use” of $232.3m in IMF special drawing rights (SDRs), it has been revealed.

Accessing this financing, which last night drew further fire from the Opposition, helped drive the Central Bank’s share of public sector debt from 7.7 percent at end-June 2022 to 12.4 percent by year-end with SDRs doubling their share to 3.8 percent over the same timeframe.

“Reflecting recent borrowing activity of the central government, the share of SDR denominated debt rose two-fold to 3.8 percent at end-December 2022 from 1.9 percent at end-September 2022,” the Ministry of Finance’s public sector debt bulletin for the 2022-2023 fiscal year’s second quarter revealed. “Meanwhile, the Central Bank’s share of claims on the public sector advanced to 12.4 percent from 7.7 percent at end-June 2022.”

The Bahamas’ total public sector debt stood at $12.387bn at year-end 2022, having increased by $256.2m or 2.1 percent during the six months to end-December 2022. The report makes clear that, with net external debt held by foreign lenders/investors declining by $135.4m during the three months to year-end, an increase in debt held domestically was largely responsible for driving the overall rise.

“Since end-June 2022, domestic debt posted an increase of $400.3m (6.9 percent) to $6.196bn at end-December 2022, which correlated to a 2.4 percentage point gain in share to 56.1 percent of the total government debt. This outcome was primarily explained by the $224.5m accretion to foreign currency domestic debt obtained from domestic sources, which was linked to the $232.3m SDR-denominated facility [that] the Government secured from the Central Bank.” 

The debt report contained a link to a government press release on the International Monetary Fund (IMF) SDR transaction from last month, in which it rejected assertions by the Opposition and others that this constituted “borrowing” or “printing money” as misleading. 

“The Government is not borrowing from the Central Bank and creating money. Instead, the Government is using resources provided by the IMF for a legitimate purpose as outlined by the IMF in its guidance notes on the treatment and use of the SDRs,” the Government said then.

Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment before press time last night. However, Kwasi Thompson, the Opposition’s finance spokesman, seized on what he argued was the discrepancy between the January press release and the public debt report’s reference to “recent borrowing activity” in relation to the SDRs.

Arguing that the report “contradicts” the earlier Ministry of Finance statement, he added: “The report clearly shows that the increase in the Government debt was due to the SDR-tied transaction just as we had claimed all along. Both the Central Bank and the Government are recording it as a loan (government debt) that must be repaid.”

The Government’s use of SDRs, which is tantamount to accessing The Bahamas’ foreign currency reserves, has been surrounded with controversy since it was first revealed by the Central Bank. 

Michael Pintard, the Opposition’s leader, had argued that the transaction potentially breaches Section 21 of the Central Bank Act which sets limits on how much the monetary policy regulator can lend or advance to the Government. It can only make temporary loans that mature within 91 days and have “market-based” interest rates attached, while the amount involved is also capped.

Combined with total issued Treasury Bills, and securities issued or guaranteed by the Government and its corporations, total outstanding loans to the former by the Central Bank cannot exceed 30 percent of the Government’s “average” or “estimated” revenue - a sum around $800m-$900m.

“Reflecting the Government’s recent borrowings, creditor balances for the Central Bank advanced to 14.2 percent of the total ($878.4m) from a nearly stable 8.8 percent in the previous two quarters, and resulted in corresponding lower share for the other creditor groupings,” the debt report said. It added that Central Bank advances due to mature within the next six months, and which either have to be rolled over or repaid, stand at $355m.

John Rolle, the Central Bank’s governor, previously revealed to Tribune Business that the Memorandum of Understanding (MoU) between the monetary policy regulator and Ministry of Finance stipulates that the Davis administration must change the Central Bank Act to facilitate the IMF SDR transaction.

“The Central Bank worked closely with the Government in concluding these arrangements to access the SDRs,” the governor told this newspaper via an e-mailed reply. “Under the MOU there is an undertaking by the Government to amend the Central Bank Act to cover the use of the 2021 allocations.

“As explained in our public release, the assessment of the foreign reserves adequacy has continued to improve given the ongoing recovery in tourism. There is even less uncertainty around the sustainability of the reserves than in 2021. Compared to one year ago, the opportunity cost of not making any use of the SDRs is therefore significantly greater. However, it is not a need that is expressed in terms of foreign reserves adequacy.”

Mr Wilson previously said the MoU would provide the Government with access to cheap foreign currency financing that is an estimated 700 basis points below prevailing market rates.

Based on the $233m valuation presently assigned to the SDRs, he added that this seven percentage point differential could generate close to $20m in annual interest savings for hard-pressed Bahamian taxpayers compared to the likely rates if the Government had to borrow in the international capital markets.

Mr Wilson also argued that the Government’s SDR borrowing was aligned with the IMF’s stated reason for issuing them, which was use for “fiscal purposes”. This is partially backed by the Central Bank’s August 2021 release, which says: “Countries can decide whether policy buffers would be used to increase the flexibility of fiscal and monetary policies, including for pandemic-related deficit financing, debt management operations, promoting external debt sustainability, financial stability or balance of payments needs.”