The economic merits and importance of the debt ceiling increase

The budget debates have come to an end, and the budget was successfully passed in the National Assembly. Budget 2021 is generally well-received. The policies, initiatives, programmes and projects are, without doubt, designed to rebuild the economy and set the framework for a diversified and resilient, modern economy in the making.
During the budget debates, though, concerns were raised about the merits and/or de-merits of raising the debt ceiling. the Main Opposition MPs, in particular, are of the view that the imposition of the increased debt ceiling would be burdensome on the Guyanese tax payers. This view is, however, misinformed and divorced from context as well as the fiscal management track record of the current Government.
Today’s article discusses a theoretical perspective, drawing from empirical literature on the importance of debt financing for sustainable development and, more so, the importance of sustainable and prudent debt management in achieving the sustainable development goals.

Long-term quality investment for infrastructure
Investing in sustainable, resilient infrastructure – including transport, energy, water and sanitation – is a prerequisite for achieving the many Sustainable Development Goals (SDGs). In a report of the Inter-agency Task Force on financing for development (2017), it was highlighted that there is an infrastructure gap of between US$1 trillion and US$1.5 trillion annually in developing countries. Estimates of the global gap generally range from US$3 trillion to US$5 trillion annually.
Given the enormous investment needs, public, private, domestic and international investment and funding would be required. It should be noted, however, that private and public sources are not necessarily substitutable; each has its own incentive structures, goals and mandates.
In developing economies, three quarters of infrastructure is financed by the public sector (government, official development assistance, and development banks), while in developed countries, this pattern is reversed, with about two thirds of investment coming from the private sector.
The proportions of public and private investment across countries reflect different institutional frameworks, policies, and levels of development, as well as varying investment needs. In developed countries, for example, much infrastructure investment is in maintenance, rather than new greenfield investment. Different sectors also have different capital structures.

Debt and debt sustainability
Borrowing, both by governments and private entities, is an important tool for financing critical investments to achieve sustainable development, as well as for covering short-term imbalances between revenues and expenditure. Government borrowing can also allow fiscal policy to play counter-cyclical role over economic cycles. However, high debt burdens can impede growth and sustainable development. As such, debt has to be prudently managed in both public and private spheres.
Developing countries made considerable progress in reducing their external debt in the early part of the century, assisted – especially in the case of the heavenly indebted poor countries – by the support of the international community. Yet, some developing countries are in debt distress, and several countries have external debt exposures that leave them vulnerable to debt difficulties from external shocks, such as falls in commodity prices, or natural disasters.
Additionally, some low-income countries are now accessing international capital markets, introducing new financing opportunities along with new risks, such as exposure to volatile international capital flows.
Developing countries have made significant progress in debt management over the last decade. Favourable liquidity conditions and debt relief initiatives have helped many countries to make their debt burdens manageable. In addition, various initiatives have focused on the reform of debt management practices and the development of domestic debt markets. It is important, however, for countries to continue deepening reforms that would help them maintain access to markets, and avoid repetition of past crisis situations.
Ultimately, each country’s capacity building needs in public debt management are different. To this end, their needs are shaped by capital market constraints they face, including exchange rate regime, the quality of their macroeconomic regulatory policies, the institutional capacity to design and implement reforms, the country’s credit standing, etc. Capacity building and technical assistance, therefore, must be carefully tailored to meet policy goals, taking into consideration the specific country’s inherent characteristics on these fronts.

To be continued…
About the Author:
JC. Bhagwandin is the Chief Financial Advisor/Analyst of JB Consultancy & Associates, and lecturer at Texila American University. The views expressed are exclusively his own, and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]