The Delta effect and Guyana’s sovereign indebtedness since 2006

Guyana and the Wider World

guyana and the wider worldConclusion

Policy options pursued

This week I wrap up my columns commemorating the 30th anniversary of the Third World Debt Crisis (TWDC) and Guyana’s fortunes in this regard since 1982. Over the period of review Guyana has pursued (like other Caricom countries), two sets of policy options for dealing with sovereign debt stress.

One has been public debt re-negotiation (undertaken under the Paris Club framework and the Multilateral Debt Relief Initiative (MDRI). The other has been the consistent pursuit of primary surpluses on the fiscal front. These are complementary policies, which have been inspired and indeed promoted by the International Financial Institutions (IFIs).

Last week’s column addressed public debt re-negotiation in some detail, pointing out that Guyana went through six Paris Club re-negotiations and became a part of the MDRI in 2005. In pursuing primary fiscal surpluses Guyana has encountered several fiscal shocks, stemming  from a combination of 1) variations in global economic activity; 2) capital flight; 3) fluctuations in remittances inflows; 4) fluctuations in private investment inflows; (FDI) as well as aid/concessionary inflows; 5) natural events (floods, agricultural pests and diseases); 6) industrial unrest (especially in the sugar and bauxite sectors); 7) fluctuations in export and import prices; and 8) political/ social conflicts.

What can be positively asserted however is that government’s overall fiscal stance has been counter-cyclical (unlike most other Caricom states where it has been pro-cyclical). This observation is well revealed in government’s fiscal response to the economic setbacks occasioned by the Great Flood of 2005.

Accounting for public indebtedness
At the kernel of recent concern over Guyana’s sovereign indebtedness is the determination of which factors have accounted for changes to its  ratio since 2006. Recall that the  ratio reveals a fundamental economic truism. First, the factors driving increases in the denominator (GDP) tend to reduce the size of this ratio. Second, the factors driving increases in the numerator (public debt) tend to increase the size of the ratio.

In sum, the main consideration driving the denominator is change in the value of the GDP, and for the numerator it is the primary fiscal balance and interest payments. Guyana’s annual real growth and price level changes are both captured in its annual nominal GDP values. The primary balance for the period since 2006 has been positive and public debt interest payments have averaged over the same period, 1.8 per cent of GDP (with payments on the external debt averaging 0.95 per cent and domestic debt interest payments, 0.85 per cent of GDP).

Put even more simply, Guyana’s debt burden is eased when 1) the economy has real growth; 2)  there is inflation; 3) the exchange rate depreciates; 4) the government’s fiscal primary balance is increased; and 5) interest payments on the debt (both domestic and external) are reduced.

In the academic paper that I referenced in the first column of this series on Guyana’s public debt, I estimated the relative contributions of these factors to Guyana’s public indebtedness since 2006. Below, I indicate some of the major results from this exercise.

First, over the period of the exercise (2006-2011) Guyana’s ratio fell from 97 in 2006 to a low of 61 in 2007. Starting in 2007, the ratio climbed steadily to 68 per cent in 2010. The reported ratio for 2011 is 67 per cent.

Second, the effect of economic growth and inflation consistently raised nominal GDP at 2006 prices thereby supporting a reduction of the ratio. The government fiscal effort has also been positive as reflected in a continuously positive primary balance.

For the economic purist, it should be stated here, however, that for this period there was an overall deficit of the public sector accounts, after grants.

Third, interest payments on the public debt have been steady, varying between 1.5 and 1.8 per cent of GDP for the period. These payments were roughly evenly divided between payments on the domestic debt and external debt.

Given, as we observed earlier, over the period the domestic debt represented on average 35 per cent of the total debt, this indicates the interest cost of the domestic debt is considerably higher than on the external debt; the latter is no doubt helped by global debt relief measures.

Finally, the exercise revealed that among the components of the    ratio there is a significant unexplained component. This I believe is because the official figures on Guyana’s outstanding public debt are an unreliable indicator of its true indebtedness.

Overall conclusion: The Delta effect
This brings to an end the brief series of articles commemorating the 30th anniversary of the Third World Debt Crisis and Guyana’s public debt performance since then. However, the purpose of the review was not only commemorative. It also sought to highlight the great benefits that can be obtained from following the economic principle of always seeking the “best possible alternative use of the country’s resources.”

This applies even in macroeconomic policy formulation and decision-making. The comments and pronouncements emanating recently from public discussion of this topic contain much misinformation, inaccuracy, mis-statement, and perhaps, worst of all, they display (both the wilful and unintended) consequences of not examining basic facts from the perspective of the best alternative use of resources.

To take a topical example, when a top commercial firm like Delta switches its resource use from Guyana’s market to others, it does so because it expects to obtain better benefits from so doing. To argue that Delta is getting a positive return from Guyana is not enough to justify its continuation.

This would be neither rational nor efficiency maximizing. When therefore the authorities claim to show positive benefit from its macroeconomic management, this does not mean they are doing the best they can. Readers should constantly remember the golden standard is the best possible alternative use of Guyana’s resources, and not just simply making a positive return from its use.