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Oil does end
Carl Greenidge in his Christmas Day letter made a frantic attempt to debunk the link between oil and debt in Africa. In so doing, he missed some important metrics.
For example, he argued that the external debt of the Democratic Republic of Congo (DRC) was a mere 13.6 % of GDP. But he totally ignored the relationship between that country’s debt and its revenues.
Like Guyana, the DRC was once a highly-indebted poor country. And like Guyana it benefitted from debt relief including from the World Bank and IMF.
The IMF in September this year projected that in 2020, the DRC’s debt service would reach the threshold of 14%. The Fund also pointed out that the DRC’s low-level of government revenues undermine debt sustainability and limits external borrowing to finance the country’s future development.
The more telling assessment, however, was in relation to the country’s debt-carrying capacity – defined as the maximum amount of debt that a country can owe beyond which the country’s income or growth can no longer increase.
The IMF assessed the DRC’s debt-carrying capacity as being weak. It found that DRC remains at a moderate risk of external and overall debt distress, with limited space to absorb shocks.
In the case of Nigeria, the largest oil producer in Africa, Greenidge superficially argues that that country’s external debt is 3% of its GDP. I am not sure the source of his data. The IMF last April had placed Nigeria’s public external debt at 6.3% of GDP in 2017, and this was projected to climb to almost 9% by 2018. Nigeria also has substantial private external debt.
Regardless of the accuracy of the numbers, the debt to GDP ratio can be deceptive. Ike Brannon writing in Forbes in August 2019 made this very point about Nigeria. He alluded to Nigeria’s high dependence on oil and the associated risks.
In assessing a country’s debt risk, one cannot rely solely on per capita income and the debt to GDP ratio. The burden of repaying the debt and its relation to the country’s fiscal revenues are equally important considerations. Just yesterday, Nigeria’s Minister of Information and Culture, Lai Mohammed, was reported as conceding that the country’s debt service to revenue ratio had been higher than desirable.
There is an ongoing spat between former President Olusegun Obasanjo and Nigerian government over Nigeria’s debt. Obasanjo has expressed concern over Nigeria’s stock of debt.
Greenidge also referred to Trinidad and Tobago which he says has a debt of 76% of GDP, a per capita debt of US$15,700. No country should find any pleasure in having such a high per capita debt despite Greenidge’s claim that Trinidad and Tobago’s GDP per capita GDP of US$ 16,085 is nearly three and a half times that of Guyana.
Greenidge would recall that in 1992, the per capita GDP of Trinidad and Tonago was ten times greater than Guyana’s. That Guyana was able to close that gap to a mere three times and before oil production says a great deal about the economic achievements since 1992.
Because of oil, Guyana is now in a position to overrun Trinidad’s per capita income. Trinidad declining oil sector now places it at a distinctive economic disadvantage.
No amount of defensiveness on the part of Guyana’s Foreign Secretary will erase the downturn in the twin-island petroleum sector. Trinidad and Tobago’s petroleum sector declined by 9.6% in 2016, 2.5% in 2015 and 4% in 2014.
PETROTRIN, the state-owned oil company, closed its refinery operation last November. Oil don’t spoil but oil does end.
And when it ends or suffers cyclic fall in prices, a country has to be wary of the likely fallout and its impact on debt sustainability. The experience of both Trinidad and Tobago and Africa should forewarn Guyana about the dangers of oil and debt.
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