Cayman’s cash crunch?

There have been repeated claims over the past five years that the Cayman Islands government is “broke.” But as the Journal reveals, that’s not accurate. 

 

The Cayman Islands government’s overall cash balances will increase to nearly $162 million by the end of the current budget year, according to estimates in the government’s main budget planning document.  

However, most of that cash is not accessible to government, at least not readily so.  

Some $60 million, it is estimated, will be left in the government’s main operating bank account by June 30, 2014 – assuming an operating surplus of $100.3 million is achieved by that date.  

However, the other $102 million in cash reserves is placed in “various reserve funds,” according to statements produced as part of the 2013/14 budget plan.  

Finance Minister Marco Archer identifies three of the “reserve funds” as the general reserve, the Environmental Protection Fund and the Infrastructure Development Fund.  

The general reserve is expected to have $44.8 million in it by end of the fiscal year. The Environmental Protection Fund currently has $47 million and the infrastructure fund will have about $2.2 million.  

Other cash balances reserved from general use by the government administration include a “sinking fund” of $1.1 million – used to help retire debt from a 2009 government bond issue; a National Disaster Fund holding $4.2 million, and about $900,000 in the Housing Guarantee Reserve. A student loan reserve fund also contains about $1.8 million.  

So, the Cayman Islands government has plenty of cash. It just can’t use it for any general purpose it wishes.  

This includes using the cash amounts in assurances to the United Kingdom that the Cayman Islands government has a sufficient amount of money to keep operating.  

“Of the reserve funds balances, it is only the general reserve balance that can be used in the cash reserves ratio calculation,” Archer says. “All other reserve fund balances are excluded from the calculation. 

“It is not the case that government is withholding use of these funds to ensure that the U.K. is satisfied with the cash balances.”  

Each of the reserve funds can only be used in certain circumstances with the approval of the Legislative Assembly, according to Mr. Archer.  

The general reserve was set up as a “safety net” to protect government against downturns in the local or international economy. Money can be spent from the fund for general government purposes, but the entire LA must approve those expenditures, not just Cabinet.  

The Environmental Protection Fund expenditure must also gain LA approval, but it can only be used “in protecting and preserving the environment of the islands.”  

Similarly, the Infrastructure Development Fund may only be spent on road improvements and other infrastructure projects.  

It is relatively rare, at least within the past 10 years, for the Cayman Islands government to access the reserve funds for any purpose. 

According to Archer, the Environmental Protection Fund has been used four times between 2004 and 2013.  

In 2004, government spent about $1.9 million in a land acquisition in the Barker’s area of West Bay and on a Seven Mile Beach “renourishment project.”  

In 2005, more than $13 million was spent from the fund for debris removal following Hurricane Ivan, which struck Grand Cayman in September 2004.  

According to records provided by the finance ministry, there have been no disbursements from the Environmental Protection Fund since.  

An additional $4 million was spent from the government’s General Reserve Fund in the repair and restoration effort from Hurricane Ivan. An additional $2.5 million was spent on Ivan-related recovery from the National Disaster Fund.  

Other than those items, the only amounts spent from the various government reserve funds in the past decade have been relatively minor amounts in the housing reserve fund.  

Just more than $22 million in government reserves have been spent since 2004, according records provided by Mr. Archer. 

 

Indebtedness 

There are two good reasons the government has been paying close attention to its cash reserves in recent years.  

First, the U.K. has forbidden the local government from borrowing any further long-term debt until at least the 2015/16 budget year.  

Second, a review of the Cayman Islands government’s debt obligations over the next several years shows the public sector will owe a substantial amount of “balloon” or “bullet” debt repayments. 

The largest one – a $261 million payment – comes due in 2019.  

According to budget records, 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 ($20 million), June 2015 (two payments totaling $11.8 million), July 2015 ($5 million) and January 2016 ($5 million). That equates to $41.8 million due between the last quarter of the 2014/15 government budget and the first half of the 2015/16 budget.  

The 2014/15 budget starts on July 1.  

With regard to the country’s ongoing debt repayments, the United Kingdom has advised the establishment of a “sinking fund,” essentially a cash savings account where accumulated funds are used to help pay off debt in future years. That sinking fund – containing $1.1 million – is now contained within the government’s 2013/14 spending plan.  

However, concerns were raised during the previous government administration by Deputy Premier Rolston Anglin, an accountant by trade, about whether the huge existing debt repayment amounts could be removed from the local economy.  

“I think we just have to be honest with the public,” Anglin said earlier in the year. “There isn’t any real possibility that we’re going to be able to have that money extracted from the economy.”  

The development bank and the 2019 debts are the only balloon repayments identified on government’s list of ongoing debts.  

Now the Cayman Islands government is paying more than $30 million each year to service the interest on its repayment requirements. 

Marco Archer headshot - color

Marco Archer

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