The Cayman Islands has a bit more space to shore up flagging government revenues, should those occur over the course of the current budget year.
According to correspondence between Cayman Islands Premier Alden McLaughlin and UK Overseas Territories Minister Mark Simmonds late last month, the Foreign and Commonwealth Office has confirmed it will allow $46 million total in short-term borrowing, known locally as an overdraft facility, through the 2013/14 budget year that started on 1 July.
Use of the temporary borrowing was restricted to $30 million through the first four months of the year, the interim budget period, according to Minister Simmonds “to allow sufficient headroom for the rest of the year”.
Mr. Simmonds wrote the premier that he had been reassured by meetings in London last month of Cayman’s intentions in paying down its debt and meeting UK financial targets by the 30 June, 2016 deadline.
Various financial restrictions on the overseas territory, such as maintenance of certain debt ratios could result in Cayman having limited ability to get major public projects done. Without the ability to borrow long-term, cash reserves are needed even more to meet debt payment requirements.
“That’s a major factor,” Mr. McLaughlin said [of the cash reserves]. He also noted that three years is not a great deal of time to comply with the “net-debt ratio” requirements contained in the budget.
The government is out of compliance in three of the six areas measuring responsible financial management. In short, Cayman is paying too much each year to service its debts, its overall debts are too large compared with government revenues and it does not have enough cash reserves to comply with legal requirements.
Government financial records show Cayman almost reached the legal requirement for cash reserves in the 2012/13 budget, having 87 days worth rather than the required 90 days.
Cayman’s “net debt” – the government’s total debts as compared with revenues – should be maintained at a ratio of 80 per cent when compared with its revenues. In the last few years, that ratio has gone well over 100 per cent.
Government estimates show the Cayman Islands’ total public sector debt will remain well above $500 million by mid-2014, despite payments of more than $30 million per year until then.
Admittedly, Premier McLaughlin has said some of those budget goals will be tough to meet within three years and he has sought to push back some of the financial deadlines related to government debt-to-revenue ratios and year-end cash balances.
The UK made no mention of that possibility in Mr. Simmonds’s letter dated 27 June.
“The latest cash forecast, which would see $20 million improvement in your unrestricted cash position at the end of this year [2012/13 budget, which ended 30 June] … mean that I am content to allow a maximum overdraft facility for the full-year budget for 2013/14 of $46 million.”
The overdraft approved for the 2012/13 year was $66 million through the majority of the government’s budget cycle. An overdraft essentially allows Cayman’s government to borrow money through the leaner months of its fiscal year, typically July through November, and is then paid back during the higher-revenue months – January to April – when the funds become available.
Whether government ended its budget year on 30 June in a better or worse position than forecasts earlier in the year had predicted was still open to question as of press time Tuesday.
Certainly, the Cayman Islands public sector was not expected to meet projections of an $82 million operating surplus first budgeted. Revised figures put that surplus at $51 million, a figure Premier McLaughlin said he hoped to improve upon through some early expenditure holding during the first five weeks of his administration.
Mr. McLaughlin said Finance Minister Marco Archer had sent stern letters to civil service managers to hold back discretionary spending during the period immediately following the 22 May general election until the end of the fiscal year on 30 June.
The $30 million drop in government’s operating surplus was blamed on delays in implementing new fees imposed by the previous government, mainly on the financial services-related industries.