Former Prime Minister Dr. Ralph Gonsalves has raised serious concerns regarding the fiscal viability of joining the Development Bank of Latin America and the Caribbean (CAF) and using its funds to capitalize a local development bank. Speaking on Star Radio, Gonsalves cautioned that borrowing at commercial-grade rates from regional institutions to fund high-risk domestic lending threatens the financial stability of the state.
Addressing recent legislative moves to finalize St. Vincent and the Grenadines’ membership in CAF, Gonsalves clarified that while the initial application for Class C membership was initiated under his administration, the financial terms are far from soft or concessional.
Under the Class C terms, the country must contribute $2 million US in equity capital subscription, granting access to four times that amount in total borrowing capacity—up to $8 million US. However, Gonsalves emphasized that CAF does not function like traditional concessionary lenders such as the Caribbean Development Bank (CDB) or the World Bank.
With variable interest rates hovering between 5.5% and 6.5%, Gonsalves noted that his administration had deliberately approached CAF with caution. He stressed that while CAF provides a useful secondary cushion during major economic emergencies or natural disasters, its borrowing costs make it unsuitable for routine state development spending.
Gonsalves directed his strongest criticism toward government plans to channel CAF funds directly into a state-managed local development bank. He argued that financing a development bank with money borrowed at 6% interest creates an unsustainable business model:
High Interest Spread Requirements: A functioning development bank requires a minimum 3 percentage point interest rate spread above its borrowing costs to cover administrative overheads and operating expenses, pushing minimum lending rates to 9% or higher.
Elevated Non-Performing Loan (NPL) Exposure: Unlike commercial institutions—such as the Bank of St. Vincent and the Grenadines, which recently set aside $15 million EC in general provisions for bad loans—development banks naturally bear higher unit costs and significantly higher proportions of non-performing loans.
Unviable Credit Risks: Gonsalves warned that charging 9%+ interest through a state development bank will disproportionately attract unviable borrowers and “party faithful” who fail creditworthiness checks at commercial banks.
Gonsalves further dismissed assertions made during the budget address that the proposed development bank would incorporate a National Housing Trust component to distribute housing grants and low-cost mortgages using CAF debt.
Terming the policy “pure amateur hour,” Gonsalves argued that issuing grants or subsidized housing loans from capital borrowed at 6% interest demonstrates a fundamental lack of financial judgment and economic literacy. He warned that attempting to run state banking initiatives without realistic risk buffers will leave the country in dire financial straits.
