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Barbados: UAE way or the highway

images-Business-uae_barbados_highway_454416699From Caribbean360

The UAE, which is somewhat westernized, is looking to build relationships worldwide as the Chinese is doing as well says Colin Daniel.

Colin W. Daniel

BRIDGETOWN, Barbados, Thursday February 27, 2014 – Barbados is at one of the most significant cross-roads in our history. Our fiscal deficit due initially to the fallout we experienced after the 2007/08 worldwide financial meltdown has been compounded by the rapid build up of debt required to fund the fiscal deficit. There are choices made by both administrations in the past which have contributed to the situation we are in. I will not be addressing those issues as there are not pertinent to the solution recently proposed by Dr. Estwick.

The following were my initial thoughts which I shared with some of my colleagues on Facebook on the morning of Saturday February 8th when I first saw the article about the proposal in Barbados Today. “I have a couple quick observations. As structured, this loan would create an asset of US$5 billion and corresponding debt of the same amount. He is recommending that we pay down all existing debt as it comes due from these funds. At 4% it adds about US$289 million a year to our debt service cost. However since it would be on deposit with interest paying institutions or invested in series of instruments that match the debt maturity profile of existing debt, the effective borrowing rate is zero. This means that we can immediately cancel the Credit Suisse facility and pay off all existing debt falling due this year and replace that component of our debt with new debt which costs us a maximum of 4% and over a much longer term.”

“Just to be clear, this also means that any debt owed to National Insurance falling due in this period would be settled by this facility and we would have a net inflow of foreign exchange. Based on his (Dr. Estwick) comments earlier this week, we have interest payments of 25% on current expenditure to meet or around US$350 million for this year. This structure adds that amount to our reserves. He indicated amortization of the loan principal was another US$350 million. This structure seems to support his position. It will give the government space to properly restructure the public service and rationalize it in the long run. It would allow for the reduction in the public service through attrition and well as the consolidation of a number of agencies. It would create a positive investment climate and it should ensure that the private sector put money on the table to undertake projects that the public sector should not be involved.”

The strategy as proposed is bold, somewhat counter intuitive since the typical first reaction would be pay off at least all of the outstanding international debt. However, those of us working in the finance and the financial sector in general understand that it is sometimes necessary to restructure and refinance debt to create the capacity to turn our business around.

The following table from the approved estimates for the 2013/14 financial year clearly demonstrates the strain that current debt service places on our country. The $1.3 billion in debt service cost represented 34.3% of the planned expenditure of government for the year.

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