Countries with high debt portfolios at risk of defaulting—UN Secretary General

Dec 18, 2021 News

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A lesson for Guyana….

Kaieteur News – Economic growth across the world has been stagnated, if not retrogressed in some parts of the world. This has led to escalating inflation rates globally, which has left many with high debt portfolios, such as Guyana exposed to the risk of defaulting on repayments.

This was the stark warning handed to world leaders on Thursday when United Nations’ (UN) Secretary General Antonio Guterres, who in his final address for the year, observed that at the end of a difficult year, while advanced economies were able to mobilize nearly 28 percent of their Gross Domestic Product into economic recovery, “for middle-income countries, that number fell to 6.5 percent.
And even worse, it plummeted to 1.8 percent for the least developed countries — a tiny percentage of a very small amount.”
Citing Sub-Saharan Africa, Guterres noted that the International Monetary Fund (IMF) projects that cumulative economic growth per capita over the next five years will be 75 percent less than the rest of the world.
This is unacceptable, he said, noting also that “inflation here in the United States and in many other countries has risen to a 40-year high and we see it growing elsewhere.”
To this end, he observed, too, that as the US Federal Reserve indicates, interest rates will rise, with it “and that will place even greater fiscal constraints on the countries that need help the most.”
Inherently, “defaults will become inevitable for lower income countries that already bear much higher borrowing costs.”
He was adamant that “the need to service an ever-mounting and more expensive debt will leave developing countries with little fiscal space for recovery, job creation, climate action, reimagining education and reskilling and training workers, and so much more.”
Compounding the situation, the Secretary General opined that “today’s global financial system is supercharging inequalities and instability.”
According to Guterres, “it is a system that allows credit rating agencies to undermine the credibility of developing countries with good growth prospects and vital development needs, and this obviously makes private finance becoming more risk averse.”
In the circumstances he noted that international financial institutions alone do not have sufficient capacities to compensate.
Compounding the global financial development, the clear majority of Special Drawing Rights are distributed to the biggest and richest economies in a way that is far from being compensated by voluntary redistributions.
Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF)
“Meanwhile, inequalities keep widening. Social upheaval and polarization will be growing. And the risks keep increasing.”
This, he said, “is a powder keg for social unrest and instability; It poses a clear and present danger to democratic institutions.”
Looking forward, he said, “it is time to clearly assume the need for reform of the international financial system.”
He was adamant, “we have a serious governance problem with respect to the prevention, detection and response to pandemics; and we have a serious governance problem in relation to the international financial system,” Guterres said “I am determined that 2022 must be the year in which we finally address the deficits in both governance systems.”
Successive administrations in Guyana, when confronted with concerns about the level of the country’s debt, have pointed the sustainability of its repayments.
The country’s debts, however, have in the recent past been coming under intense scrutiny, with as much as a third of this year’s budget being financed through loans. This is in addition to the numerous others contracted during the course of the year, or are in the process of being negotiated.
This past week, Kaieteur News in a report from the Audit Office for government’s financial performance during last year, had found that both the Coalition, A Partnership for National Unity + Alliance For Change (APNU+AFC), and the People’s Progressive Party Civic (PPP/C) governments, by the end of 2020, had racked up a whopping $163.3B ‘illegal overdraft’ in the national coffers—the Consolidated Fund.
Illegal, since bringing the Consolidated Fund into overdraft is in breach of the Fiscal Management and Accountability Act (FMA).
To rectify the illegal and fiscally embarrassing books for an oil producing nation, the PPP/C administration in May this year, approved the sum of $200B, “through the issuance of Debentures ranging from 1 to 20 years, to raise funds to clear the overdraft. This exercise took effect in June 2021.”
What the findings essentially mean is that at the end of last year, the Consolidated Fund or Guyana’s Treasury—presided over by the APNU+AFC and PPP/C administrations for that year—was not only empty but had a $163.3B debt.
That state of affairs, according to the FMA Act, is a breach. To this end, the PPP/C Government in 2021 approved the printing of debt instruments-Treasuries-guaranteed by government.
This, in turn, was then sold to all and sundry, in order to raise the $200B needed to clear the overdraft.
The bills were sold to those willing to make purchases on the agreement that government would buy back the debt when matured—as indicated, for period between one to 20 years—therefore repaying the debt incurred.
It was explained that this was done in order to raise the cash needed immediately, and clear the overdraft, while at the same time bringing government into compliance with the laws of Guyana.
The Mid-Year report for this year, in documenting the move by Cabinet had stated in June 2021, that government securitised the inherited overdraft at the Bank of Guyana.
That report issued by the Ministry of Finance, under the auspices of Substantive Minister, Dr. Ashni Kumar Singh, had said this securitising of the overdraft was done using 85 variable-rate debentures, with tenors ranging from 1 to 20 years, totaling G$200B.
“Consequently, the first half of 2021 ended with the Consolidated Fund, as well as public deposits, reflecting a positive balance.”
According to Dr. Singh in his report, “these moves were intended to bolster transparency and accountability in public debt management, and to restore the integrity of Guyana’s fiscal accounts.”
The country’s total public debt at the end of 2020 had stood at some US$2B, but by the time of the Mid-Year report, had ballooned to $3B.

 

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