Billions in capital allocations to be financed from foreign loans

Budget estimates reveal…

…deficits will cut oil and gas revenue – Ram & McRae

Government’s $300.7 billion Budget was approved in the National Assembly on Friday, with Ministers outlining their plans for spending the money. However, a perusal of the estimates shows that a large chunk of capital allocations will come from foreign loans.
According to the estimates, $27.7 billion in capital expenditure will come from loans and grants. However, the majority – some $20.4 billion – will come from loans from both international agencies and countries.
The estimates show that the Inter-American Development Bank (IDB) accounts for $7.9 billion, which is the largest chunk. Not far behind is China, which accounts for $4 billion. This is actually a reduction from the $9 billion the latest estimates show was attributed to them for 2018.
India also accounts for $3.7 billion, while a sum of $2.6 billion is attributed to the Caribbean Development Bank (CDB). In terms of grants, the European Union accounts for $2.3 billion. Norway, through the REDD+ Investment Fund (GRIF), accounts for $1.4 billion.

Deficit financing
In the context of the oil and gas sector, several worrying fiscal indicators has caused audit firm Ram and McRae to project reduced earnings from first oil for Guyana if these trends are allowed to continue.
One such trend is the Government’s fiscal deficit, a case where monies are sourced more from loans than from revenue. According to the firm in its Budget focus, Guyana risks less money going towards the Natural Resources Fund and more going towards making up for the deficit.
“The danger of deficit financing is that all things being equal, oil revenues for the early years after First oil will simply go to bridging the deficit and little left for investments and savings,” the firm noted.
At a recent event hosted by the Georgetown Chambers of Commerce and Industry (GCCI), Opposition Leader Bharrat Jagdeo had warned that earnings from oil and gas in the first few years may fall short of the “rosy picture” being painted by the Government.
He had even posited that Government may not even get the chance to use the earnings from oil revenues as they see fit, on account of the debt racked up from domestic borrowing. Soon after this, however, Minister of State Joseph Harmon was quoted disputing this prognosis.
In the Budget 2019 estimates, it is noted that the fiscal deficit will be approximately five per cent of Gross Domestic Product (GDP). Ram and McRae said while the total expenditure for 2019 is $300.7 billion, total income is $248.6 billion.

According to the Ram and McRae, this results in an overall deficit of $52.1 billion.
“Total current revenues are projected to increase by $21.4 million to $238.3 million or by 9.9 per cent. Of this, the Guyana Revenue Authority is expected to account for revenues of $223,583 million or 93.8 per cent of total revenue, an increase of $24,092 million or 12.1 per cent when compared to 2018.”
“Not only does increasing tax revenue appear to be a major policy objective of the Government but instead of using the increases to reduce the Budget deficit, the Government chooses to incur sometimes extravagant and avoidable expenditure. As a result, 2019 will see a widening of the deficit from $41,300 million to $52,156 million,” the firm added in its Budget Focus document.
According to Ram and McRae, increasing tax collection at a rate much faster than the growth of production sector depletes “the oxygen… from the economy.” The firm warned that this is not a good strategy for preventing the Dutch Disease.
The Dutch disease is an economic term for rapid changes to a country’s revenue earnings that result in a reduction in the value of other exported commodities. The situation is often blamed on the sudden development of one sector at the expense of others.