MPs have approved legislation which will allow Government to increase its overdraft from $15 million to more than $110 million this year.

The Temporary Loans Amendment Act 2009 was passed in the House of Assembly on Monday evening and will enable Government to borrow ten percent of its approved estimated expenditure each year on a short-term basis. That amounts to about $111.7 million this year.

Finance Minister Paula Cox told the House of Assembly that the aim was to provide "increased short-term financing flexibility" at a time when Government's cash flow would be affected by it giving assistance to other industries.

She said initiatives this year to help "key industry sectors" with their cash flow would see tax collections from major revenue sources being spread over a longer period of time.

She described the $15 million short-term borrowing limit set in 1985 as "outdated" and said it needed revising to address the above "predicament". The legislation, she said, "does not purport to increase the overall level of debt but to facilitate access to credit for short-term liquidity".

The majority of borrowing under the amended law will be overdrafts with local banking institutions, which offered the best rates, said Ms Cox.

"These facilities allow Government to obtain short-term funding at very competitive rates and are generally meant to cover short-term financing requirements which are caused by the cyclical nature of Government revenue collections," added the Deputy Premier.

"They also provide financing for any unexpected operational expenses, such as pay awards above budgeted amounts.

"Another advantage of this form of funding is that it can be effectively used as a medium-term loan during times when international capital markets used to raise long-term debt become dysfunctional, as was the case last year."

Shadow Finance Minister Bob Richards described the increase from $15 million to $111 million as "a big jump, it's an over 600 percent jump".

He said: "I think we need to be clear that this is not just a trifling matter. This is a very large change in direction and change in magnitude."

Mr. Richards said the act defined "temporary" as up to 15 months but "temporary can often become permanent".

"After 15 months, all they have to do is roll it over," he said. "We hear that it is temporary but it could become permanent within the ambit of the legislation that we see here."

The money borrowed under the amended legislation will be counted as part of the public debt but will not require contributions to the annual sinking fund, unlike most other forms of public debt. Mr. Richards told MPs: "It's a neat way of getting some money but not actually having to put the normal amount (2.5 percent) of government debt into the sinking fund per year."

The Opposition MP said it was surprising that the $15 million limit hadn't been amended until now. "The ramifications of this are, I think, quite serious," he added. "The ceiling is a very significant amount of money.

"I think most of the extra debt that is being budgeted for the coming year in the Budget statement, I think pretty much all that could go into temporary loans and then once in there could be rolled over ad infinitum and the Government would not have to put aside that money."

He added: 'It would be better if the Government had come here with a plan that showed that Government had to borrow money temporarily but showed that they were going to take it from the temporary basket and put it in the permanent basket."

Shadow Works and Engineering Minister Patricia Gordon-Pamplin questioned whether the revenues to be received by Government would cover the repayment of the temporary loans.

And Shadow Education Minister Grant Gibbons asked what kind of a drawdown Government expected to see on the $111 million during the coming year.

Ms Cox said Government would likely be seeking to borrow between $40 million and $60 million, with a figure of about $500K per year for debt servicing. She said the interest rate on the loans would be between 2.75 and 3.75 percent.

The Minister said the legislation would not allow the debt to be rolled over and that the aim was to convert it to long-term debt. "It's not another way to increase our debt," she said. "The temporary loans are either paid off or converted into long-term debt."

Ms Cox added that she did not expect the borrowing to affect Bermuda's financial ratings.