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Measuring Virgin Islands indebtedness Part 2

August 11th, 2018 | Tags: Dickson C. Igwe
Dickson C. Igwe. Photo: VINO/File
Dickson C. Igwe

Accurate statistics, and sound economic metrics, are critical to engineering economic recovery.

An understanding of the nature, scope, depth, and weight, of the annual borrowings of the Virgin Islands (VI)—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 per cent and 100 per cent of Gross Domestic Product (GDP) is a norm in the global marketplace.

If VI GDP in past years was put at $3 billion for instance, a national debt figure of 60 per cent 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 debt metric, in a $3 billion VI economy that are too numerous to insert in a short economics story.

The main one being that the VI 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 Foreign Direct Investment (FDI).

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

The VI cannot—like economic superpowers—create cash out of thin air to sustain huge internal and external leveraging.

The VI 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 macro-economic 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 VI, 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.

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4 Responses to “Measuring Virgin Islands indebtedness Part 2”

  • ... (11/08/2018, 11:34) Like (1) Dislike (0) Reply
    tell them
    • @... (11/08/2018, 14:17) Like (3) Dislike (0) Reply
      @..., tell them what? The commentary is filled with many definitions and not much on solutions. The BVI needs quantitative and qualitative solutions.
  • Political Observer (PO) (11/08/2018, 11:48) Like (3) Dislike (0) Reply
    “Now, a debt of between 80 per cent and 100 per cent of Gross Domestic Product (GDP) is a norm in the global marketplace.” True, there are scores of countries with debt/GDP north of 80%. They include Japan (253), Greece (178), Italy (131), Congo (117), Singapore (110), US (105), Jamaica (103), Egypt (101), France (97), Canada (89), and EU (81). However, both IMF and World Bank suggest that debt to GDP ratio over 60% may be unhealthy for countries.

    Undoubtedly, the BVI depends heavily on external investment; it needs Foreign Direct Investment (FDI). The BVI is in recovery mode and needs FDI now more than ever, after the devastation by hurricanes Irma and Maria. How it needs to keep its debt load within a manageable and affordable limit. Moreover, some international bodies also suggest that the debt/GDP ratio target for developing countries is 40%; developed countries, 60%. Further, a low debt to GDP indicates that a country’s economy is growing and it can pay its debt without incurring additional debt. On the other hand, a high debt/GDP ratio suggests that a country would have to pay too much on its debt and not enough towards goods and services.
    • RealPol (11/08/2018, 21:06) Like (2) Dislike (0) Reply
      @PO, real talk. Prior to the hurricane devastation in September 2017, the territory’s GDP was approaching $1B. However, due to the devastation, the GDP for 2018 could be cut in half, increasing the debt to GDP ratio. As noted by other bloggers, the VI debt to GDP ratio is rising yet manageable. However, the BVI shouldn’t go hog wild borrowed. .

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