“Economy Minister Sayed-Khaiyum is dragging the nation deeper and deeper into the debt trap with his insatiable appetite for borrowings, putting a noose around the necks of our children for the future” : Mahendra Chaudhry.
Alarmingly, he borrows more to repay old debts, rather than for developmental purposes, as he claimed in his Budget address.
His so-called “smart borrowings” come at a great cost to the nation. If a large chunk of government revenue is taken up on repaying debts, what will be left to grow the economy, provide infrastructure and improve social conditions?
Budget 2020-21 has announced a total of USD640 million in new loans, a staggering $F1.4 billion, much of which will go towards debt re-financing ie. paying off old debts.
It will raise Fiji’s total debt to $8.1billion which is a mammoth 83.4% of the nation’s GDP – up from $6.7 billion in July 2020 (65.6% of GDP). If contingent liability of 12.4% of GDP is added, government’s total exposure comes to a staggering 95.4% of GDP.
Fiji’s debt level has trebled under the FF government from $2.56b in 2006 to $8.1b in 2020.
Khaiyum’s mounting debt cycle is actually a two-pronged strategy: he is making use of international lending agencies’ commitment to provide easy and cheap loans to poor countries in their efforts to fight the COVID crises – to obtain funds at low, attractive terms to refinance his debts. At the same time, external borrowings support foreign exchange levels and liquidity in the banking system.
Growing the economy or paying old debts?
He has actually placed himself in a quandry by vastly eroding the revenue base in Budget 2020-21 through huge tax concessions at a time when the COVID crisis had already substantially reduced government revenue.
The Minister, however, has the audacity to grossly mislead the nation by claiming in his Budget address that his “smart borrowings” are to grow the economy.
Here’s what he says:
“Rather than frame smart borrowing as an investment in the future, they [Opposition] claim it’s a burden on our children.
“But when we borrow prudently we allow our children to be educated, our communities to be connected to electricity, roads and jetties, and our economy to grow. Borrowing now to build for tomorrow means future generations can borrow less.
And a growing economy with a skilled and educated workforce generates more than enough national wealth and tax revenue to repay debt and invest in the future.”
The operative phrase here, Minister Khaiyum, is to “borrow prudently” and not borrow from Paul to pay Peter which is what you have been doing over the years.
Disguising the Loans
A week ago, the Minister signed a loan agreement with the Asian Development Bank in Suva for USD200 million ($F426m).
Both ADB and the Minister issued statements afterwards to say that the money will be used to sustain government’s private sector growth reform programme which, in turn, will assist in post-Covid economic recovery.
BUT, the 2019-20 Revised Budget Supplement said something else:
“Government is re-financing the US$200 million global bond in October 2020 with policy based loans from the Asian Development Bank and the World Bank. Government had completed a series of sub-programmes as part of the entire-policy based reform programme and has secured US$65 million from ADB and US$35m from the World Bank.
“Government is currently in the advanced stages of the final sub-programme which will result in an additional loan financing of $US200 million by ADB towards global bond refinancing (US$100m) and budget support for Covid-19 (US$100m).”
It is clear from the Supplement that half of this USD200m will be used to repay the global bond due in October this year.
The USD65m from ADB and USD35m from the World Bank were also earmarked to refinance the global bond issue. Indeed, the entire refinancing of the global bond will be from borrowed funds.
The agreement signed last week was for this US$200m ($F426m) loan. But nowhere in the statements by ADB’s South Pacific subregional director Masayuki Tachiiri or the Minister is there any reference to half the money being used to re-finance the global bond issue.
An ADB statement issued in Manila on 16 July 2020 said the loans would not only support Fiji’s response to the COVID-19 pandemic, but would also “…create a business environment conducive to private sector growth which will in turn drive economic recovery and long term growth through investment.”
Again, there was no mention of half the money being used for debt repayment. It appears that specific care was taken in the official statements from the ADB and Minister Sayed-Khaiyum to avoid any mention of the money being used to re-finance old debts.
In my books, such a significant omission from the official statement is reprehensible, to say the least.
The loans are being paraded as “policy based loans” for economic recovery but are, in fact, largely for budget-support and to repay old debts.
Apart from government’s own direct borrowing, it has a huge contingent liability at $1.26 billion or 12.4% of the GDP. The Fiji Sugar Corporation and Fiji Airways together take up half the total amount.
The national airline has admittedly a $38million monthly commitment. Under the circumstances, and with the aviation industry virtually grounded, the government guaranteed loan facility of $455 million will not go far, more will have to be borrowed a little later.
What is alarming is that the terms of the loans to Fiji Airways, both domestic and offshore, have not been revealed. The airlines failure to meet repayments, will certainly put “a noose around our necks”.
Fiji Sugar Corporation defaults
In 2015, FSC raised $25m through corporate bonds subscribed by FNPF. The bonds were government guaranteed and matured on 30 September ($15m) and 4 November 2019 ($10m). As expected, FSC defaulted on the redemption of the bonds, forcing a call on the government to settle the debt as the guarantor.
A provision of $25.8m is made in the 2020/21 Budget to settle this debt, inclusive of the interest thereon.
FSC’s default raises questions about the integrity of the Bond market. Why, for instance, was RBF approval given for the issuance of these Bonds when FSC’s ability to repay on maturity was in serious doubt on account of its insolvent state at the time.
If the government wanted to assist, it could have provided funds directly to FSC, rather than engaging in a process that I believe has undermined confidence in Fiji’s bond market.
As the coming months unfold, a clearer picture of where we are headed may emerge. But for the time being it seems that Sayed-Khaiyum’s ‘Dinau-nomics’ will be the order of the day.