The Economy: The IsDB US$900M Line of Credit: What would be the implications on macroeconomic stability?

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Sometime early last month, the Honorable Minister of Finance announced that Guyana is poised to access US$900 million from the Islamic Development Bank over the next three years – that is, 2018 – 2020/21.

This announcement at the time provoked some amount of critics from some commentators and the political opposition. This article, however, seeks to examine this from a different dimension – more or less – in an objective and a practical manner.

According to the Honorable Minister, the financing “will be directed to key development areas, including economic infrastructure, rural development and trade and competitiveness” (Newsroom, April 05, 2018).   It is worthwhile to note that these areas identified by the Ministry of Finance (MoF), are crucial aspects of Guyana’s socio-economic development.

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Guyana’s Stock of total Public Debt

GYD$ Millions

Illustration 1:

Illustration 2:

  2014 2015 2016 2017
Domestic Debt 78,437.7 81,693.3 90,571.6 89,364
External Debt 251,105 236,029.5 239,953 249,865
Total Public Debt 329,543 317,723 330,525 339,229

 

Illustration 3:                                     Key Debt indicators for the period 2012-2016

  2012 2013 2014 2015 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 %

Source:  Debt Management Division, Ministry of Finance and Bank of Guyana; Bank of Guyana Statistical Abstract, 2018

That being said, the data in the above illustrations revealed that Guyana’s total stock of debt (which includes both domestic and external debt), stood at $339 billion at the end of 2017. And, in order to present a more accurate picture of Guyana’s public debt, it would be prudent to factor in the $30 billion syndicated loan which was obtained this year – in an effort to resuscitate the Guyana Sugar Corporation Inc. (GuySuCo) – thereby giving rise to a total public debt figure to date of some $369 billion.

Assuming that the average total debt service to revenue ratio for the next three years is 18 %, then in three years the current stock of total debt should reduce to approximately $280 billion (e.i.18% of total average annual revenue which is about $180 billion x 3years less total stock of debt).

Now, if one were to add US$900 million from now to 2020/2021 – total stock of public debt will be about $465.8 billion or US$2.25 billion. Additionally, by 2020 GDP is expected to surpass the $800 billion mark so therefore using a GDP at current market price for 2020/21 of $800 billion will thus give rise to a debt-GDP ratio of about 58 % – just under 60 %.

What this means is that, by 2020 should the GoG increase their total borrowings by US$900 million, it will still be at a sustainable level under these assumptions and provided that all other economic variables remain constant.

In other words, things like total exports do not diminish significantly, instead one would expect revenues from exports increase despite the loss of a large proportion of exports from sugar.

One would also expect other productive sectors to fill the void in addition to potential oil revenues, also, importantly, provided that the international reserves held at the Bank of Guyana are not further depleted. Instead, efforts should be made towards rebuilding the international reserves held by the Bank of Guyana to ensure a much more resilient economy.

There is also another dimension to this analyses and that is, the model of Islamic financing is quite different from the traditional development financing such as financing from multilateral institutions such as the World Bank, Inter-American Development Bank and the International Monetary Fund to name a few.

During the last three decades, Islamic finance has strongly presented itself as an important option to development finance. The top reasons behind the choice of Islamic finance have been efficiency and equity.

Islamic banks and financial institutions provide finances to enterprises through either sharing directly in the net results of their activities or financing their purchases of assets, goods and services on credit. It is therefore expected that Islamic banks hold equity in corporations and sit on the boards of directors.

Islamic finance is a viable, efficient and equitable option for financing development. Its advantages rely on its basic characteristic of avoiding trading present for future money, in addition to using universal banking which is in itself a practice that can offer developing countries special advantages.

Put differently, unlike traditional financing wherein the repayment of such loans are derived from present revenues earned by the Central Government, Islamic financing is repaid from the profits earned from the venture or the project that it is used to finance.

It is thus a more viable model of financing indeed because another crucial distinction to note is that under strict Islamic principles governing this kind of financing, they do not attract interest – instead, they share in the profits. Such a model, to be applied in a developing country perspective – will allow for more fiscal space to the Government – meaning there will be more money available for Government spending on other priority areas and focusing on developing the economy etc.

Finally, to simplify this further, given the unique model of Islamic financing, it may not heighten Central Government’s debt obligation, or, debt repayment would not be that burdensome upon the Government especially with respect to diverting current revenue towards debt servicing.

As such, it will be a more viable and economical model of development financing as against the conventional development financing. This should be a good thing for a developing country like Guyana in the long run, as long as the economy is prudently managed.  

*The author is the holder of a Master of Science Degree from a UK university in Business Management, with specialism in Global Finance and Financial Markets.

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