Measuring debt burden
As I proceed with the discussion of the debt crisis, the first issue that should be clarified is how to determine the burden of public or sovereign indebtedness among countries. Countries vary widely in both their economic size and the value of public or sovereign debt that they carry. Obviously, therefore, one billion US dollars worth of public debt would weigh more heavily on a small country like Guyana, than it would on a large country like the United States. When comparisons are therefore made, the burden of a country’s debt is expressed as a relative concept that brings together both the amount of the debt and the size of the economy.
One obvious way to combine these two is to divide a country’s public debt by its economic size, and the ratio arrived at would then summarize the burden of its debt. The economic size of a country is measured by its GDP. And, the size of the public debt is usually the amount reported by the authorities. The resultant public debt-to-GDP ratio is the most commonly used measure of a country’s public debt burden.
However, from time to time, other divisors have been used for particular specialist purposes. Thus for example, the amount of money spent on servicing the debt, divided by the value of taxes a government collects is a measure of the fiscal burden of the debt. As a rule, while it is relatively easy for readers to envisage the public debt-to-GDP ratio, in practice establishing the sizes of both the public debt and GDP accurately, are not always straightforward.
As I have explained in earlier SN columns, the World Bank Debt Tables provide an official guide to measuring the total public sector debt of a country. There it is recommended that this includes all domestic and external obligations of the government, including all obligations of 1) the central government and all its agencies; 2) subsidiary governmental bodies and all their sub-divisions; 3) autonomous public bodies; 4) state enterprises, and any other enterprises for which central or local government provides implicit or explicit guarantees or obligations in regard to the repayment of their creditors.
Similarly, there are various GDP measures and the practice is for the authorities to determine which one to use and apply it on a consistent basis. For my part, when I report on Guyana I consistently use GDP at current purchaser prices or market prices. This is larger in value than the alternative, GDP at current basic prices or factor cost, as its value includes taxes on products, net of subsidies. Because the GDP is the denominator, in establishing the ratio this procedure yields a lower ratio.
For Guyana, the above description of total public sector debt is hard to determine accurately. In practice the quality of reporting on the various items identified for inclusion varies widely. Prudent investors and/or analysts do not take the official data that is put out at face value. The real difficulty here is that the government has contingent liabilities, implicit and explicit, which it does not always and consistently include. A good example is private commercial bank deposits. While these are formal obligations of the private banks that accept them, if the banks were to confront serious difficulties of repayment, most investors would expect/demand/hope the government would provide the needed financial cover, especially as the saying goes, ‘these are considered as too big to fail.’
Since the global crisis debt
As indicated last week, since the eruption of the global financial crisis in 2007-08 sovereign debt crisis concerns are presently concentrated on Europe (the Eurozone area), Japan, and the United States. IMF data reveal that at the end of 2011 Japan had the highest public debt-to-GDP ratio for the 171 countries whose sovereign debt burdens it reported on.
The economies most affected in Europe are the so-called PIIGS economies: Portugal, Italy, Ireland, Greece and Spain. These are ranked respectively at numbers 10, 7, 9, 2, and 38 out of the IMF list of 171 countries. Parenthetically, it should be noted that other important European states (Belgium, France and Spain) are ranked above Spain at 38.
The case of the United States has been dramatized by the ongoing political and economic crisis known as the fiscal cliff, spending cuts, and debt ceiling impasse. At the end of 2011, the United States was ranked at 13 in the list of the world’s most highly indebted countries.
Third world debt
Although as indicated above, global attention is now focused on the First World Debt Crisis the Third World Debt Crisis continues to be a major burden on poor and small middle income countries (as in Caricom and the wider grouping of Small Island Developing States (SIDS)).
Four pieces of global data strongly support this contention. First, and foremost, IMF information indicates that about one-quarter of the Low Income Countries are either in an actual state of high sovereign debt distress or face a high degree of risk of entering this stage of financial and economic unravelling. Second, and combining with the above, another one third of the low income countries face a risk of significant public debt distress.
Third, and disturbingly, about one quarter of the low income countries that had benefited from international and/or regional support over the past decade or so, because of their extreme public indebtedness are now once again “at risk.” In other words, their earlier debt crises have re-emerged after temporary abatement!
Finally, recent estimates (2012) from both the IMF and the global NGO movement (Jubilee Coalition and Eurodad) project that payments on outstanding public debt by developing countries as a group, would rise by as much as one third over the next few years.
Next week I shall briefly describe the public debt status of Caricom, which as we shall see, is probably the worst in the world. Then I shall turn my attention to the situation in Guyana as I wrap us these commemorative articles on Guyana’s overlooked role in the Third World Debt Crisis.