UK extends borrowing ban

The Cayman Islands government has committed to the United Kingdom that it will not seek any long-term borrowing from the current fiscal year through the end of the 2016/17 budget, extending the existing borrowing ban for another year.  

The original plan approved between the U.K. Foreign and Commonwealth Office and former Premier McKeeva Bush’s administration called for the ban on long-term borrowing to extend through June 30, 2016. At that time, the Cayman Islands government had hoped to be within all operating principles of responsible financial management, including debt service and overall debt ratios required under law.  

According to recently released government budget records, Cayman’s core government public sector debt stood at CI$573.7 million on June 30, 2013. Entire public sector debt, including amounts held by government-owned companies and statutory authorities by that same date was just shy of CI$712 million.  

The ban on long-term borrowing will not prevent the government from acquiring a certain amount of short-term debt to help make ends meet within a given budget year. For instance, Cayman has been granted approval to borrow up to CI$46 million within the 2013/14 financial year to cover for the lower revenue-earning months. Any use of that short-term borrowing or overdraft facility must be paid back within the budget year.  

In addition to the borrowing ban, the Cayman Islands has agreed that no supplementary appropriations – extra spending above what was initially approved in the budgeted expenditures – will be allowed.  

“The Budget Delivery Committee, led by the deputy governor … will have a key role in ensuring that departments stick to their budgets and do not make requests for supplementary expenditure appropriations,” U.K. Overseas Territories Minister Mark Simmonds wrote in an Aug. 22 letter to the government.  

Mr. Simmonds said he “could not agree” to expenditure above the maximum limit set in the budget “unless there were significant exceptional circumstances, such as the impact of a natural disaster.” 

The government’s 2013/14 spending plan will be released on Monday along with its four-year budget overview that sets out more general guidelines as to how the Cayman Islands will bring its budget back within the limits of the Public Management and Finance Law. Right now, the budget does not comply with requirements for cash reserves, which must cover at least 90 days worth of government’s executive expenses. Also, the “net-debt ratio,” which states that government’s overall debt should be no more than 80 percent of core government revenues.  

An agreement signed with the U.K. in 2011, later passed into law, known as the Framework for Fiscal Responsibility, sets a deadline of June 30, 2016 for compliance with all those financial requirements. It is not known what will occur if Cayman does not hit the deadline, but government officials confirmed Tuesday that it was likely noncompliance would result in a further ban on long-term borrowing by the U.K. beyond the 2015/16 budget year.  

The fiscal framework, passed into law during the final full year of the former United Democratic Party government’s administration, gives the U.K. unprecedented controls over its territory’s financial options.  

“We do not have a lot of fiscal space in which to operate,” Mr. McLaughlin said, summing up the situation last week to the Cayman Islands Chamber of Commerce.  

There is no “sunset” or end date for the U.K.-drafted Framework for Fiscal Responsibility, which sets guidelines on certain areas like government spending and borrowing, bidding for public projects and rules for financial reporting. 

During his first visit to the Cayman Islands in November of last year, British Overseas Territories Department Director Peter Hayes fielded questions during a press conference about the fiscal framework.  

“[The Framework for Fiscal Responsibility] doesn’t sunset,” Mr. Hayes said. “But it’s not something that we would see as cast in stone forever. One would hope, as the financial management situation develops and as the guidelines come back within the debt limits … then obviously we want to make sure the Framework for Fiscal Responsibility is keeping pace with circumstances.”  

Then-Cayman Islands Governor Duncan Taylor elaborated.  

“There’s a timetable to get the government finances back into a position where they meet all the borrowing guidelines,” Mr. Taylor said. “At that stage, assuming we get there, then some of the ability of the minister in the U.K. to have a say in the setting of the [Cayman Islands] budget falls away.” 

In the meantime, any public capital projects in Cayman would either have to be financed out of government surplus – if there is any – or through public-private partnership agreements. Even those partnership agreements have some restrictions within the fiscal framework and can be vetoed by U.K. officials.  


Biting ‘the bullet’  

The bill won’t come due until the next Cayman Islands government term, however, a CI$261.3 million balloon payment on a 2009 government bond offering will have to be paid in November 2019 and government insiders find it likely officials will have to refinance that debt – i.e. borrow again via refinancing – to pay it off.  

The U.K. advised establishing what’s known as a “sinking fund” to put aside certain amounts of cash to help pay off that looming debt and others the Cayman Islands will have to pay in the coming years. However, government officials have previously admitted neither the interim government nor the former UDP government had done so.  

A review of the Cayman Islands government’s bond obligations over the next several years shows the public sector will owe a substantial amount of “balloon” or “bullet” debt repayments prior to its CI$261 million payment in the year 2019.  

According to records reviewed by the Caymanian Compass, the government has five separate “bullet” loan repayments due between mid-2015 and early 2016 for borrowings from the Cayman Islands Development Bank.  

A “bullet” or “balloon” debt payment is one that is owed all at once, rather than over a period of years. The government’s 2009 bond issue is one such example where $261 million is due in November 2019.  

The five bullet loans taken out on behalf of the development bank have maturity [due] dates listed as: April 2015 (CI$20 million), June 2015 (two payments totalling CI$11.8 million), July 2015 (CI$5 million) and January 2016 (CI$5 million). That equates to CI$41.8 million due between the last quarter of the 2014/15 government budget and the first half of the 2015/16 budget. 


Mark Simmonds, the UK’s overseas territories minister, and Cayman Islands Premier Alden McLaughlin, right, meet last week in London. – Photo: Submitted