Summary
The Government of Guyana is practicing very prudent debt management, such thatthe macroeconomic framework is sufficiently resilient to withstand external shocks and oil price volatility. It would be worth noting that cumulatively for the period 2020-2023, the Government of Guyana collected $409 billion more in non-oil revenue than it has collected in oil revenue. Over this period, total revenue amounted to $1.856 trillion, of which non-oil revenue accounted for $1.132 trillion (61%), and oil revenue accounted for a meagre $723 billion (39%). Furthermore, over the period 2018-2023, external debt increased modestly by 1.3x, whereas the domestic debt (denominated in local dollar) increased by almost 6x. Therefore, the larger portion of the total stock of public debt is domestic debt, accounting for 61% of the total debt stock, and external debt accounting for 39% of the total debt stock. Within the debt sustainability management framework, it is prudent to practice conservative increases in the external debt and relying more heavily on domestic debt through higher increases of the domestic debt stock.
Introduction
In part I, this author examined thedebt sustainability framework. Following the circulation/publication of part I, this author received comments and critical feedback on the analysis contained therein, in particular, from a respected Guyanese academic in the diaspora. The academician raised some very important observations, which is also important that those are addressed in some greater detail for the benefit of the general public. Hereunder is a summary of the professor’s commentaries captured in italic font and “inverted commas”, followed by this author’s expanded commentary in the discussion and analysis section.
Discussion and Analysis
In part I, the analysis therein demonstrated that a “debt crisis” is highly unlikely should there be a collapse in oil price. What is more likely is a downturn in the economy, not a crisis.The economy has sufficiently strong buffers and macroeconomic resilience to withstand these shocks. This was proven in the manner in which (i) how the economy recovered from the covid-19 pandemic (without oil resources), and (ii) historically, how the economy recovered from bankruptcy in the 1980s-90s, where the debt-to-GDP was 9x (900%) the size of the economy, to economic stability in just two-decades, without oil resources. These werehistorically, remarkable economic achievements that cannot be understated, by the incumbent Government.
Guyana was deemed a success story andhas since been a country of special interest for the International Monetary Fund (IMF).The IMF couldn’t fathom how Guyana achieved stability from bankruptcy in just two decades. That was quick, according to the IMF, given that at that time, many other countries were experiencingsimilar debt crises and were on similar IMF economic reform programs. Yet,some of those countries have not been fully recovered, while some have not even achieved economic stability to date. In the case of Guyana, the stability achieved was attributed to fiscal discipline and prudent fiscal management.
“External Debt Sustainability:This is based on medium to long-term forecasts of our income streams denominated in foreign currency (USD).”
In terms of future fiscal planning within a prudential fiscal framework, considering macroeconomic risks, external shocks, commodity price volatility etc., future projections have to be taken into account, with sensitivity analysis. In this respect, a more dynamic modelling and sensitivity analysis will have to be performed, which this author will embark upon shortly. However, there is an important point in the analysis that may have been overlooked, which is worth re-emphasizing, and reinforced herein.
First, let’s understand what the reserve-to-external debt ratio is, what it measures, how to interpret it, and what does it mean for debt sustainability. What was demonstrated was that the reserve to external debt ratio since post-independence (58 years) was less than one (1). This means (a ratio of less than 1, i.e.) that the country’s forex reserves, historically, had always been inadequate to cover the external debt (principal + interest).In 2023, however, this position has been reversed, wherein this ratio has now moved to almost 2:1;meaning that for every dollar of USD debt, there is 2 dollars of USD in the forex reserve to cover that debt. This is a healthy position to be in from a sustainability perspective, and in terms of what is refer to as “buffers” to withstand external shocks. It is critical to note that Guyana has never been in this position since post-independence; it is for the first time in 58 years thatthe net forex reserves-to-external debt ratio has increased to almost 2:1. Typically, a ratio of 1:1 is usually the minimum desirable benchmark, but 2:1 is obviously a better position, signaling stronger macroeconomic resilience.
“Oil Revenues, Debt Service, Impact of Falling Prices: Oil revenues are spent on imports and not used to service external debt obligations. Therefore, external debt servicing depends on non-oil exports like gold and agriculture. The article has not produced any medium-term forecasts of external debt to non-oil exports ratio… The effect of falling oil prices depends on the cause. If a global recession reduces oil prices below a threshold, this could negatively impact our non-oil exports and undermine our ability to service external liabilities and imports. Also, the interest rate on new borrowing will rise with a collapse in the oil price for any major oil producing economy”.
As wasillustrated in part I, a fall in oil price will have practically zero impact on the external debt servicing capacity, because the debt service to non-oil revenue (excluding oil revenues totally), is less than 10%.Although there is likely to be a slowdown in the economy owing to an oil price collapse, depending on the extent of a collapse, whether, for example, it’s a 50%, 60%, or 90% decline,this will determine the degree of the impact. But even in these scenarios, a debt crisis is unlikely sincethe total debt service (not just external debt service) currently represents<10% of the non-oil revenue. And it is important to note that this is well below the prudential (maximum) benchmark of 30%, whereby it states that debt service (principal and interest) should not exceed 30% of revenue.
Furthermore, it can be argued that even if there is a relatively sharp decline in oil price, it may not manifest into a prolonged decline in the economy considering that it is unlikely that low price will interrupt production. This notion will be examined in greater detail by this author separately in due course.
“Debt Ratios and GDP: Debt ratios scaled by GDP are misleading. The debt-to-GDP ratio will fall due to oil exports, but this does not accurately reflect our ability to pay. We must subtract cost oil, Exxon’s profit share, and Guyana’s take, which are not used for debt servicing. This leaves us with non-oil GDP, which is also misleading for external debt sustainability since we cannot repay foreign debt in Guyana dollars. External repayment depends on the USD we earn from non-oil exports”.
The debt-to-GDP ratio is not and cannot be a misleading indicator by any measure. GDP is a measurement of the aggregate wealthand the value of the economy, establishedupon the value of the aggregate production of goods and services within the economy. The aggregate wealth of a country constitutes the wealth of households, firms and the Government/State combined. The goods and services produced within the economy are produced by the population who are employed by the firms through which the goods and services are produced. The income generated therefrom are used to pay wages and salaries to the employees (households’ income); the profits derived therefrom are subject to taxes, which the Government earns as revenues to the State.
With that in mind, it is for this reason that the debt to-GDP ratio is not a misleading indicator because the amount of debt contracted to finance government spending is dependent on the economy’s (GDP) capacity to service that debt based on the amount of income the economy, through the productive activities, can generate. In this regard, the following should be noted as of the fiscal year ended 2023:
- Non-oil revenue represented 30% of non-oil GDP;
- Total Revenue (including oil revenue) represented 21% of GDP; and
- The total stock of public debt amounted $939 billion, representing 62% of non-oil GDP, which remains within the moderate risk range in terms of debt sustainability.
Furthermore, over the period 2018-2023, external debt has increased modestly by 1.3x, whereas the domestic debt (denominated in local dollar) increased by almost 6x. Therefore, the larger portion of the total stock of public debt is domestic debt, accounting for 61% of the total debt stock, and external debt accounting for 39% of the total debt stock. Within the debt sustainability management framework, it is prudent to practice conservative increases in the external debt and relying more heavily on domestic debt through higher increases of the domestic debt stock. Effectively, this is demonstrative of the fact that the Government is practicing very prudent debt management.
“Net Foreign Exchange (Forex) Reserves-to-External Debt Ratio:This ratio is also misleading. As Figure 4 shows, the Bank of Guyana has been purchasing more foreign currencies from the banking system than it sells since 2019, which explains why the ratio has increased. However, this net purchase position has contributed to the local foreign exchange shortage and cannot be sustained amidst persistent complaints. In recent weeks, the Bank of Guyana sold foreign exchange to the banking system. Therefore, the rising Net Forex Reserves-to-External Debt ratio will come to an end. This is why it is more instructive to look at medium to long-term trends”.
This is a flawed analysis of the net forex reserve, an error which was committed even by the IMF in their 2022 Article IV country report, which they have since corrected in their 2023 report. To this end, the IMF had inadvertently considered only the net foreign assets held by Bank of Guyana, whichwas technically incorrect.
The country’s net foreign assets (or net forex reserves) for the purpose of establishing the forex reserve-to-external debt ratio ought to include the net foreign assets held by the Bank of Guyana, the Commercial Banks and the Natural Resources Fund balances combined. Additionally,the export earnings is not the only source of forex inflows; other sources include investments, foreign direct investments (FDIs), and sale of carbon credits, just to mentionthree of the other main sources of forex inflows.
It would be worth noting thatcumulatively for the period 2020-2023, the Government of Guyana collected $409 billion more in non-oil revenue than it has collected in oil revenue. Over this period, total revenue amounted to $1.856 trillion, of which non-oil revenue accounted for $1.132 trillion (61%), and oil revenue accounted for a meagre $723 billion (39%).
Conclusion
The debt-to-GDP ratio is not and cannot be a misleading indicator by any measure. GDP is a measurement of the aggregate wealth and the value of the economy, established upon the value of the aggregate production of goods and services within the economy. The analysis presented herein is demonstrative of the fact that the Government is practicing very prudent debt management. The macroeconomic framework is sufficiently resilient to withstand external shocks and oil price volatility.