The Economy: Public debt management and Guyana’s stock of public debt: A critical review
Sovereign debt management can be defined as the process of establishing and executing a strategy for the management of the central government’s debt. Governments incur debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals which the government may have set out to achieve (IMF paper, 2001). In a broader macroeconomic context, governments should seek to ensure that both the level and rate of growth in their public debt is fundamentally sustainable, and can be serviced under a wide range of circumstances, while meeting cost and risk objectives.
The Minister of Finance, recently presented to the National Assembly, the second edition of the Public Debt Annual Report for the fiscal year ended December, 2016. In the light of this, and as expected, it was the subject of a few critiques issued in the media by political and economic commentators. In this regard, a popular commentator called upon the government to stop borrowing in which the argument was made that government spending is spiraling out of control and the level of the nation’s public debt is climbing steadily.
The tables below illustrate some of the key debt indicators for the period under review:
Key Debt indicators for the period 2012-2016
|Total Debt to GDP Ratio||63.7 %||57.9 %||51.9 %||48.4 %||46.6 %|
|Total Debt Service to Revenue||9.5 %||31.8 %||24.8 %||13.7 %||7.3 %|
|Total External Debt Service to Exports||2.5 %||12.8 %||12.4 %||7.6 %||3.5 %|
Key Debt indicators for the period 2012-2016
GY $Millions, unless stated otherwise
|2012||2013||2014||2015||2016||2012-2016 (change in %)|
|Total Public Debt||371,296||355,810||329,620||317,740||330,606||12.3 %|
|Total Public Debt Service||12,314||43,405||36,101||22,149||13,020||5.7 %|
|Total Current Revenue||130,229||136,495||145,726||161,710||177,289||36.1 %|
|Total Current Expenditure||114,915||122,054||133,834||147,638||170,152||48 %|
|Exports of Goods and Non-Factor Services||350,110||316,424||278,445||269,730||318,196||-10 %|
|International Reserves & Net Foreign Assets (held by the Banking System)||
Source: Debt Management Division, Ministry of Finance and Bank of Guyana
Given the aforementioned data, total stock of public debt stood at $330.6 billion as at the end of December, 2016, of which total public domestic debt stood at $90.6 billion and – the remainder of $239.4 billion or US$1.162 billion constitutes total stock of external debt, according to the Public Debt Annual Report. This level of public debt is also reflective of an increase of 4 percent or $12.9 billion when compared to the corresponding period in 2015. For simplification, domestic debt constitutes the government’s borrowings in the local capital market and external debt is simply the central government’s borrowing from foreign sources – that is, both bilateral and multilateral institutions and /or lenders.
In the interest of providing updated information, however, according to the Bank of Guyana (BOG) half year report for the period ended – June, 2017, total stock of public debt stood at US$1.638 billion dollars or G$338.2 billion, reflecting an increase of 2.3 percent or $7.6 billion, which was as a result of further loan disbursements from international creditors.
Guyana’s debt to GDP ratio of 46.6 percent achieved for the fiscal year ended December, 2016 is relatively low (under 60 percent) when compared to other Caribbean Countries for example, Trinidad & Tobago’s debt to GDP ratio was 61 percent as at the end of 2016, the Bahamas was 74 percent and Suriname was projected to increase to 68 percent at the end of 2016. In the last five years, this ratio was at its highest in the fiscal year of 2012 which was 63.7 % and, therefore an improvement by 17.1 % during this period is a commendable achievement.
It is observed also that total stock of public debt has not increased or changed significantly in the last five years – in fact, it was at its highest level in 2012 and declined by 12.3 % from 2012 to 2016, to $330.6 billion from $371.3 billion; total debt service to revenue ratio of 7.3 % for the fiscal year 2016, is the lowest for the five years period under review with the highest of 31.8 % recorded in 2013. It is worthwhile to mention that this ratio, in particular, is considered the most important measure of the total public debt management structure – because it shows what proportion of central government’s revenue is needed for the nation’s debt servicing obligations.
Against these backgrounds, the highlighted key debt indicators presented above, revealed that the current level of the total public debt is deemed manageable, healthy and sustainable, with adequate leverage for additional borrowings, if need be, provided that all other variables remain constant, or relatively unchanged – within the current macroeconomic framework. It should be mentioned too, that with the anticipated oil revenues in just under three years, when this becomes realizable, it will further minimize the risk of default and the risk of any potential sovereign debt crisis, and will help to strengthen the country’s resilience to the volatilities prevalent in the global environment.
Notwithstanding, this column supports the viewpoint – that the Central Government needs to manage its expenditure more responsibly. There is sufficient evidence in the public’s domain with respect to government’s spending, that corroborates this position – wherein the government has incurred – in some cases unnecessary and exorbitant expenditure for example the one billion plus Durban Park project, millions of dollars spent on frivolous bill boards across the country depicting the Finance Minister upcoming budget presentation, and last but not least, the government of the day, its bureaucratic structure, is unarguably too large for a small economy like Guyana, and thus, necessitates the extravagant wastage of monetary resources.
Put differently, the Central Government’s actions in managing the day to day and economic affairs of the country, are yet to reflect that they are doing so in a responsible and prudent manner – particularly ensuring value for money and, yet to reflect that they have got their priorities set right. Not because the risk of default or a debt crisis is low at this point, certain matters on government’s spending should be taken for granted; one bad or reckless decision could induce a crisis – overnight.
In concluding today’s piece, this assertion is supported by the fact that the one indicator that should lead to a more proactive approach in the management of the economy – is the state of the country’s international reserves and net foreign assets held by the banking system: as the data above revealed – total international reserves and net foreign assets held by the banking system deteriorated by 27.6 percent over the last five years, from US$1,873.3M to US$1,468.1M or by US$405.2M.
This outcome cannot be ignored as it could have severe adverse implications not only for the economy overall, but also the public debt management framework. It means that, with the steady depletion of international reserves and net foreign assets, the country will inevitably default on its external debt servicing obligation especially; as adequate foreign exchange may not be available to do so and to accommodate international trade – imported goods will therefore become more expensive and /or – certain goods and services – the country may not have the capacity to import due to shortage of foreign exchange – inflation will increase, and the currency is likely to depreciate further. These are just a few of the consequences that could occur. Therefore, the risks highlighted herein and the situation with the nation’s international reserves need to be arrested now to avert the risk of a depressed economy.