Government debt is projected to fall to around $96.0 million by 30 June 2006. This compares with around $200 million prior to the Manila Agreement in 1998.
The level of debt was $97.0 million as at 30 June 2005. The projections assume draw downs of $4.0 million on the Asian Development Bank loan for cyclone rehabilitation, partly offset by loan repayments of $2.7 million. The debt has also fallen when denominated in NZ$ as a result of favourable exchange rate movements, particularly against the Euro and Japanese Yen.
Around $45.0 million of the debt is owed to SACE, a finance company owned by the Italian Government, in relation to the failed Sheraton Hotel project at Vaimaanga.
Net borrowings after taking account of advances to public enterprises and loan reserves are projected to be $72.9 million by 30 June 2006, or around 25.8% of GDP. Nearly all of the debt is concessionary.
The Government has not taken out any new commercial loans in recent years. As noted previously, it made a commitment in the Manila Agreement in 1998 not to undertake new commercial borrowings for seven years unless Crown debt was at prudent levels. Since that time, the only new loans have been two concessionary loans from the Asian Development Bank.
The seven year period expired in September 2005. In any case, Government debt is now at prudent levels. There is therefore scope for resuming commercial borrowing for critical infrastructure projects.
The Government has recently received confirmation of technical assistance to be provided by the Asian Development Bank to develop an environmentally sustainable infrastructure master plan. The plan will cover a 20 year period and will enable the Government to develop ports, harbours, airports, roads and other critical infrastructure in a phased manner in partnership with aid donors. While major infrastructure projects on the Outer Islands are usually able to attract donor funding, this is generally not the case on Rarotonga. Hence some commercial borrowing will be necessary.
Nevertheless as noted in previous updates, any new commercial borrowing should be undertaken cautiously and subject to a number of conditions:
• Rigorous business cases should be developed before any projects are considered for commercial funding, and contractual arrangements should be transparent and contestable.
• As much as possible, the costs of servicing the debt should be met through user charges. There has been a reluctance to implement user charges in the past, but they are critical to ensuring that the debt service burden is sustainable.
• Where user charges are not feasible, commercial borrowing should only be considered where debt servicing costs can be funded from within the Government’s operating revenue.
Complete report: MFEM, Half Year Economic and Fiscal Update