On the Sustainability of Guyana’s Debt
Posted By TarronKhemraj On February 20, 2013 @ 5:01 am In Daily,Features | Development Watch
Introduction
A controversy has emerged on whether Guyana’s external debt is sustainable. I would therefore suspend my “Politics and Guyana’s Underdevelopment” series and give a few thoughts on the Guyana external debt. I want to make it clear that this recent debate is restricted to the external public debt, which will have to be repaid in foreign exchange, namely US dollars or by bartering rice for oil with Venezuela. Finance Minister Singh noted the barter arrangement with Venezuela; however, he stopped short of telling the country the amount owed to Venezuela under PetroCaribe. The people of Guyana have the right to know this number given Venezuela’s claim on 3/5 of our territories.
The debate does not consider the domestic debt, which needs to be analysed separately. There is a monetary policy component of the domestic debt. I have written letters on this in the past. We can certainly take this issue up in a later column. The domestic public debt will be repaid in Guyana dollars; however, the external public debt must be repaid in foreign exchange. Therefore, associated with the external debt is foreign exchange risk should the Guyana dollar depreciate rapidly.
When debt is sustainable it means the country is earning enough revenues to keep servicing existing debt. In a recent Stabroek News report (Feb 11, 2013) Minister Singh was quoted as saying: “… higher wealth and income levels make debt payments easier. As a result, a person or country with greater income could borrow more without putting their financial situation in jeopardy”. The Minister is therefore making a case that Guyana can pay its external debt bill comfortably. He is also making the case for Guyana to take on more external debt.
Is the debt sustainable?
The answer will depend on several qualitative and quantitative factors. The Minister gave several quantitative variables or reasons why we should not bother too much about the external debt. Of course, 1992 is given as the benchmark year. One variable given is the increase in central government revenues from US$371 mill in 1992 to US$637 mill in 2012. I believe this is a problematic number to use when trying to convince the public we should not worry about the external debt. Government tax revenues are obtained in Guyana dollars that must be converted into US dollars to service the external debt. We still do not circumvent the foreign exchange risk.
A more relevant number given is the increase in total exports from US$382 million in 1992 to US$1.4 billion in 2012. This quantitative indicator is important because it is the only legal way, except remittances and foreign aid, for the country to earn foreign exchange to pay off the foreign debt. While this number seems impressive, it does not take into consideration some qualitative issues pertaining to the nature of Guyana’s exports. As a matter of fact, the traditional debt sustainability measures do not consider what I am about to say.
It is well known that the makeup of Guyana’s economy did not change significantly since independence in 1966. The economy still produces mainly primary commodities for exports such as gold, timber, bauxite, sugar, rice and unprocessed agriculture. The price of all these commodities is extremely uncertain or volatile. The good fortunes in gold could be reversed in a few short weeks, especially as the Federal Reserve starts to increase interest rate. We know the US will increase interest rates and therefore US$ will strengthen and with it comes a falling price of gold. An astute economic planner has to take the present production structure of the economy (and its structure of exports) into consideration when implementing large economic projects.
We just can’t say because the IMF says net present value (NPV) debt is within certain bounds it is sustainable. This is why it is absolutely important for the Ramotar government to reconsider and re-sequence some of projects it is taking on that will have to be financed by new external debt. Is rebuilding the airport terminal absolutely necessary at this point and what would the country have to give up in order to obtain a new airport of US$160 mill? Could this money be better spent on fixing the Skeldon sugar factory into which US$180 million was already spent? The IMF never considers these qualitative factors in its Excel spread sheet that measures debt sustainability; nor does the Debt Management Unit of the Ministry of Finance.
Based on these qualitative factors, the onus is on the President to make a call. Furthermore, President Ramotar ought to bear in mind the impending sustainability problems at NIS that will have detrimental and debilitating effects on the poor and working class. Those with the money can self-sponsor to Canada and other places. Adding unnecessary foreign debt to the NIS problems could be extremely harmful to the future of the country.
What exactly is the level of US$ GDP?
I find extremely problematic the level of GDP that Minister Singh quoted. It was noted that Guyana’s GDP increased from US$371 mill in 1992 to US$2.8 bill in 2012. For this to occur it means the compound annual GDP rate of growth had to be 11.22% each year for 19 years. Who out there believes that? The real GDP grew at an annual average of approximately 4.2% since 1992. Adding the rate of depreciation of the Guyana dollar relative to the US dollar still cannot account for 11.22% annual compound rate of growth.
One might ask why it is so important to have a precise estimate of GDP level. The Minister gave the answer in the quote above. If a person or country is producing more, then that person or country has a higher capacity to borrow. However, it cannot be that the level of US dollar GDP is 2.8 billion if we believe that in 1992 the level was US$371 million. The annual rate of growth of 11.22% just does not make sense even if we factor in the rate of depreciation since 1992. If the Minister insists that the level of GDP in 2012 is indeed US$ 2.8 bill, then the level in 1992 has to be significantly higher than US$371 million. The mathematics of compound growth will not allow him to have it both ways.
Taking on new debt
As was made public, the level of foreign debt is US$1.7 bill. Amaila will add approximately US$ 900 mill, while the airport expansion will add a further US$ 160 mill. Therefore, by the end of 2016 – by which time Amaila hydroelectric power plant should be completed – the level of external debt will be US$2.78 bill at minimum. Of course, there will have to be other borrowings.
As I noted above, the quoted US$2.8 bill GDP level does not make sense because 11.22% annual compound growth of GDP does not make sense. What if we consider a generous rate of growth of 6% since 1992? That means as at 2012 the level of GDP is around US$1.12 billion instead of US$2.8 bill. In that case the debt/GDP ratio in 2012 is approximately 151% (with a generous rate of growth since 1992). That is a very high ratio. It implies the country has little capacity to take on great levels of external debt.
Let us now work out the projected debt-to-GDP ratio until the end of 2016. Assume another generous rate of growth in US$ GDP for 2013 of 6%. This will take the level of GDP to US$1.189 billion.
Assume further that the Amaila and the airport projects have a short-term growth in GDP of 10% in 2014, 2015 and 2016. Note that this spectacular expected growth (10%) in GDP will not result in more monies for Guyanese in the short-term since mainly Chinese workers will get work.
Nevertheless, let us carry out the logical exercise. It means that by the end of 2016 the level of GDP will be US$1.583 bill. In that scenario the debt-to-GDP ratio will be approximately 175%. Given the problems at NIS and the structure of production (and exports), I have to cancel my plans to re-migrate to Guyana. Perhaps the Minister can convince me otherwise by exorcising some of the anti-PNC jumbies by showing us that the level of GDP in 1992 was significantly higher than US$341 mill.
