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Borrow from home or abroad?
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 dollars in infrastructure spending over the coming 5 years to get the economy back to pre Irma GDP. Most of this cash will come from deficit spending, another name for borrowing.
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. The preceding keeps cash working in the local economy as the loaned cash is sourced and utilised 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 organisations? How would becoming lender of last resort for government change the specific call and nature of these organisations?
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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8 Responses to “Borrow from home or abroad?”
Ok. The BVI was battered by 2 monster Cat 5 catastrophic hurricanes, Irma and Maria, along with a historic flood that cancelled/shortened the annual Emancipation celebration. The estimated recovery cost per government information is approx $3.6K. 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 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. 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.