Guyana is more indebted than Haiti

The total stock of public debt (both external and domestic) increased by 4.3 percent to US$1.61 billion at the end of 2017 when compared to 2016 (see graph below). The projected stock of debt for 2018 is expected to grow more than the economy, making Guyana more indebted per size of the economy than Haiti. If one were to add the G$50 billion overdraft incurred at the Central Bank by the Government, Guyana is having its worst debt position since 2014. Sadly, there is every reason to expect that Guyana’s debt will worsen in the months ahead, as the unsettled political situation encourages capital flight. When all is said and done, this situation will cause a rapid deterioration in the Debt-to-GDP ratio.
The Debt-to-GDP ratio is designed to help investors determine if a country has too much debt. In 2017, growing debt represented 46.1 percent of GDP, and this is expected to worsen in 2018 to just shy of 49%. Why this increasing Debt-to-GDP ratio will be bad news for Guyana in 2019?

Increasing debt service cost
In 2017 the total domestic debt service payments increased by 11.7 percent to US$11 million. External debt service payments rose by 13.2 percent, to US$61 million from US$54 million in 2016. This leaves less money for investment in critically needed developmental projects.

Who is supplying the debt?
The portion of the national debt is increasingly foreign. In 2017 it was 73% foreign funded, while in 2018 it is expected to be 75%. In such a situation, it means that foreigners with no loyalty to Guyana are increasingly buying the nation’s debt, not because they have confidence in the Guyanese economy, but as a live investment with sizeable returns. They see Guyana as an opportunity to harvest larger and large rates of return, as in the case of China, which has lots of free cash flows and sees this as an opportunity to buy political votes from countries like Guyana at international forums like the UN, while at the same time making a healthy return on their investments.

Economic growth and debt
The economy is growing at a slower pace than the growth in the debt. In 2017, the stock of debt grew by 4.2%; the economy grew by 2.1%. This is bad news! Because of the low economic growth rate, the ability to pay off these new debts is becoming less possible, and as Guyana’s credit profile worsens, the international investors will find more lucrative opportunities elsewhere, which can then stagnate the nation. Guyana should really be using all of this borrowing to expand its productivity and production, not waste it on idle pipe dreams like the Green State Economy, which is yet to be defined with bankable projects. One of the biggest miscalculations this Granger Government is making is that there is scope for a rapid expansion of revenue collection in a weakening economy. The second biggest miscalculation being made is that this Government has the ability to instill discipline in spending. Thirdly, the Government programme to rapidly expand new opportunities for investment seems dead on arrival. GO-Invest continues to fail at its intended mission; and clearly, its work model needs a through re-examination. The policies coming out of this Granger Government can be classified as confusing and lethargic. Since May 2015, there have been major spates of policy paralysis in Guyana as the Government struggles at rolling out a comprehensive plan that can turn the economy around.
Here are some common solutions to a high debt-to-GDP ratio:
1. Cut Government Spending – Governments with a high debt-to-GDP ratio can cut spending to reduce their debt burden. However, the trick to successfully cut spending in non-value added areas is to not deter growth and undermine the GDP portion of the equation. Let us cut all the parades, wasted travel and pageantry from the budget.
2. Encourage Growth – The Bank of Guyana can play a big role in encouraging growth by cutting interest rates, which should lead to easier commercial lending to the private sector. Higher growth increases the GDP end of the equation, and lowers the overall debt-to-GDP percentage.
3. Increase Tax Income – Governments can increase taxes as a way to pay off debt. But, again, the trick is to increase taxes in a way that broadens the range, rather than increase tax rates so as not to affect GDP growth and undermine the denominator in the equation.
There is no easy path, but action must be taken; because, before we know, it servicing our debt will become more expensive, to the point that it can become unsustainable.