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THE DEBT TRAP

Aug 21, 2016 Editorial, Features / Columnists

Guyana’s small but encouraging success in its attempts to reduce the stranglehold of debt on the economy is proof that the country and its CARICOM counterparts continue to be among the most indebted countries in the world. And while none of these countries are very wealthy, based on North American and European standards, they are not overly poor either and there is hardly any starvation among their populations.
Guyana’s debt, which is approximately US$1.65billion continues to be a major impediment to economic growth and human and sustainable development. It has deprived the government of the ability to use monetary policy to promote growth and provide the path for improved lives. It has become obvious to the authorities that everything has to be done to reduce the debt, because it is economically unwise for the nation to be burdened by such a huge liability.
Economists have posited that when the debt is over 75 percent of Gross Domestic Product (GDP) which is not the case in Guyana, a country cannot grow its way out of debt and it will be difficult for it to improve its economy. It is worthy to point out that several Caribbean countries are already in this debt trap. Jamaica leads the way with a debt to GDP ratio of 110.5 percent in 2015 followed by Barbados at 108.5 percent, Grenada at 99.1 percent, Antigua at 96.4 percent, The Bahamas at 82.4 percent, St Vincent at 79.4 percent, St Lucia at 78.4 percent, St Kitts at 78.0 percent, Belize at 77.3 percent, and Dominica at 74.1 percent. Guyana’s debt to GDP ratio is 55 percent, which is the lowest in the Caribbean.
The English-speaking Caribbean countries are in a terrible slippage in debt sustainability due to a lack of prudent fiscal management. Many could face serious economic problems including a recession if efforts are not made to reduce the debt. In its latest economic report on the Caribbean, the United Nations Economic Commission of Latin America and the Caribbean (ECLAC) has stated that the region’s public debt declined marginally from 72 per cent of GDP in 2013 to 70.7 per cent of GDP in 2014. However, ECLAC was quick to point out that significant increases in borrowing in the first half of 2015 erased the gains made in 2014.
Debt servicing costs have increased in the entire region by an average of 25 percent of fiscal revenue in 2015 and are likely to be higher in 2016. Debt at these high levels requires debt rescheduling and restructuring as in the past. However, most governments in the Caribbean have an insatiable appetite for debt, therefore debt rescheduling would lead to the supervision of their economic and monetary policies by the International Monetary Fund in order to help reduce the level of their debt.
In the past, debt restructuring has had a negative effect on the countries of the Caribbean. It requires cutbacks in spending on social services, a reduced civil service and a reduction in the value of currency. The experiences of Belize, Grenada, St Kitts and Jamaica show that it was a Band-Aid approach. Yet debt restructuring is seen as a success of economic management by the governments of the region. Everywhere else, it is seen as an obvious sign of failed economic management.
However, one would think that the region’s experience with debt rescheduling and the stringent policies of the IMF in the past was such a tough lesson that they would reduce their borrowing and instead seek to improve their fiscal and economic policy and debt management. Unfortunately, that has not been the case.
Debt continues to rupture the Caribbean countries’ economy. Countries that fail to learn from past experiences are living with the consequences. But the problem is that it is not the politicians who feel the economic pain of failed debt management, it is the people.

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