In the Hawaii island of Maui, at least 93 persons have died and hundreds of persons reported missing, as a result of wildfires that began last Tuesday. A total of 15,000 tourists have so far left the island while six emergency shelters remain open. According to the Hawaii Governor, the fires are the largest natural disaster in Hawaii state history, with 80 percent of the beach-front town of Lahaina destroyed. Eyewitnesses reported that the blaze ripped through the town so quickly that some people jumped into the harbour to escape the flames and smoke. Several countries have had to grapple with wildfires due to rising temperatures caused mainly from the burning of fossil fuels.
The Auditor General of Ontario, Canada, issued a scathing report on the Province’s decision to open up parts of the Greenbelt for housing. The Greenbelt is an area of about two million acres of protected farmland, wetlands and woodlands. It was created in 2005 to permanently protect productive farmland and natural features from uncontrolled urban development. The Auditor General found that the arrangement favoured certain developers, lacked transparency and failed to consider environmental, agricultural and financial impacts. Of the 7,400 acres of land removed from the Greenbelt, 92 per cent could be tied to three developers with direct access to the housing ministry. Premier Doug Ford reaction was that ‘[w]e could have had a better process. As Premier, the buck stops with me’. He, however, stated that the provincial government will not reverse course to build 50,000 homes using land from the Greenbelt. The report can be accessed at https://www.auditor.on.ca/en/content/specialreports/specialreports/Greenbelt_en.pdf.
Last month, the World Bank announced that Guyana is now a high income country, joining 81 other countries, including Canada, United States, United Kingdom, Germany, Japan and Switzerland, that fall within this grouping. This elevation is due to the country’s status as a major oil producing nation, with a surge in the production coupled with higher oil prices. In another related development, the National Assembly recently approved an increase in the ceiling for both internal and external borrowing to finance developmental works. In today’s article, we discuss these two developments and their implications for Guyana’s public debt.
Categorisation of economies
The World Bank groups countries in four categories based on their economic performance as reflected in their Gross National Incomes (GNI) per capita: low income (up to US$1,045); lower-middle income (US$1,046 to US$4,095); upper-middle income (US$4,096 to US$12,695); and high income (US$12,696 and above). The United Nations, on the other hand, classifies countries according to the level of overall development: least developed (or under-developed); developing; and developed. According to the Bank, there is a high degree of correlation between the two categorisations, as development often runs parallel with income levels. Lower- and upper-middle income countries are considered developing countries. Guyana is now considered a developed country.
A country’s GNI is calculated using its Gross Domestic Product (GDP), then adding money its citizens and businesses brought in from other countries, and subtracting money taken out of the economy by businesses and investors based in other countries. Once a country’s GNI has been calculated, it is divided by that country’s population to determine its GNI per capita. It is important to note that GNI offers little insight into a country’s income inequality but is nonetheless considered one of the most important at-a-glance assessments of a country’s economic health. See
https://worldpopulationreview.com/country-rankings/high-income-countries.
A country’s standing among these groups is calculated using the GNI per capita as a starting point, adjusted to take into account the average exchange rates over a period of time as well as rates of inflation in comparison to the international inflation rate. This method of
calculation uses what is known as the Atlas conversion factor. For any given year, the average of a country’s exchange rate for that year and the two preceding years is used, adjusted for the difference between the rate of inflation in the country and international inflation rate. The objective is to reduce short term changes to the exchange rate caused by inflation.
Guyana’s elevation to high income country
In 1992, Guyana’s GNI per capita was US$390. According to the Auditor General’s report for that year, the external debt was G$138.157 billion, equivalent to US$1.105 billion. Debt repayment and servicing costs were $12.480 billion, representing approximately 70 percent of the country’s current revenues. The internal debt was also as high as the external debt, with amounts totalling G$136.499 billion outstanding at the end of 1993. Guyana was therefore a heavily indebted poor country.
The then Administration appealed to the international community to assist the country in alleviating its debt burden.
As a result, Guyana benefited from two debt relief measures – HIPC Initiative in 1997, and the enhanced HIPC Initiative in 2000, the latter reaching completion point in 2003.
This was in addition to the earlier rescheduling and cancellation of certain debts based on bilateral and other agreements. In 2006, Guyana’s GNI per capita reached US$1,450, resulting in its elevation to the status of lower-middle income country. By 2015, the GNI per capita increased to US$5,560, and the country was further elevated to upper-middle income status.
In 2022, Guyana’s GNI per capita moved to US$15,050, resulting in the country now being considered a high income one. According to the World Bank, this was despite a substantial increase in outflows of primary income abroad. In equivalent Guyana dollars, the GNI per capita is G$261,494 per month which is 4.35 times the private sector minimum wage of G$60,147; and 3.49 times that of the public sector minimum wage of G$74,900. Guyana’s minimum wage is perhaps one of the lowest among the high income countries. On the human development index that the United Nations Development Programme uses to measure a country’s progress in health, education and standard of living, Guyana was ranked 108 out of 191 countries in 2021.
When one considers that the GNI per capita is calculated using the size of entire population which includes children under 18 years old, the unemployed and the elderly, the situation becomes even worse. The World Bank’s latest assessment is that 47 percent of the population live on less than US$5.50 per day which is threshold for upper-middle income economies. This state of affairs is further exacerbated by the rising cost of living, partly due to developments in the oil sector.
Increased borrowing capacity
Last week, the National Assembly approved new ceilings for borrowing to finance the Government’s developmental programmes and activities. The domestic borrowing ceiling has now been increased from G$500 billion to G$750 billion in accordance with the Public Loan Act, Chapter 74:13 of the Laws of Guyana. That Act authorises the raising of loans in Guyana for the purpose of financing general development, not to exceed G$150 billion. The Act also authorizes the Minister of Finance to issue an Order for any increase, subject to affirmative resolution by the Assembly. In February 2021, after 48 years, the ceiling was increased to $500 billion. Last week’s increase in the domestic borrowing ceiling is therefore the second of its kind in 50 years.
In relation to external borrowing, the External Loans Act, Chapter 74:08 of the Laws of Guyana authorises the Government to raise loans outside of Guyana not to exceed G$400 billion. In February 2021, the ceiling was increased to G$650 billion. Last week’s increase to G$900 billion in external borrowing also represents the second increase after 50 years.
Guarantee of loans
In addition to the provisions of the Public Loan Act and the External Loans Act, there is a third piece of legislation that has implications for the public debt. We refer to the Guarantee of Loans (Public Corporations and Companies) Act, Chapter 77:01 of the Laws of Guyana. This Act authorizes the Government to guarantee the discharge by a corporation or company under any agreement which may be entered into by the corporation or company as authorized by the Government. The aggregate amount of the liability is not to exceed G$50 million, or such greater sum as the Assembly may approval by resolution.
The ceiling was increased to $500 million, then to G$1 billion in 1980.
In August 2013, the ceiling for the guarantee of loans was further lifted by G$50 billion to G$150 billion to give coverage to the Power Purchase Agreement between the Guyana Power and Light Inc. and the aborted Amaila Falls Hydropower Project. And in May 2018, the Minister of Finance on behalf of the Government entered into a loan guarantee in the sum of $30 billion to assist in the restructuring of the Guyana Sugar Corporation Ltd. (GUYSUCO), thereby further increasing the ceiling for the guarantee of loans to G$180 billion. In November 2020, the outstanding balance of $12.321 billion on this loan, which was taken by the National Industrial and Commercial Investments Ltd. (NICIL) on behalf of GUYSUCO, was transferred to the public debt. This was in view of NICIL’s inability to repay the outstanding balance.
It will also be recalled that NICIL was unable to service the loan taken from the Republic Bank to finance the construction of the Marriott Hotel. As a result, the Government was forced to assume responsibility for the repayment of loan which was transferred to the public debt.
Implications for the public debt
The latest audited public accounts showed that the public debt at the end of 2021 was G$690.697 billion, compared with G$415.153 billion at the end of 2020, an overall increase of G$275.544 billion, or 66.4 percent. This increase was mainly due to a significant increase in the internal debt from $143.428 billion in 2020 to $260.562 billion in 2021, representing a 182 percent increase, as shown below:
In equivalent United States dollars, the external debt was US$1.375 billion, compared with US$1.303 billion at the end of 2020, an increase of US$72 million. In December 2022, the Government announced the signing of two loan agreements with the China in the sums of US$192 million and US$172 million for East Coast Demerara road expansion project and the construction of the New Demerara Harbour Bridge, respectively.
In relation to the internal debt, the Authorities had decided to liquidate the overdraft on the Consolidated Fund through the issuance of 85 variable interest rate debentures with a total value of G$200 billion. The overdraft at the time was G$171.479, and the residual amount of $28.521 billion was used as supplementary domestic financing of the Budget.
In his 2023 budget speech, the Minister of Finance stated that the total public and publicly guaranteed debt was US$3.655 billion at end of 2022, an increase of 16.9 percent over the amount shown at the end of 2021.
The external debt was US$1.572 billion, an increase of 12.9 percent. Domestic debt amounted to US$2.081 billion, up from US$1.732 billion at the end of 2021, attributable to the issuance of new Treasury Bills.
According to the Bank of Guyana report for the first quarter of 2023, the total stock of public and publicly guaranteed debt increased by 2.3 percent or US$ 84.5 million to US$3.739 billion from the December 2022 position. The external debt increased by 0.5 percent to US$1.580 billion while the total domestic debt grew by 3.7 percent to US$2.159 billion from US$2.083 billion at the end of 2022 on account of the growth in the stock of Treasury Bills.
Considering the above, it is evident that the Government has been progressively increasing its borrowing capacity to finance developmental projects, mainly due to the oil revenues it is currently receiving as well as the prospects of greater revenues in the coming years. The Authorities have argued that the debt-to-GDP ratio of the country enables it to increase its borrowing capacity. Critics have, however, argued that it is very risky to do so, due to the inherent uncertainties in crude oil production as well as the volatility of oil prices; and that the country’s borrowing capacity should instead be based on the performance of the non-oil economy and not the total economy from which the GDP is derived.
There is also another argument that instead of increased borrowing, the Authorities should use the oil revenues to liquidate some of its debts, thereby saving on debt servicing costs. At the end of 2021, such costs amounted to G$7.620 billion. Besides, with Guyana now a high income economy, external borrowing at concessional rates and increased timeframes for repayment may no longer be possible.
As so, the debate rages on, and only time will tell whether or not Guyana is on the right track in terms of borrowing.
