COMMENTARY: Borrow from home or abroad?
By Dickson Igwe, Contributor
Governments, even micro administrations of tiny jurisdictions, have the ability to raise finance, to an exponentially greater degree than individuals and small businesses.
In the aftermath of the September 2017 natural disasters that devastated the Virgin Islands economy, borrowing heavily to stimulate economic growth is not an option.
The British Virgin Islands requires at least $3 billion in infrastructure spending over the coming five years to get the economy back to pre Irma GDP. Most of this cash will come from deficit spending, another name for borrowing.
Long-term strategic economic plan
However, borrowing must be tied to a long-term strategic economic plan. Financial management of the borrowing that drives Post Irma economic recovery, must be part of a vision for the country, transparent, efficiently administered, and effectively audited.
Now, there have been assertions that borrowing from local institutions is a better option for the country than external borrowing. Why? Because interest payments on local loans mean revenues remain in the territory.
Consequently, these local institutions are strengthened financially.
Economic stimulus
The preceding keeps cash working in the local economy as the loaned cash is sourced and utilized locally. This cash increases the velocity of transactions in the internal market economy, which is a form of economic stimulus.
The question must then be asked: have those institutions the capital requirements and cash reserves that offer them the ability to lend government the hundreds of millions required for short to medium term disaster and economic recovery?
And how would lending government the cash impact the bottom line and mandated operations of these organizations? How would becoming lender of last resort for government change the specific call and nature of these organizations?
Caution
There are voices that state that caution, and a gradual approach to borrowing, is what is appropriate at this time, and not taking on borrowing from external sources that have no interest in the welfare of the Virgin Islands.
Government can borrow locally gradually, over a longer period of time. Doing the preceding, and adopting a gradual approach to borrowing for redevelopment, is more sustainable, than heavy external borrowing for swifter economic stimulus and disaster recovery.
All of the preceding assertions and arguments are worthy of detailed analysis and assessment.
To be Continued
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Mr. Igwe, you write lovely long sentences with very little substance. Local Banks are not in a financial positions to lend to a defaulting government and the SSB money should be used for it’s intended purpose – retirement..
The purpose of the post was to obtain feedback- no need for insults – appreciate your assertions
Feedback he received – stop providing useless assumptions – the BVI needs funding and a lot of it. The only viable option is the UK backed financing at the moment..
True that is the intended purpose of Social security but with the other options of borrowing, there are too many stipulations attached and we are well aware and comfortable with borrowing from home. The only downfall is the persons who will be in control are the very persons that have us in this slump. We want honesty and nothing else in the BVI
The stipulations are there to ensure that the monies are not misused. Even if the government borrowed locally, they would only misspend the monies as they always do. I think people should appreciate this. Many years people have been calling for transparency and accountability and now that we have a chance at that it seems to be a problem.
either wat SSB or UK bonded NDP still needs UK’s permission, so why borrow from SSB when you can borrow from else where at 1%? Its not rocket science!
Yawn – what a boring post, what was actually said? what recommendations were made? talk about sitting on the fence this guy is perched there for sure just pontificating (good word) on others but not really contributing anything meaningful in my opinion, is he related to Strude?
From you response you undoubtedly are near illiterate
Go sit down . You dont even know nothing
Who gave this man permission to talk what is not his business. I doubt he can even speak publicly where he is from. Why they think they can reside here and speak out of turn. Tired of these people. Yes, I said it. I am tired of non-bvislanders speaking out of turn.
Igwe is both a UK citizen and a Belonger- he probably got more rights in the BVI than you- so shut it
This is certainly an option but is it better than getting a lower interest rate?….this is what the government should be debating with all the facts and documents on the table…..if tbe people have to give up their first born shouldn’t they know about it?
Virgin Islanders have a lot of pride and do not like to be told what to do, especially from those deemed not to belong. Hence, the issue at hand of having a foreign source requiring that much greater oversight and accountability must be in place before loan guarantees will be awarded.
It makes no financial sense to borrow locally. First, there is not enough capital to do so. Secondly, defaulting payments back to SS will bankrupt our promised retirement. Having watched both parties squander money for decades, is going it alone with the same accountability we have had in place wise? No, the money will be squandered away as it has historically.
With hundreds of millions of dollars at stake, we must swallow our pride, implement the oversight and transparency required, and make the economically intelligent decision to utilize the UK guarantee. Despite the noise, the government knows this as the only path forward and we can expect them to perhaps try to tweak legislation, but to proceed with foreign borrowing.
By doing so we many not only generate the stimulus needed, but also help correct some of the corruption that has been in place for decades.
True, governments, including governments of microstates, have the authority to increase taxes and fees to fund government to deliver vital services. However, microstates have distinct disadvantages to do so; they have small economies, small populations and limited sources from which to increase fees and taxes. Further, increasing taxes do not necessarily mean increased revenues. For example, when taxes are too high, taxpayers find ways to avoid paying them. High taxes boost and fuels the underground or informal economy, robbing the Treasury of revenues. Additionally, increasing overall tax rates too high relative to GDP can adversely impact economic growth. There must be a balance b/w revenue and growth.
Ok. The BVI was battered by 2 monster Cat 5 catastrophic hurricanes, Irma and Maria, along with being inundated by a historic flood that cancelled/shortened the annual Emancipation Festival. The estimated recovery cost per government information source is approx $3.6K. And there is a proposed project on the board to invest $721,000,000.00 over 5 years on the recovery effort. The question is if the $3.6B is in the ballpark is investing $721M over 5 years aggressive enough to get the economy and GDP revived quickly enough to pre- Irmaria level?
Moreover, no doubt, the BVI lacks the fund reserves to fuel the recovery and will definitely have to borrow money from either internal or external lending institutions, agencies……..etc to do so. True, the recovery effort/need provides an opportunity for banks, social security …..etc to invest locally, ploughing money back into the community and keeping money local. But do the local institutions have the capacity to fully meet the borrowing needs? Further, will government borrowing heavily from local institutions crowd out residents borrowing ability, ie, home construction, business start up/operation, home repair, buy cars/equipment ……….etc.
Further, the territory depends heavily on external investment; it was so b4 Irmaria and it is so now; foreign direct investment (FDI) is vital to economic growth. Bottom line is the BVI needs to borrow money; it needs to employ a balanced mixture of local and external borrowing. It needs to borrow money at the lowest cost so as to put the most money into rebuilding. The UK £300M ($403M) loan guarantee and the proposed Agency is a discussion for another day.