The previous column – “Government deposits at the BoG and some MMT-like themes”– makes several points. Firstly, the Consolidated Fund has been in overdraft since 1985, according to data my co-author, Mr. Joel Bhagwandin, assembled from the annual Budget Estimates. The year 1985 is the starting period for which we can find the data and not the first year when a deficit was recorded.
Secondly, the summary Consolidated Fund is no longer reported in the Estimates. One can think of this account as being similar to a business’ chequing account, which can be in overdraft if the business is faced by random expense shocks exceeding revenues. The Bank of Guyana (BoG) houses the Consolidated Fund. Thirdly, central government – in principle – can write cheques to make payments to the private sector and not bother too much about directly repaying the BoG. These expenditures expand the liability of the central bank, just like if the government decides to print Guyana dollar notes and make payments. These currency notes, if printed, will also expand the BoG’s liabilities. The overdrafts generate surplus reserves in the banking system. Exactly how the structural surplus reserves in the economy are managed is the subject of much academic research and debate. I will discuss later in this essay how the BoG manages these structural excess reserves that are created by the overdrafts.
Thirdly, the previous column presented data showing that aggregate deposits at the central bank are in overdraft starting from the last quarter of 2015. These deposits include multiple government deposits which are opened for special projects. When the BoG reports government deposits, these are grouped together with the balance in the Consolidated Fund. For statistical purposes, the BoG aggregates these special deposits with the Consolidated Fund. Therefore, we cannot say for sure what percentage is the Consolidated Fund versus the percentage of special deposits at the BoG, except to say that the total is in overdraft. These different accounts have been the source of great misunderstanding and speculation during the time of the previous administration. Although my objective for this essay is not to decipher the legal dimension of the accounts – for which I am woefully unqualified – but to explore the monetary aspects, the law does allow the Minister to have different accounts for different projects. However, all laws in Guyana – especially the constitution – are drafted with enough ambiguities to enable the political class to pursue legal challenges as an avenue of political destabilisation.
Central government and state-owned corporations also have deposits in the commercial banks. These are positive balances, but they appear to be declining in recent years. For example, in 2011 total government deposits in the commercial banking system amounted to G$40.4 billion, of which state-owned enterprises accounted for G$18.6 billion. In 2015, total deposits increased to G$68.2 billion, of which state-owned corporations contributed G$47.2 billion. Total deposits in banks declined to G$58.8 billion at end 2018; of this total public corporations owned G$27.3 billion.
In 2015, there was a debate on whether the government should withdraw its deposits from the commercial banks. I did a column back then arguing that removing these deposits could greatly shock the system of liquidity – both in terms of excess cash reserves and interest-earning liquid assets like Treasury bills. Treasury bills are most useful for signalling market-based interest rates and for creating a domestic profit centre for financial investors. If these bills do not exist, then we can expect private economic agents to hoard foreign exchange and buy foreign interest-earning securities. This will have adverse implications for the BoG’s ability to manage the exchange rate. Many like to say Treasury bills are meant for sterilising excess reserves. However, this is not the real purpose for Treasury bills since Guyana cannot really undertake open market operations like what the Money and Banking textbooks outline. An important question is where are these excess reserves coming from? This is where the Consolidated Fund comes into the picture since it has an important monetary role. A purpose of independence was to have one’s own central bank and currency. Preserving the value of the national currency is always a complicated task given that its use is limited at the borders. Countries with internationally demanded currencies have a lot more wiggle room to run deficits and build up debt. Japan and United States are in this fortuitous position. The amount of overdraft the Guyana government can run in each year is limited, although the previous column shows a dramatic increase in these overdrafts in recent years.
When the government runs overdrafts on its BoG account it increases the liabilities of the central bank and expands the assets of the private sector. These assets are gained by households and businesses. The overdrafts help to pay salaries of public servants and for services of contractors, among others. The assets ultimately show up as deposits and non-remunerated excess reserves in the banking system.
However, when government and state-owned businesses make payments from their accounts in commercial banks, they are just shifting around financial assets inside the private sector. In this case, monies from one private bank are deposited into another private bank, and so on. These inside private sector payments will not change the quantity of non-remunerated excess reserves (unless of course the central bank accommodates; I don’t want to get into a discussion of deep monetary theory of endogenous money here). Hence, the central bank is not required to ‘sterilise’ or sell securities when government keeps some deposits inside the private sector.
The situation is different when central government spends money from outside the private sector – as in the case of the deficits on the Consolidated Fund. When households and businesses have cash in excess of requirements, and the cash pays no interest, they will be incentivised to find an opportunity that pays something above zero. As noted earlier, the banks will have excess reserves as well. Since there is a shortage of financial investment opportunities in Guyana, the banks, households and businesses will search overseas for an interest-earning opportunity. Those who do not have the access to information or cannot pay the transaction cost associated with sending monies overseas will just buy US$ and other currencies and hoard them at home; and perhaps also hoard non-productive assets like gold.
If the BoG does nothing, the country will lose scarce foreign exchange that could have otherwise gone into productive investments in the production economy. In addition, the overdrafts could accumulate pent up demand to such a level that the exchange rate starts to depreciate. In the previous column, I attributed the latter as one possible explanation for the depreciation (or if you prefer devaluation since the BoG targets the rate) of the Guyana dollar from around G$206 in 2011 to around G$217 these days.
Hence, as central government runs up the overdrafts, the BoG has to sell Treasury bills to create an investment opportunity in the national currency. If the central bank does not provide enough securities, then commercial banks, households and businesses will invest in foreign exchange. By selling Treasury bills, the BoG reduces the liability as it is removing the money that previously came from the central government overdrafts. The BoG bears an interest cost for central government, the fear of which is exaggerated since the interest payment is in national currency. Of course, interest cost on foreign currency debt can be problematic if not managed properly.
The mechanism I outlined above presents the wiggle room countries like Guyana possess. It represents a purpose for gaining independence. Without such a wiggle room we can expect greater social discontents, more crimes and higher unemployment. However, without social cohesion – an alien concept in Guyana – given the present constitution, this privilege of independence is not optimised.
The mechanism also has distributional implications for who gets what. The political situation in Guyana means that the group which wins the executive can create wealth using this monetary system at the expense of the loser. Here is yet another reason why the governance, constitutional and electoral systems need to be overhauled. Imagine being able to use this privilege for productive instead of wasteful political purposes.
Comments can be sent to tkhemraj@ncf.edu
