IDB warns region about ‘excessive’ borrowing

Jan 31, 2023 News

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– as Guyana’s public debt increases by 16% last year

Kaieteur News – Amid growing concerns here about the country’s ballooning public debt, the Inter-American Development Bank (IDB) in a new report has cautioned Latin America and Caribbean (LAC) countries against ‘excessive’ borrowing and urged governments to bring their debts down to more prudent levels.

Finance Minister, Dr. Ashni Singh announced two weeks ago that the country’s total public debt stood at US$3,654.9M an increase by 16.9 percent from last year. Almost all of its recently announced public infrastructural projects government has been borrowing to finance them despite earning over US$1B in the oil account for last year.

In its report titled, ‘Dealing with Debt – Less Risk for More Growth in the Latin America and the Caribbean’ the IDB disclosed that debt has risen and stands at some US$5.8T which is 117 percent of the Gross Domestic Product (GDP) in the region.

“Given the dangers of excessive debt, the current situation in Latin America and the Caribbean is worrisome,” the IDB said.

IDB said public debt serves a critical role for countries to pursue public investment projects, implement countercyclical policies, and provide support to economies in the face of negative shocks. However, the IDB warned that if public debt becomes too large or is not managed with sufficient caution, interest costs may balloon, growth prospects may suffer, and in the limit, a costly debt crisis may be provoked.

It was stated that public debt had risen before the pandemic, with sudden debt spikes accounting for much of the increase. According to the IDB, “that spikes occurred largely during times of stress, fueled by a combination of low growth, high fiscal deficits, ballooning interest payments, currency depreciations, and significant off-budget and unfunded liabilities.”

“This pattern of debt increases in the region points to the need for stronger fiscal institutions to establish credible and sustainable medium-term objectives to limit debt spikes, and where they are necessary, to promote periods of debt reduction…” the IDB said.

According to the report, governments can bring down their debt levels by improving spending efficiency, expanding the tax base, and seeking wider reforms to enhance fiscal balances and boost growth.

The IDB said that there are many reasons why public debt levels should be lower than they currently are, highlighting that there are several ways to reduce that debt.

“An analysis of past debt reduction episodes around the world points to countries that have reduced debt-to-GDP ratios by increasing growth and improving fiscal balances,” it was stated.

Notably, it was disclosed that the region has more cases in which significant debt reductions have been achieved through low real interest rates or higher inflation, although they have typically not been as smooth or resulted in as good growth performance.

Meanwhile, delivering his budget presentation, Dr. Singh sought to allay the fears of Guyanese by claiming that Government has “maintained its long-standing practice of prudent debt management.”

He argued that Guyana continues to enjoy strong debt sustainability fundamentals, “even as we expand investments in public infrastructure, social services and other initiatives geared at ensuring improved standards of living for all Guyanese. This delicate balancing act hinges on our time-honoured debt management strategy of contracting development financing and meeting debt service obligations at the lowest cost, within prudent risk parameters. “

To this end, he announced that total public and publicly guaranteed (PPG) debt amounted to US$3,654.9M at end-2022, up 16.9 percent from end-2021, on account of growth in external and domestic debt. “Notwithstanding, the ratio of total PPG debt-to-GDP declined substantially over the past year, from 38.9 percent at end-2021 to 24.6 percent at end-2022. This outcome is testament to our judicious contracting of development financing, at a level well within Guyana’s debt carrying capacity,” Singh told the National Assembly.

He added that at the end of 2022, Guyana’s external debt totalled US$1,571.9M, representing a 12.9 percent increase compared to end-2021, mainly as a result of positive net flows from both bilateral and multilateral creditors.

Meanwhile, domestic debt amounted to US$2,080.6M at end-2022, up from US$1,731.5M at end-2021. This increase is attributed to Government’s issuance of new fiscal treasury bills. Total public debt service rose from US$121.9M in 2021 to US$150.2M in 2022. This increase was driven primarily by domestic debt service payments, which totalled US$65M in 2022, up from US$41.2M in the preceding year. The growth of domestic debt service payments was, in turn, largely due to the commencement of principal repayments on debentures issued in 2021 to securitise an inherited overdraft at the Central Bank. Compared with the previous year, external debt service payments increased by 5.5 percent to US$85.2M in 2022, mainly on account of higher principal and interest payments to multilateral creditors.

Only recently former Auditor General, Anand Goolsarran warned that while Guyana’s medium-term economic prospects appear very favourable due to anticipated oil revenues, government should nevertheless exercise restraint in Government spending, given the volatility of oil prices. Goolsarran had made the comments in his Column, published in the Stabroek News.

His counsel comes at a time when Guyana’s loans from China are set to surpass that of Sri Lanka, which stands at some 20 percent. In drawing reference to that country, the former Auditor General pointed out that Sri Lanka is now in a state of severe economic crisis after years of economic mismanagement coupled with the impacts from the COVID-19 pandemic. In 2020, Guyana had six loans with the Export Import (EXIM) Bank of China totalling US$240.451M. This represented 17.5 percent of the country’s external loan portfolio according to Goolsarran. To this end, the former AG wrote “Last week, the Authorities announced the signing of two loan agreements with the China (Bank) in the sums of US$192M and US$172 million for the East Coast Demerara road expansion project and the construction of the New Demerara River Bridge respectively.

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• borrowing, Caribbean, Debt, IDB, public debt

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