Rising national debt in many countries has reached levels where words such as ‘unsustainable’ and ‘crisis’ are the only means to describe the actual situation that has evolved over the past two decades. To a certain extent what has occurred at the national level in many countries is similar to the credit boom that led to the US housing crisis in 2008.
In the same way that many Americans were ‘hooked’ on borrowings, many governments have relied far too easily on securing additional borrowings to address their fiscal issues in the short term, instead of focusing on long term expenditure cutting, divestment and sustainable revenue options.
Is Cayman’s situation any different from these countries? In one respect, yes. The Cayman Islands is a relative newcomer to the issue of high national debt. The public debt was a mere $143 million only 10 years ago, and has increased by over 500 per cent since then to the now forecasted figure of $600 million by June 2012.
On the other hand, that same recent increase suggests that the Cayman Islands is also falling into the same debt trap, which has created a host of problems in other countries. The question now is what can we do to reduce the debt without creating a host of other economic issues?
Why national debt matters so much
The size of the national debt affects us directly because it usually means that the government has to raise taxes, reduce public services or delay or cancel important infrastructure projects in order to assist in repaying the national debt.
Debt is also one of the key signs of the economic health of a country. High levels of debt combined with signs of inability to repay or any other signs that the debt may become unsustainable, could lead to serious reputational and international problems, the recent US downgrade by S&P being one example.
Sell off or bail out?
When the government looks to sell national assets in an attempt to reduce a significant portion of the national debt this is sometimes met with cries of “selling off the country”. It is understandable why the strategy meets with such opposition, especially if the asset in question is an income producing one.
But one does not have to look very far to see that there are very few countries that have not had to pursue some form of divestment strategy in response to their national debt and fiscal crises. Using some of your existing assets is not simply a political or emotional debate to wrestle with; it is a financial strategy, which is seen as necessary for survival.
In the case of the Cayman Islands the FCO seems to have recognised this clearly as they have recommended that the government sets up a sinking fund from the proceeds of cash from divestment activity. So while a massive sell off would be questionable, it is difficult to argue against a few material divestments with some urgency to reduce the debt burden the country is facing.
This is something that the government should do decisively and with urgency as this would go a long way towards bailing us out of this current situation.
Grow the economy, reduce the debt
The country should be pursuing aggressive strategies to stimulate economic growth because this can assist in debt reduction through increased government revenues or through partnerships with investors. A good example of such a partnership is the one being discussed with the Dart Group whereby media reports suggest that the government will secure over $100 million in infrastructure spending as part of the deal. If the government had to borrow to fund these projects, the debt increase would be unsustainable.
At the same time, the economic activity resulting from this additional expenditure will create jobs and will indirectly also provide additional revenues to the government as the funds filter through to the rest of the economy.
While no formal estimate of this has been carried out, various economic impact studies carried out over the years (including one carried out by a foreign consulting group on our financial services sector and a few others) suggest that there would be at least an additional economic impact of $50 million as a result of this $100 million expenditure.
This does not include the estimated hundreds of millions of dollars of direct investment, which will also occur as a result of this agreement.
The Cayman Islands does not have a long history of excessive borrowing. But its time to reverse the trend of the past decade of relying on additional borrowings to keep the country going. Without some decisive action in the area of divestment and practical strategies to boost economic growth in the medium term, we run the risk of becoming too comfortable with perpetual borrowings, an issue that has led to the long term destruction of many economies.
Paul Byles is managing director of Focus Consulting. He is an experienced economist and finance professional having worked in the financial services industry for 20 years. He formerly served as an external consultant to the Ministry of Finance from 2009 to 2010. He is former director of a big four consulting firm and a former financial services regulator.