In a Guyana Times article published on October 28, 2018, it was reported that Guyana recorded an overall fiscal deficit of a whopping $24.268 billion for the period January – December, 2018. This article therefore seeks to put into context what fiscal deficit means, and their macroeconomic implications.
Fiscal deficits, as conventionally defined on a cash basis, measure the difference between total government cash outlays — including interest outlays, but excluding amortisation payments on the outstanding stock of public debt — and total cash receipts, including tax and non-tax revenue and grants, but excluding borrowing proceeds. In this manner, fiscal deficits reflect the gap to be covered by net government borrowing, including borrowing from the central bank.
Central bank deficit financing in a constrained fiscal space
The financing of fiscal deficits by central banks is not a new phenomenon in both developing and advanced economies. However, it has assumed importance particularly in the aftermath of the recent global financial crisis. Generally, budget deficits can be financed in a number forms: increasing fiscal revenues, reduction in expenditure, printing money, or by borrowing from domestic and external sources (Alagidede, 2016). Each of these mechanisms carry different tradeoffs that policy makers have to always bear in mind. In some countries, there are provisions governing the amount of central bank financing.
A brief review of experiences of developing countries with central banks’ financing of deficits showed varied outcomes. For example, in Costa Rica, the central bank finances 5 per cent of government expenditure and 25 per cent of the national budget. In Bahrain, the maximum amount that can be borrowed is left open to negotiations between the central bank and the Minister of Finance (Alagidede, 2016).
Central bank financing is subject to congressional approval in other countries, such as Korea (Jacome et al, 2012) cited by (Alagidede, 2016); and in some other developed countries, such as the United Kingdom and Australia, their central banks do not finance deficits at all.
Jacome et al (2012) found that the legal provisions on central bank financing of the government deficit seem to be inversely related to a country’s level of development. The implication is that where countries have lax laws, central banks are allowed to provide advances to the government, which is a common feature in many developing economies, especially those with undeveloped financial systems and shallow tax base. Alagidede (2016) put forward the argument that central bank financing of deficits can be detrimental to economic growth and stability. Continuous central bank financing of structural deficits may undermine their operational autonomy.
Fiscal deficits, current account dynamics and monetary policy
A transition from a fiscal regime in which the budget deficit is set “exogenously” to one in which it “endogenously” responds to the business cycle (as the empirical evidences suggest in the 1990s) may induce a transmission mechanism that amplifies the distortions in the system following a structural shock. Any attempt by monetary policy alone to stabilise the external balance could prove effective, but would require excessive fluctuations in the exchange rate, and imply high costs in terms of inflation and output gap volatility (Giorgio and Nistico, 2008).
Fiscal policy, public debt and monetary policy
in emerging market economies
During the 1980s and 1990s, the vulnerability of EMEs to shocks was often exacerbated by high fiscal deficits, underdeveloped domestic bond markets, and large currency maturity mismatches. In many cases, fiscal and monetary responses were procyclical. Debt management policy played very little part in either the choice of an optimal debt maturity or in stabilising the economy (BIS, 2012). Fiscal policy remained a major concern for monetary policy in EMEs for much of the past three decades. Unsustainable fiscal deficits and public debt levels created the spectre of fiscal dominance in many countries, leading to high and volatile inflation and elevated risk premia on government debt. An unfavourable exchange rate dynamic–linked to weak fiscal and monetary policy credibility – exposed EMEs to destabilising capital outflows.
The Guyanese context/conclusion
The question was asked: What is responsible for this magnificent fiscal deficit? The answer is very simple. Over the last three years, Guyana has had the largest budgets compared to those under the previous Administration, and almost all of the national budgets have been largely deficit budgets; meaning, the expenditure is greater than the revenue collected. This deficit means it has to be financed by borrowing from both domestic and external sources. In Guyana’s case, the central bank has also been financing these deficit budgets viz-á-viz the overdrawn accounts, as was cited by other commentators and analysts alike.
The most important concerns at this point in time are those which have been recently highlighted in the Auditor General’s Report, wherein billions of dollars are not accounted for properly. There are definitely real issues in regard to excessive, wasteful and unproductive spending which need to be addressed. With respect to the actual macroeconomic implications in Guyana’s context, further research and analysis is needed, which is forthcoming.
