The Tribune

• Suggests ‘sinking fund’ use breached law

• 35% of assets used in 6 months for debt

• Represents $190m ‘reversal’ from Budget

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Opposition’s finance spokesman yesterday challenged whether the Government may have violated public finance laws by drawing on $133m from its “sinking funds” to pay debts coming due.

Kwasi Thompson, former minister of state for finance under the Minnis administration, told Tribune Business that the Government’s 2023-2024 fiscal second quarter and half-year report reveals a more than $190m ‘reversal’ of its “sinking fund” strategy as set out in last May’s Budget.

That, as confirmed by this newspaper, showed the Davis administration showed planned to expand the total assets held in its four “sinking” funds by almost $60m during the 12 months to end-June 2024. Yet it has instead reduced, or drawn down on, these assets by $132.7m “for the servicing of debt obligations” during the first six months of the 2023-2024 fiscal year.

Mr Thompson argued to this newspaper that this represents a likely breach of section 56 in the Public Finance Management Act, which the Davis administration brought to the House of Assembly in 2023. This stipulates in clause two that “the minister [of finance] shall, as part of the annual budget, disclose the particulars of government securities and loans to be redeemed from the sinking funds”.

This was not done in May 2023-2024, and both the full-year Budget and half-year report, the latter of which was released yesterday, show the Government intended to expand the sinking funds’ collective asset base by $59.8m during the course of the fiscal year.

That was to be accomplished via a $1.131m payment from the Clifton Heritage Authority; $3.7m and $1.7m in likely interest received on respective $200m and $100m US dollar bond issues; and the bulk - some $53.279m - generated from a $750m US dollar bond holding.

However, the 2023-2024 half-year report revealed: “Over the six month period, drawings on the sinking fund for the servicing of debt obligations totaled $132.7m.” This means that some 35 percent, or more than one-third of the total $378.6m in assets spread between the four “sinking funds” at the start of the current fiscal year have been employed to repay debt.

And, of the near-$246m remaining, 37 percent are still tied-up in the repurchase (repo) agreement that the Government struck with the Goldman Sachs investment bank in February 2022. That saw the latter advance the Government more than $200m in US dollar-denominated liquidity, with the assets held in the “sinking funds” pledged as security. The Government was to buy them back over a two-year period.

“On a cumulative basis, the four sinking fund arrangements earmarked for scheduled retirement of external bonds amounted to $245.9m at end-December 2023, of which $97.1m is subject to the February 2022 repurchase agreement in which external bonds were sold for repurchase in two years,” the half-year report.

Simon Wilson, the Ministry of Finance’s financial secretary, could not be reached for comment before press time last night despite multiple Tribune Business attempts to do so. It thus remains unclear whether the “sinking fund” draw down was, in part, done to help cover the Government’s near-$259m first-half fiscal deficit as some observers have suggested.

That $258.7m deficit represents new debt incurred by the Government during the six months to end- December 2023, but the half-year report revealed net central government debt had increased by just $156.9m - some $100m less - during that period.

Mr Thompson told Tribune Business: “In looking at the Public Finance Management Act, the Government it appears is in breach of that Act. Section 56 of that Act speaks to sinking funds, and says if the Government wishes to use the sinking funds it must disclose in its annual Budget the particulars as well as the ways it will use those sinking funds.

“The Budget, unfortunately, said the opposite. It said they were going to add to the sinking funds, not use the sinking funds. It appears the Government once again is in breach of the law.” The east Grand Bahama MP then queried whether the Davis administration was in compliance with section 56’s clause three which requires the appointment of trustees to oversee the “sinking funds”.

“The minister [of finance] shall appoint trustees to administer the “sinking funds” in accordance with the provisions of the Public Debt Management Act,” this clause states. However, the appointment of such trustees has not been announced publicly.

“Section 56 also speaks to trustees that the Government must appoint to oversee the sinking funds,” Mr Thompson said. “If the Government is using the funds, we’d like to know who are the trustees that the Government has appointed to oversee the funds. The Government has a lot of questions it must answer with respect to usage of the sinking funds.

“The law is clear in terms of the obligations on the Government to articulate how it is, and why it is, and the particulars they’re using the ‘sinking funds’ for. I understand that’s a very important in the usage of the sinking funds to pre- vent what the Government appears to be doing - if there’s a need or shortfall, it will go into the sinking funds and use the sinking funds.

“I believe that provision was put into law to prevent that, so they must state why they are using it and what they are using it for. That’s what I understand that provision was put in there for.” The Government created the “sinking funds” to help accumulate US dollar and other foreign currency assets to help meet the redemption of The Bahamas’ multi-million dollar international bonds when they mature.

The “sinking funds”, whose assets typically include US Treasuries and other securities, were thus designed to avoid the Government having to come up with large sums of money at once when these bonds fall due and principal must be repaid to their investors.

“You set aside monies to minimise having to come up with large sums at one time,” one contact, speaking on condition of anonymity, said of the rationale. “There’s no law that directly prohibits them using the sinking funds for other purposes, but that ought to have been laid out in the annual borrowing plan. There’s no explanation for why they’ve made this change in their approach.”

Mr Thompson, in a statement yesterday, added: “The Opposition is concerned that the Government is indicating a drawdown of $133m from the sinking fund assets when the Government’s budget for this year stated that some $59.8m was to be added to the fund.

“This was clearly an unplanned draw down and also inconsistent with the Government’s published annual borrowing plan, which made no mention of using the sinking funds to meet current debt obligations. Once again we find the Davis administration committing to one thing to the Bahamian people and then turning around and doing the opposite.....

“We must ask what caused the Government to take this drastic and unexpected step. Is this evidence that the Government continues to have challenges in sourcing the budgetary financing consistent with its annual borrowing plan?”