BASSETERRE St. Kitts, December 7th 2011 - An objective evaluation of the economic, financial and social policies which were being pursued by the Federal Government of St. Kitts and Nevis, I concluded, as an Economist that “a cold economic freeze was facing this Nation”. The symptoms were quite clear. The Government had embarked on a borrowing and spending program which created a National Debt of EC$3 billion with a debt service ratio of 200% of Gross Domestic Product. This is unsustainable; in simple language the Federation cannot pay its way. The IMF report stated that in 2010 arrears on the National Debt amounted to EC$73.4 million. The Nation has been told continuously that the Government was meeting its debt obligations. Now the Government has announced that it was defaulting on payment to its bond holders.
The gravity of this latest act needs to be examined in the whole context of the economic and financial policies and programs which have been pursued by the Federal Government. The Government adopted a policy of borrowing and spending on projects that did not benefit the country and essentially did not generate the necessary revenues to service the debt.
Roads were built to everywhere; houses were constructed for poor people who were led to believe that they did not have to service their loan. A golf course was to be constructed and has not materialized after the Government spent EC$116.3 million. In addition the Government accumulated a deficit of EC$653 million (Director of Audit Report). The repercussions to this act of defaulting on its debt are far reaching. Creditors and investors will lose confidence in purchasing Federal Government securities. Holders of Treasury Bills who have invested their life savings for their retirement and to pay for their children’s education cannot be sure that funds will be available. At the OECS level this will have some negative impact on the money market which is underdeveloped and investors will view this market with a high degree of suspicion. The degree of uncertainty will also affect the indigenous banks such as National Bank and there will be some run on the savings lodged at these institutions.
The concept of Debt restructuring entails either an extension of the current period for the life of the loan or convincing existing creditors to reduce their rate of interest and foregoing certain amount of interest payments. Most of The Federation’s National Debt is held by Commercial Banks which have shareholders to whom they are responsible. It will not be an easy task and may not be achieved.
The Government’s inability to service its debt is evident from the deterioration in its financial position which deteriorated in 2010 relative to 2009. An overall deficit of EC$73.7million was recorded in 2010 (ECCB Financial and Economic Review). The introduction of VAT and the 80% increase in electricity rates have placed additional burden on the people. Aggregate demand will fall so will Government’s revenue. The Government will be faced with making several tough decisions such as how to pay Civil Servants in the ensuing year. Education, health and welfare services will be curtailed or neglected as the Government struggles to meet payments on the spiraling National Debt which the Prime Minister has always treated with a certain degree of disdain.
The economy requires an injection of investment funds and the Government is bankrupt with no coherent economic policy. The statement by the Prime Minister that present taxes will be increased is cause for alarm since this is contrary to economic and empirical evidence which dictates that in a recession such an act will depress the economy by reducing aggregate demand and increasing the level of unemployment. There will a resultantincrease in the level of poverty, crime and domestic violence.
Arming the police and military and harassing the young people will not solve the underlying problem that the country is in recession which has been generated mostly by policies and programs which were pursued by the Federal Government.
The Nation requires policies and programs which will inspire confidence.
Particularly, competent and respected leadership is required. This cannot be achieved with the current personnel. An urgent independent review and revision of the current education policy which leaves 57% of school leavers ill-equipped to make constructive and meaningful contribution to the growth and development of this Nation needs to be undertaken. The continued alienation of this important section of our human resources will cause it to smolder and eventually erupt as a destructive force.
Fiscal incentives to stimulate investment programs must be applied without political bias. The taxation policy and the pricing of utilities require revision. Particular attention should be paid to agriculture, agro-processing, fishing and import substitution projects. The Nation is flirting with economic financial and social disaster.
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