Every Finance Minister this country has ever had has struggled with one familiar problem: How do you make a dollar out of fifteen cents?
Well, in some cases, when the economic conditions are favourable; this kind of magic trick in finance is possible. But then there are cases when it just isn’t. So what do you do? You borrow!
Many countries like Guyana have been borrowing from its bilateral and multilateral partners in an effort to fund projects that are needed to advance the development of the nation. These projects make up the national budget which has, in Guyana’s case, always been run at a deficit.
Since the APNU+AFC Coalition Administration took over, there has been worry about the country’s debt profile. It is currently in check, but many citizens still have probing questions. Some of these concerns are premised on how much borrowing the new administration has done since it came to power, how much it has actually inherited from the PPP regime and which outstrips the other.
Finance Minister, Winston Jordan, recently set the record straight on this matter for the Guyana Inc. Magazine. He noted that between 1964 and 1992, in terms of borrowing, the last government borrowed US$2,047,854,139. The PPP/c, in 23 years borrowed US$2,611,371,581. Jordan revealed that the current administration has racked up, between May 2015 and December 2017, US$210M.
He explained that, of the US$210M, it inherited several debts from the PPP regime. These include the loan for the East Coast Road for US$45.2M, the Ogle Bypass Road US$50M, etc. He said that real borrowing for APNU+AFC is under $100M.
The Finance Minister said that he is proud of what the Government has done so far where debt is concerned, since he and his Government have been doing an exceptional job on debt reporting where the law does not require or was ever done before.
FACTS ON INTERNAL/EXTERNAL DEBT
The Finance Minister also provided some essential facts on Guyana’s debt standing as of 2017 in his budget 2018 speech. The economist noted that the Government remains committed to providing efficiently for its financing needs by minimizing borrowing costs within an acceptable amount of risk.
He said, “Debt relief of US$17.7 Million and debt forgiveness of US$55.5 Million are expected to finance the balance of payments deficit for 2017 and permit an increase in the Bank of Guyana‘s (BOG) net foreign assets by US$20.1 Million. Gross reserves of the Bank of Guyana are expected to be equivalent to approximately 3.4 months of import cover at the end of 2017, well above the 3.0 months minimum benchmark for reserve adequacy.”
The Finance Minister noted, too, that the total stock of public debt is projected to increase marginally, from US$1.60 Billion in 2016 to US$1.66 Billion in 2017. This corresponds to a further declining total public debt-to-GDP ratio of 45.2 percent in 2017, relative to 45.7 percent at the end of 2016.
Jordan related that the external debt-to-GDP ratio is expected to marginally increase from 33.2 percent in 2016 to 33.6 percent in 2017, as a result of faster growth in the external debt stock, from US$1.16 billion in 2016 to US$1.23 billion in 2017, when compared with growth in the GDP. Total external debt service is projected to increase by 16.6 percent, from US$53.7 million in 2016 to US$62.7 million in 2017.
He said that this increase is attributed to higher principal and interest payments to several multilateral creditors, one bilateral creditor and one private creditor. In spite of this, the cost of servicing our external debt obligations remains manageable, consuming a mere 5.7 percent of the projected central government revenue for 2017. This represents a significant reduction from the 23.7 percent and 12.6 percent recorded for 2014 and 2015, respectively.
Jordan stated, too, that, “The stock of domestic debt is projected to decline from US$438.6 million in 2016 to US$427.8 million in 2017, representing a decrease of 2.5 percent. However, domestic debt service is expected to increase by 16.8 percent, from US$9.3 million in 2016 to US$10.9 million in 2017, primarily due to the payment of the National Insurance Scheme (NIS) debentures issued in 2016 to assist in recovering the impaired investment in the Colonial Life Insurance Company (Guyana) Limited (CLICO).”
In the area of public debt management, the Finance Minister also reported that progress has been made to consolidate various pieces of legislation that govern debt into a draft Public Debt Management Bill. It is anticipated that under this consolidated umbrella, institutional and legal frameworks will be solidified to allow for more effective public debt management. The intent is to promote transparency, accountability and debt sustainability while striving to meet financing needs at minimal borrowing costs and an acceptable level of risk. The Bill is expected to be laid in the National Assembly this year (2018).
BORROWING AND
THE LOOMING EFFECT ON OIL
While the aforementioned is all well and good, local critics continue to ask poignant questions.
Since the news was announced that Guyana had found oil, local critics have been warning about the proclivity of any government to step up borrowing since the forthcoming wealth can be used to repay that debt. But there is great danger in this and even cause to worry when the current borrowing figures are looked at from a different angle.
The perspectives of Chartered Accountant and Attorney-at-Law, Christopher Ram are useful in this regard.
Ram also agrees that the National Budget has been running at substantial losses for years and these have translated into increased domestic and external debts. The Chartered Accountant noted, however, that a ballooning in spending not financed by increased revenue will only exacerbate the situation with the effect that there will be no resources to be put into the Sovereign Wealth Fund in the early years of oil production.
The Chartered Accountant then referenced a graph to cement his case. The graph examines the deficit for the past five years as well as the domestic and external debts from 2013 to 2017.
The Government has since announced that Guyana stands to gain about US$300M in its first year of oil production. But looking at the deficit first, Ram stated that it is uncertain whether revenues from oil for part year 2020 and full-year 2021 will cover the deficits for those years.
The Chartered Accountant explained that the variables are simply too many, and too substantial to offer an acceptable level of comfort in making projections.
He said, “For example, will the Government pursue restraint in spending or does it see its electoral prospects tied to uncontrolled borrowings? It has to contend, too, with the vagaries of the oil market and the production cost of oil which determine the country’s share of oil revenues.”
Ram continued, “Second, the implications on these numbers of any borrowing of the magnitude contemplated by Minister Jordan will rupture the existing permitted ceiling under the External Loans Act which authorizes the raising of foreign loans for the broad purpose of financing the general development of Guyana. That Act places a ceiling on borrowing at four hundred billion dollars in the aggregate, or roughly US$1.9 Billion.”
The Chartered Accountant added, “The Act does, however, give the Minister the power to increase the limit by way of an order which is subject to affirmative resolution. That means that any increase in the borrowing ceiling has to be approved by the National Assembly before it becomes effective.”
Ram also noted that the Act requires that a copy of every agreement for a loan under the Act must be laid before the National Assembly as soon as is practicable, and that the repayment of the sums borrowed and all interest and other charges payable thereon are charged on the Consolidated Fund.
