The Guyana APNU/AFC Government Debt Gamble
Photo : Irfaan Ali
Please allow me space to comment on Guyana's rising debt. The government of Guyana continues to demonstrate, overtly, an unruly obsession with large scale borrowing. Recently, through the Islamic Development Bank (IsDB), the government was able to secure a whopping US$900 million credit for, according to Finance Minister Winston Jordan, development in the area of agriculture, banking and finance, human development, energy and rural development. Similarly, SPU (Special Purpose Unit), a unit under NICIL, reeled in another GYD$30 billion to revitalize the three opened sugar estates.
A point to be noted here is the massive increase in total debt. As at December 2017, our total debt (both domestic and external) stood at USD$1.66 billion or 45.2% of GDP. Given the addition, this revised debt figure is now, approximately GYD$2.7 billion, or GYD$1.05 billion more. Thus, our new debt-to-GDP ratio, using the 2018 GDP forecast of 3.8%, is now 73%. To have an understanding of the humongous increase in total debt, our average growth rate in GDP is roughly USD$126.8 million. In other words, this government sees it economically sound to increase the country’s total debt by more than 28%, when our growth rate in GDP is projected optimistically, at 3.8%. Hence, this is what epitomizes debt unsustainability: increase in total debt surpasses increase in aggregate income. Guyana is once again on the road to exorbitant debt levels. In respond, the government continues to remain obstinate in adhering to the various calls to reduce large scale borrowing by international observers.
In relation to the large-scale issuance of bond by SPU, much needed capital would likely be diverted from private investment, which could further dampen economic growth through reduced national savings and income. If, however, economic growth accelerates to keep apace, and the debt-to-GDP doesn’t balloon, which is very unlikely, then all may be well for a time. On the contrary, the growth in debt will cause economic dislocations down the line. To counter these externalities, the country, cowering under the mammoth pile of debt, will be forced to scrimp on critical investments such as education, health, housing and security. The vulnerable and poor are the ones who will be affected the most.
To deal with high debt-to-GDP ratio, future politicians will be forced to pursue inflationary policies such as reduce spending. Thus, interest rates would likely rise, which would translate to higher borrowing cost, and slower economic growth. In the long run, as the economy recovers, excessive public debt will compete with private sector demand for limited domestic credit, a trend that is already conspicuous: in 2015, the year this government came into office, just after one year, in 2016, domestic credit to central government skyrocketed by 98.9% to $56.3 billion. And in 2017, that figure rose by another 43.1% to $80.1 billion.
In the banking sector, high interest rate will likely add further pressure on borrowers, sparking an increase in non-performing loans. As businesses confront shortages of capital, unemployment rate will likely increase, driving private consumption furthered down, a tendency that is already at an alarming stage: as outlined in the Budget Estimate 2018, private consumption plummeted from an astonishing 82% in 2014, to 62% by the end of 2017.
As consumption dwindles, less revenues will be generated, which means larger budget deficit. In the long run, as production level shrinks due, prices for basic commodities will increase, which add pressure on disposable income. Hence, the recipe for an economic concussion is completed. As the country grapples with its unruly debt, the first shock might be in the form of a sovereign debt crisis, whereby investors will perceive the country’s debt as unsustainable and will no longer be willing to finance it.
To rekindle confidence, government will, not surprisingly, drive the message that oil will be the trump card to counter all economic misfortunes. However, given our economic trajectory, by the time oil begins to flow, not to mention Guyana received one of the worst oil deal in history, the crippling manufacturing and industry sector would stand no chance against the Dutch disease. With the inflow of foreign currency, if one is to be optimistic, local currency will appreciate, causing our domestic goods to become uncompetitive on the global market. Export of our traditional goods will shrink dramatically, which will further stoke unemployment.
Hence, the APNU/AFC government is unknowingly playing with fire; if the experts are right, future generation will get burn.