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Debt and Development

Jul 28, 2013 Editorial

 

In the course of the debate on the Amaila Falls Hydro-Electric Project (AFHEP) the question of debt sustainability has been raised. This is somewhat ironic since the special purpose vehicle used by the government to handle the project was supposed to be organised on the Build, Own Operate and Transfer (BOOT) model which is designed to reduce risks, and increase the sustainability of the lesser quantum of debt the government is now responsible for.
It is now accepted by the government that it will be borrowing approximately US$584 million to fund the AFHEP project, for which it will be personally liable. If this is added to the US$1.7 billion debt we had contracted up to the end of 2012, this will bring our debt up to US$2.284 billion, which is 81 per cent of our present GDP of US$2.8 billion.
On comparison, the ratio for Jamaica, concededly in crisis, is 140 per cent. The critics of the government’s decision to proceed with AFHEP under the present arrangements, in addition to questioning the need for the government to borrow so much for the project, is also claiming that the overall debt level might be unsustainable.
From one perspective, one cannot blame the critics for being wary about our debt levels: as the government itself invariably points out, the PNC had contracted a debt burden of US$2.1 billion by 1992 which had proven unsustainable to service. After great effort on the part of the present administration more than half of the debt was eventually qt cancelled by the international community. The critics might be worried whether we would return to our pre-1992 predicament.
However the real question is whether the debt being contracted is “sustainable” – the buzzword of the present era. Essentially this means whether the government will be able to sustain the servicing of the increased annual payouts.
To a large extent the answer lies in the use to which the debt was put and whether it resulted in growth of the economy and increased government revenues. With all things being equal, the growth of the economy should result in the government collecting increased revenues from which it could service the higher debt payments. For instance, the government raked in US$637 million last year, compared to the US$141 million in 1992.
Debt and growth then must be considered in tandem with each other. Ironically, just a few months ago there was a very intense and extensive debate in the press and in economic academic circles over the connection between the two terms. That debate does not appear to have informed the ongoing one in Guyana. It is a pity.
In the midst of anaemic or negative growth in the developed countries, there were strident calls for governments not to incur more debt to fund stimulii and engender growth. In fact the calls were for “austerity”.
Two eminent Harvard economists, Carmen Reinhart and Kenneth Rogoff, reviewed data linking public debt to economic growth and concluded that growth turns negative (that is, economies tend to collapse into recession) when public debt rises above 90 percent of GDP. This gave a fillip to the “debt cappers”.
But Reinhart and Rogoff’s computations were wrong, and average GDP growth in very-high-debt nations is around 2.2 percent rather than a negative 0.1 percent.
Overall, however, while there is evidence that public debt is negatively correlated with economic growth, there is no demonstrated causal chain in either direction. In Guyana, therefore, we must recommend that while we cannot simplistically assume that because we could not sustain high debt levels in the past, we cannot do the same in the present. We call on all participants in the present debate to utilise more empirical data in their support of either position on debt.
In the absence of such data, it may be best for them to observe the caution of Wittgenstein: “whereof one cannot speak thereof one must be silent.” That is, if you don’t know what you’re talking about, be silent.

 

 

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