COMMENTARY: The BVI’s indebtedness

By Dickson Igwe, Contributor

An understanding of the nature, scope, depth, and weight, of the annual borrowings of the Virgin Islands, public and private, are vital to economic growth and prosperity, post the hurricanes and flooding disasters of September 2017.

Annual deficits lead to a national debt that accumulates year after year. This is what gives the national debt number. National debt is debt driven by government borrowing.

National debt is a norm. It is not an anomaly by any means. Then the sum total of individual, family, and business debt and borrowings gives insight into private debt levels: debt not directly controlled by government.

A highly-leveraged, highly-indebted consumer and corporate market has implications for economic growth and consumer demand. Consumer demand drives economic growth.

Weak demand slows economic growth and strong demand drives strong growth. However, there are additional factors that stimulate economic growth. High personal or private debt can also point to economic overheating.

A crisis of bad debt and loan default derives from a business and market environment where firms are highly-leveraged and where businesses pay a significant percentage of revenue in interest payments.

The preceding restrains companies from taking on of new employment obligations and new investment. This negatively impacts business confidence which further impacts economic growth. Business confidence and consumer confidence are strongly linked.

Now, a debt of between 80 percent and 100 percent of GDP is a norm in the global marketplace.

If BVI GDP in past years was put at $3 billion for instance: a national debt figure of 60 percent would be termed sustainable. That is $1.8billion. That metric appears very high considering the present state of the economy. And, there are numerous caveats for the viability of a 1.8 billion dollar debt metric in a $3 billion Virgin Islands economy that are too numerous to insert in a short economics story.

The main one being that the Virgin Islands is not in control of its currency. And the country has to manage its affairs within numerous constraints: it is an overseas territory of a great power, it is not resource-rich, and the external economy is overwhelmingly driven by FDI: Foreign Direct Investment.

Furthermore, the financial services industry that generates the greater proportion of GDP is a fragile and unstable source of national income.

The Virgin Islands cannot, like economic superpowers, create cash out of thin air to sustain huge internal and external leveraging.

The Virgin Islands does not have the power or capability to generate monetary liquidity on its own and drive monetary velocity.

The country’s economy is controlled by factors mainly outside of its control, and borders. There is a limit to what a government of a tiny jurisdiction can accomplish in driving economic growth.

However, in spite of the limitations, an accurate calculation of the national debt allows government and lenders some insight into what is possible in terms of government borrowing and spending.

It also offers both micro and macroeconomic insight into the health of the economy. Global investors too are offered insight into the health of the economy and how their investments will fare over a fixed period of time.

Governments, unlike private individuals, even tiny governments, such as the government of the Virgin Islands, have the ability to borrow very large sums of money in proportion to their populations and national resources, and carry that debt for years, without any impact on the economy, in terms of sustained economic growth, pressure on the standard and quality of life, and the ability of government to pay its way.

The reason is the international investor. The global investor is always looking for a place where his nest egg will bring a return higher than what he or she will get in a simple high street bank savings account.