Barbados has embarked on an ambitious liability management plan to cut public debt and put the island nation in a stronger position to face the challenges of climate change, a top government official said.
“We are using financial instruments in an innovative way, not just to pay down our debt but to build climate resilience,” Finance Minister Ryan Straughn told LatinFinance on the sidelines of the World Bank/IMF annual meetings in Marrakech, Morocco. “It is a numbers game, but we are focusing on getting it done.”
Among the government’s financial goals is a reduction in the national debt to the equivalent of 60% of GDP from the current 114%, he said.
The principal innovation is a proposed debt-for-climate swap that could close in the first quarter of 2024. It is not the only plan in the works. Straughn said the island nation was working with multilateral institutions and the private sector to scale up its ambitions.
Attention today is on the climate swap, which will build on a $150 million debt-for nature swap concluded last year with the help of the Inter-American Development Bank (IDB) and The Nature Conservancy.
The new swap is designed to upgrade the country’s sewage treatment plant in order to provide the island with about 4 million gallons a day of water. The swap has three environmental components: helping replenish aquifers, providing water for agriculture and preserving the country’s remaining mangrove swamp.
The cost of the plant upgrade would be just north of $100 million, and Straughn said the idea is to swap at least $150 million. Barbados is working with the European Investment and IDB on the structure, and it plans to include access to concessional funds from the UN-backed Green Climate Fund to start work on the project.
The minister said that while no agreements have been reached, the government is talking to other multilateral institutions and private investors about its new plans, including the need to fund the energy transition.
He said Barbados wants to bring in other multilateral lenders and is actively looking at private sources.
“After the swap we will look at the market, because it is all about timing and the market is finicky. We will continue to work with multilaterals, but patient capital is out there —pension funds and others — and we are studying what we can do for debt management. It is vitally important to work with the private sector,” he said.
On the energy transition, the government has been replacing diesel-run buses with e-buses — it has 70 in place — and wants the private sector to follow suit. It is also looking at alternatives for energy generation with renewables. The country currently produces electricity with thermal plants that run on bunker.
Scott MacDonald, chief economist at Smith’s Research & Gradings, said the energy issue is critical for the Caribbean.
“The big thing that looms over the Caribbean is investment in the energy sector,” he said in an interview. “Most of the countries are still dependent on oil, the power grid is a huge issue, you need technology to move away from oil. The first step is natural gas and, ultimately, renewables. All of this costs money.”
Straughn agreed. “Whenever the cost of fuel goes up, the quantum changes, and we would rather spend the money to prepare so shocks are not so great. We do not need a lot, but we need the right structure so the economy becomes stronger and more sustainable to better absorb shocks,” the minister said.