The Consolidation Fund and the persistent overdrafts

 We noted last week that the Consolidated Fund (CF), which has been a standard part of the budget estimates, was not reported for the 2018 budget. When questioned by the Opposition Leader about the absence of this statement, the Minister of Finance responded that Mr Jagdeo could always obtain a copy of the statement if he makes a request. This matter should not elicit such a flippant response, since this is the account into which all revenues received by the government are deposited and payments made by it are debited. When the AFC and PNCR were in the opposition they insisted that the PPP follow the constitution and deposit all moneys into the CF. We learnt last week that the signing bonus was not deposited in said account. Moreover, we noted that the removal of the statistics from the annual budget estimates presents a non-commitment to credibility and transparency on the part of the APNU+AFC government.

Writing last week in his Accountability Watch column, Dr Anand Goolsarran noted that the CF has been overdrawn for most years since 1992, and possibly earlier. In other words, since successive Guyanese governments consistently spend more than they earn in revenues, the CF has a negative balance or overdraft. I have seen some statistics from Dr Goolsarran indicating that the accumulated stock of overdrafts since 1992 amounts to approximately $133 billion.

The Bank of Guyana Act notes that the central bank cannot directly print money to finance the deficit of central government or public enterprises. For example, the central government cannot legally increase the wages of public servants and finance that expense by printing money. The BOG Act, however, recognizes that the central bank is the fiscal agent of central government. Therefore, the BOG is the government’s bank – as specified by Article 45 (a) of the Act – by  being the “official depositary of the Government or specified public entity concerned for any funds whether held in Guyana or elsewhere and accept deposits and effect payments for the account of the Government or specified public entity, provided that the Bank may, after consultation with the Government or the specified public entity, select any other bank to act in its name and for its account as depositary of the government or specified public entity…”

The overdraft of the CF indicates a form of liquidity or short-term cash flow to central government. Commercial banks also provide a similar short-term liquidity facility to private businesses. These overdrafts allow businesses to meet short-term liabilities when revenues are lumpy. However, this form of liquidity is a debt that has to be repaid. More specifically, the overdraft on the CF represents short-term debt financing and not money printing.

This is important from a macroeconomic standpoint since debt and money have different effects on the economy and with different days of reckoning (different time lags). The impact of printing money to finance central government and public entities’ deficits would be fairly immediate as it would engender adjustments in the form of loss of foreign currencies, devaluations and inflation. Debt, on the other hand, takes a long time to work its way through. Sometimes government debt in domestic currencies never really prompt a serious day of reckoning, provided there is a demand for the debt created by the overdraft. It is all about the demand. When the demand stops the meltdown occurs.

Since the overdraft is used to meet regular payments by government, it results in an injection of reserves (mainly electronic and bookkeeping deposits, not money printing) in the commercial banking system. Article 45 (a) notes that the central bank would select commercial banks to facilitate the government’s overdraft payments to their customers whose accounts are credited since they do some type of business with government. This expands commercial bank deposits and the level of reserves, often in excess of the required amount. The commercial banks are required by law to maintain required reserves (also in the BOG Act). However, each week they find themselves holding reserves in excess of requirements; hence, the term excess reserves. The excess comes from various sources, as I have documented in my academic writings, but the overdraft on CF is definitely one of them since private citizens and businesses do business with government and have to be paid.

It is often believed that the overdraft is financed by Treasury bills. This is not necessarily the case, or at least the Treasury bills are not meant to finance the overdraft, but to enable the Bank of Guyana to pursue its monetary policy objective. As far as I am aware (and I stand corrected), there is no direct auctioning mechanism between central government and the private sector. All sales of Treasury bills go through the Bank of Guyana, which sells the bills to bidders. There are however other models which are not necessarily superior to Guyana’s. For example, in Barbados there is a direct market in which the central government is on the sell side and the private sector and Central Bank of Barbados on the other bidding. I think this is all important because at some point someone would need to sit down and think about restructuring all financial markets in Guyana and even the Region.

Given that this excessive government spending and other factors generate persistent excess reserves, the Bank of Guyana needs to get them out of the economy as there is an interpretation that if left unchecked they will generate problems in the foreign exchange market. Essentially, commercial banks which hold excess reserves and private citizens who own excess money balances might be tempted to buy foreign currency assets. That complicates the central bank’s ability to maintain a stable exchange rate and prices.

Therefore, the Bank of Guyana auctions Treasury bills each week to commercial banks, pension funds and others. The BOG Act – through Article 50 – institutionalizes this market system. What is interesting, however, is the BOG never buys securities in the open secondary market because there is none in Guyana. Instead, the central bank always sells Treasury bills because of the persistence of excess reserves.

Moreover, Article 42 of the Act specifies that financial institutions must demand a certain amount of liquid assets, of which Treasury bills are a significant component. In other words, by law the BOG Act and the Financial Institutions Act create a demand for Treasury bills in the private economy. These securities are primarily used to neutralize the excess reserves created by persistent government overdraft in the CF. Therefore, the Treasury bills indirectly allow successive governments to run overdrafts because a captive demand for the securities exist (speaking of stable captive demand, Development Watch columns years ago suggested that an E10 mandate should be created in Parliament to incentivize private investors to invest money in GuySuCo). The excess moneys removed from the economy when banks and private agents buy Treasury bills are locked away in a Sterilization Account at the Bank of Guyana. Therefore, excess liquidity (in the form of Treasury bills, a liquid asset) is generated to sterilize the excess reserves which come from consistent government deficit spending.

This is a privilege that a country has once it maintains a national fiat currency, a delicate system which requires a credible central bank to keep it going indefinitely. We cannot say when Guyana’s day of reckoning – à la Zimbabwe – will come, except that it becomes more likely when the details of the Consolidated Fund are hidden from the public. I have a hunch the motivation is a spending extravaganza in time for 2020. It must be very difficult working in a technocratic position with the Guyanese political class.