The Bolivarian Republic of Venezuela’s PETROCARIBE agreement allows Belize to purchase fuel by paying 40% of the costs up front….and the balance to be paid at 1% per annum interest over 25 years.
The government of Belize claimed in April 2014, that since the program started in 2012, Belize has accumulated around $190 million of credit. Assuming a two year period, this would suggest that Belize accumulates around $95 million in credits per year….which at 60% of purchases would suggest that total purchases of fuel averaged $158 million per year.
However, Belize is known to import around $220 million in fuel per annum….so perhaps Belize is sourcing another $62 million of fuels from a source outside the PetroCaribe agreement?
The National Budget read on March 7, 2014, suggests that Belize had only used around $25 million of this available credit up to that date. Hence principal plus interest payment for the year, on the credit used, would be around $1.25 million. But Belize would have to pay towards the unpaid 60% for the value of the fuel….so that another $6.32 million would have to be paid in the first year….for a total of $7.57 million. National debt, as a direct result of this program, would have increased by $88.68 million.
In the second year, if Belize uses another $25 million, payment on the now $50 million in used credits would increase to $2.5 million….and the amount to be paid towards the supply would be around $12.64 million…for a total of $15.14 million. National debt would have increased by $171.04 million.
In the third year, if Belize uses another $25 million, payment on the now $75 million in used credits would increase to $3 million…and the amount to be paid towards the supply would be around $18.96 million…for a total of $21.96 million. National debt would have increased by $247.08 million.
In the fourth year, if Belize uses another $25 million, payment on the now $100 million in used credits would increase to $4 million…and the amount to be paid towards the supply would be around $25.28 million….for a total of $29.28 million. National debt would have increased by $316.8 million.
In the fifth year, if Belize uses another $25 million, payment on the now $125 million in used credits would increase to $5 million…and the amount to be paid towards the supply would be around $31.6 million….for total of $36.6 million. National debt would have increased by $380.2 million.
Already you can see where this is headed. We need to be very cautious about the lure of cheap credit.
It is not clear whether Belize is to pay 1% of the available credit….or whether it is only to pay 1% on the credit used. If the payment is on available credit….because money can’t just be sitting down doing nothing…..then the numbers related to annual payout would have to increase to reflect this.
It is also not clear whether Belize is allowed to accumulate available credit…..or whether it has to pay each year for fuel supplied, minus the amount of credit used. This would be like an enticement to use up as much of the available credit as quickly as possible….thus Belize would increase its annual additional use of available credit beyond the $25 million per year alluded to here….and could run into trouble rather quickly.
The Prime Minister has suggested that GOB is looking at using this available credit to buy down super-bond debts…which would be exchanging higher rate debts for lower rate debts….which would be highly productive and we should all loudly encourage him to do this as quickly as possible, if the super-bond agreements allow for it. Significantly lowering our super-bond commitments would put us in a much better position to negotiate debt-for-education and debt-for-nature swaps as an important strategy for reducing our foreign debt load, enhancing the fundamentals of our national finances and rapidly improving our education and natural resources development frameworks. We need to be very cautious about over-indexing our debt exposure to Venezuela, which is experiencing very challenging political difficulties.
Venezuela’s foreign reserves fell in 2013 by around BZ$8.8 billion….to around BZ$50 billion….so making these credits available to Belize and other Caribbean countries is a drop in their bucket…..and their foreign reserves probably does not earn much more than 1% per annum in the open markets, given current rates.
Still, it is a good gesture that the Bolivarian Republic of Venezuela affords us…given Belize’s credit rating.
Yet, Belize has to be very responsible about how it uses the kind gestures of friends….because other friends and would-be friends are watching.
If Belize sinks this available credit into unproductive programs….then it is not doing what is right to be in the best position of “ability-to-pay”.
Belize needs to use these funds to enhance the economic engine of Belize.
Strategically, Belize should view this help by Venezuela as a temporary dose of oxygen to help us run faster, not as the daily bread that we depend on to survive.
Therefore these funds need to be used only for the following purposes, and in the order of priority suggested below:
1. Buying out more expensive debt with this cheaper debt….to the extent that a balanced exposure portfolio is achieved….which the country will be able to meet sustainably….without counting on crude oil finds in Belize (count the chickens only after they have hatched).
2. To support structural fiscal adjustments that will make the country’s economy rapidly improve its competitiveness and productivity, eg. Removing all taxes (except 10% GST) from imported fuel so that the pump-price is comparable to Mexico and USA agricultural belt, the principal competitors. Also to broad based GST, Business Tax and PAYE at lower rates of 10%, 1% and 10% respectively.
3. To enhance the development financing facilities for the productive sector with interest rates between 6-8% and terms of 15-20 years in cooperation with index-funds managed by a more consolidated commercial banking system (this will make commercial banks gain experience in productive sector financing and yield synergistic results down the road)….and housing construction/improvement, including the lowering of interest for lower and middle income home-owners to around 6.25% p.a. and increasing the term to 25 years, in cooperation with National Bank of Belize, Social Security and a more consolidated Credit Union system.
4. Infrastructure that enhances the economic development landscape, especially for growing exports and/or attracting more domestic and foreign investments. We may be able to finance this from domestic tax revenue, instead of using this line of credit, if the economic boom from fiscal adjustments are robust as I project they would be.
This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University.