Over the last few weeks, a number of concerns were expressed that raising the ceiling for Government guarantees of loans to public entities has the effect of increasing the public debt. These concerns relate specifically to the Government’s guarantee of the Power Purchase Agreement (PPA) between the Guyana Power and Light Inc. (GPL) and Amaila Falls Hydro Inc. for the supply of electricity. The Government has maintained that its guarantee of the PPA has no effect on the public debt.
Today, we discuss the concept of public debt and how it relates to Guyana as well as guarantees of loans by the Government and their implications for the public debt.
Meaning of public debt
Our Constitution refers to the public debt of Guyana but does not define it. The Fiscal Management and Accountability (FMA) Act is also of little help in that it refers to it as the “indebtedness of the State”. The general principle, however, is that the public debt is the accumulation of the financial obligations of all government bodies of a nation, as confirmed by the Collins English Dictionary. The Web definition also describes it as the total of a nation’s debts i.e. debts of local, state and national governments.
In the United States, the public debt, or the national debt, is the gross federal debt of the United States Government. It is the amount owed by the US federal government to creditors who hold US debt instruments. As at October 2007, that debt was US$5.04 trillion. It does not, however, include money owed by states, corporations or individuals as well as Medicaid and Social Security. If these are taken into account, the figure would have been US$59.1 trillion.
Unlike developing countries, the UK and the Canadian governments do not generally borrow money by way of loans to undertake infrastructure and other works in support of their national budgets. They therefore define the public debt in a different way. It is the total borrowings of the Government through the issuing of securities by the Treasury Department and other government agencies.
India’s public debt is the debt obligation of the Government and is considered generally in relation to the central government. However, the external debt, i.e. moneys owing to organisations outside of India, includes liabilities of the Indian government, the public and private sectors and financial institutions. The rationale for this approach is that foreign currencies have to be found to meet these liabilities.
Guyana’s situation is not dissimilar to that of India except that the external debt has historically been restricted to central government activities. However, Section 69 of the FMA Act requires the Minister, as part of the annual consolidated financial statements, to certify and issue an official schedule of public debt outstanding in the name of the Government, other levels of government and public enterprises. This suggests a broader view of Guyana’s public debt than what is currently being reported in the consolidated financial statements.
Constitutional and legislative requirements relating to Guyana’s public debt
Article 221 of the Constitution states that the public debt of Guyana and the servicing of that debt (including the interest on that debt, sinking fund payments and redemption of moneys in respect of that debt and costs, charges and expenses of and incidental to the management of that debt) are a direct charge on the Consolidated Fund. A sinking fund is a fund set up and accumulated by regular deposits for paying off the principal of a debt when it falls due. It is a method of setting aside money over time to retire an indebtedness. It is, however, no longer being used by the Government.
A direct charge to the Consolidated Fund means that the transactions are not subject to the approval of the National Assembly but are paid out of the Fund as and when payments are due. Direct charges to the Fund are also described as statutory expenditure, meaning that if there is a financial crisis, such charges must be given priority over other forms of expenditure. It is therefore necessary for adequate safeguards to be put in place to ensure that the State is not encumbered by unnecessary debts and that borrowings by the Government are done with due regard for the national interest and result in good value for money from the proceeds of such borrowings. It is mainly for this reason that Section 3 of the External Loans Act, as amended by Order No. 31 of 1991, authorizes the Government to raise loans outside of Guyana not exceeding G$400 million.
In addition, Section 6 of the said Act requires all agreements relating to such loans to be laid before the National Assembly as soon as practicable after the execution of the related agreements. The Government, however, has not been timely over the years in presenting these agreements to the National Assembly, and there were hardly any questions being asked, or any discussion taking place in the Assembly when a loan agreement was tabled.
Section 57 of the FMA Act authorizes the Minister of Finance to borrow on behalf of the Government: (a) to meet cash shortfalls during the execution of the annual budget; (b) to fund investment and infrastructure projects; (c) to finance a budget deficit; and (d) to meet the objectives of monetary policy. He is responsible for the administration of all domestic and external indebtedness of the Government, Government guarantees and contingent liabilities as well as the maintenance of the related records.
In addition, Section 61 of the said Act requires the proceeds of any borrowings by the Government to be paid into the Consolidated Fund. In the case of an external loan, at the request of the Government, the lending agency makes payments directly to suppliers and contractors for the acquisition of goods and services and the execution of works. The related book entries are made as if the funds have been deposited into and withdrawn from the Consolidated Fund. This approach is necessary because of our outmoded, outdated and cumbersome cash-based system of government accounting and financial reporting inherited from Colonial times, with little or no modifications over the years.
Further, as indicated above, Section 69 of the Act requires the Minister, as part of the annual consolidated financial statements, to certify and issue an official schedule of public debt outstanding in the name of the Government, other levels of government and public enterprises.
Guyana’s legislative framework for the guarantee of loans
Section 3(1) of the Guarantee of Loans (Public Corporations and Companies) Act authorizes the Government to guarantee the discharge by a corporation or a company of its obligations under any agreement which may be entered into by the corporation with a lending agency in respect of any borrowing by that corporation which is authorized by the Government. The aggregate amount of the liability of the Government in respect of guarantees given under the Act is not to exceed $1 billion. This limit has since been lifted to $50 billion to facilitate the PPA between GPL and AFH Inc.
A Government guarantee can only be issued to a public entity, and it is the responsibility of the Minister under Section 62 of the FMA Act to retain all original documentation pertaining to a government guarantee, to maintain the related records and to report on the aggregate of liabilities under government guarantees as contingent liabilities as part of the consolidated financial statements. Each public entity in receipt of a government guarantee is required to pay a levy, as determined by the Minister.
The FMA Act defines a Government guarantee as “a contingent liability that is an obligation undertaken by the Government to pay the debt of a third party in event the third party defaults on its debt obligation”. It further defines a contingent liability as “a future commitment, usually to spend public moneys, which is dependent upon the happening of a specific event or the materialization of a specific circumstance”.
The general principle for the recording of a contingent liability is the probability of occurrence of an event. If such probability is remote, then the transaction is a contingent liability. If there is a possibility that the event will crystallise out, then financial prudence will dictate that the transaction be recorded as an actual liability. Given GPL’s performance and financial state of affairs, the lifting of the ceiling to cover the PPA between GPL and AFH Inc. may very well have implications for the public debt at some future point in time.
Section 71 of the FMA Act requires the Minister, as part of the annual consolidated financial statements, to certify and issue an official schedule of Government guarantees, identifying, among others, the public entity whose borrowing has been guaranteed, the identity of the creditor, and the amount of the Government’s potential obligation in respect of the guarantee.
To be continued