PetroCaribe Loan Scheme

First Published: 2005-10-21

Both the Minister for Trade and Industry, Leslie Miller and members of his Petroleum Usage Review Committee, have suggested that the savings that could accrue to The Bahamas Electricity Corporation (BEC) is reason enough for The Bahamas to sign on to PetroCaribe.

They have stated that if BEC purchases $100 million of petroleum products a year, they could finance up to $40 million for up to 25 years at the reasonable rate of 1% per annum. And, this $40 million can be used each year to create a welfare state.

So, being sceptical of offers that sound too good to be true, it prompted a few calculations:

1. Assuming there are no payments made during a five-year loan period, The Bahamas will owe Venezuela $202 million dollars.

2. Taking this one step further, The Central Bank of The Bahamas has indicated The Bahamas imported fuel totalling of $265 million during 2004 (net the BEC purchases). 40% of this amount would provide an additional $106 million in loans per annum.

3. Here again, if no payments are made to reduce this indebtedness during a five-year period, The Bahamas will owe Venezuela another $535.3 million.

Combining the purchase of fuel for BEC and the fuel for the general consumer over five years, The Bahamas total indebtedness to Venezuela would be $737.3 million dollars.

In addition, these numbers are simply staggering when extrapolated out over 25 years. The National Debt would increase by $3.7 billion which is more than our current national debt of $2.65 billion.

Click here for the PetroCaribe Loan Assumptions Spreadsheet.

Of course these assumptions will differ based on changes through negotiation and do not consider the two-year grace period or any required payments. However, they do provide a quick summary of how fast the country's debt could mount utilizing an arrangement like this.

This begs the question: Should The Bahamas be mortgaging its future on a consumable item such as fuel with long-term foreign hard currency borrowings?

Petroleum is a "consumable" item in both economic and physical terms and should not be financed with long-term borrowing. The theory of long-term borrowing is that it is appropriate when used to finance an investment today that will produce an attractive return over a long period of time. Of course, when the petroleum is gone, no asset will remain.

More importantly, the debt is likely to be foreign hard-currency debt, which will greatly alter and magnify the country's financial management problems. "Bankruptcy" usually occurs when a country can no longer service its foreign indebtedness; and such bankruptcy usually means devaluation of the currency and a drop in the standard of living.

To date the Bahamas has financed its fiscal deficits with B-dollar borrowings and this practice has been sustained with the maintenance of exchange controls. If the Bahamas eliminated exchange controls, then there would be a capital outflow and a pressure on the exchange rate. It is this fear that has restrained the country's fiscal excess.

PetroCaribe financing starts this country down the road of financial mismanagement of the type that has plagued Latin America for decades. It is no surprise that it is being proposed by a Latin American socialist strongman who offers cheap long-term foreign financing as an inducement to enter his international political alliance.

The Nassau Institute

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