BRIDGETOWN, Barbados – If you could buy $1.00 for $0.90 cents, would you? Today, Barbados is offering that deal to anyone willing to risk buying its heavily discounted external debt.
Of course, there is a reason for that discount. In the first 40 years of Barbadian independence, annual public revenue was exceeded by public spending just four times. By contrast, in the last 10 years, spending has been less than revenue only once. Result: public debt is spiralling and the price of Barbados bonds is being marked down as confidence wanes in our ability to repay.
Imagine out of this quandary that we aim not only to tame the debt. We also target creation of an additional economic pillar that can buttress against the hurricanes of future crises and contribute to national development. Call it a National Investment Fund (NIF).
What might it do?
The overarching goal of an NIF would be to harness Barbadian savings to invest primarily – though not exclusively – in overseas markets. This would create a pool of capital denominated principally in hard currency and able to provide a stable stream of future revenues for the national good.
But for what exact benefit?
The most crucial benefit is that a substantial NIF can counterbalance the impact of recessions. For example, by providing government with a dividend to finance spending plans when revenues fall short, an NIF helps maintain programs that protect the vulnerable. Moreover, the mere existence of a hard currency focused NIF would bolster our foreign exchange reserves and strengthen our credit rating.
In normal times a NIF can spur growth and development by (for example) persuading worthy local small and medium sized enterprises (SMEs) to take it on board as an investor. Thus it might be part of a broader campaign to inject life into the moribund local stock market.
SMEs are a key driver of growth and employment in any economy and at least two studies by the Central Bank of Barbados and the University of the West Indies have found Barbadian SMEs require cash and liquidity to grow.
This is a wider point than at first glance it may seem. Such action would improve capital allocation in a dysfunctional economy regularly described as enjoying ‘excess liquidity’. Which is another way of saying banks are unable to loan money on terms they find agreeable – particularly to SMEs. Depositors, meanwhile, enjoy little if any interest on their savings. An NIF could help both.
Funding a NIF – is it even possible in today’s context?
A NIF might be funded by several means. The most obvious for Barbados is by transferring state-owned enterprises to it. Singapore’s Temasek Holdings, effectively a sovereign wealth fund (SWF), was created in 1974 by just such a mechanism. Their 2017 review is here: http://www.temasekreview.com.sg/downloads/temasek-review-2017.pdf and page 20 sets out their performance over the last 43 years.
That is not the only funding method of course. A payroll tax is also an option and, in the event of windfall energy revenues, we might copy Trinidad’s Heritage and Stabilization Fund and allocate a portion of those to the NIF. It is also possible to allow a NIF to attract funds by offering savings products to compete with the near-zero interest rates banks pay their depositors.
Our starting point could be worse
A strong NIF is a long-term project – which may be discouraging to policy makers mindful of the electoral cycle. So it would be remiss not to refer to an example of one successfully made on a bed of literal and metaphoric ashes.
Today, France’s Caisse des Dépôts et Consignations (CDC) has assets equal to 6% of national GDP. But it was founded amidst the ruin of war in 1816. This precluded increasing taxation as a source of public funds: the state was compelled instead to restore confidence in its capacity to service its large existing debt. And that was the outcome the CDC successfully pursued.
Sensitive Barbadian ears may detect a small historical echo – and one worth following.