‘Jagonomics’ has failed

Aug 06, 2023 Features / Columnists, Peeping Tom

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Peepin Tom…

Kaieteur News – For the second time since it returned to office in 2020, the PPPC has increased the country’s debt ceiling. The increase in the debt ceiling acts a legal authorization for the country to borrow more.

The increase in the debt ceiling is another demonstration that the financial management of the country is on ‘high seas’ and that those managing the economy do not have either a medium-term of long-term plan. Had they, there would have been no need for such regular increases of the debt ceiling.

It also implies that ‘Jagonomics’ is in full cry. The country continues along the path of begging, borrowing and buying. This tired and failed strategy will get Guyana nowhere. It exposes the ill-preparedness and lack of competence of the PPPC administration to manage the world’s newest petro-state.

The fastest growing economy in the world is now forced to borrow to finance development. Yet it does not see it fit to renegotiate lopsided contracts which can provide greater revenues and prevent a borrowing spree.

The government’s justification for raising the borrowing ceiling is that because the economy is growing and growing fast that it can afford to borrow more. In this regard, the government can justly point to indicators such as debt-to GDP and debt servicing-to-revenue ratios to make a compelling case that it can afford to borrow more.

But the very notion that the more a country’s economy expands, the greater will be its capacity to borrow is a simplistic and potentially misleading one. Economic growth is not the sole determinant of whether a country should contract increased debt.

While economic expansion can contribute to a higher GDP, it does not guarantee a corresponding reduction in the debt-to-GDP ratio. If a country’s debt grows at a faster rate than its GDP, the debt burden can become unsustainable even in the midst of economic growth.

Borrowing capacity is also determined by the country’s fiscal policies. Guyana does not have a medium-term fiscal policy. The IMF has warned the country that it needs such an anchor.

But the economic growth enjoyed because of the oil boom does not necessarily remove the structural vulnerabilities of the local economy. Indeed, Guyana is racing to exploit its oil resources because it sees this oil boom as a bubble which will eventually burst because of the global emphasis on renewables.

A recent report suggested that as much as 80% of the country’s exports come from oil. What should happen if there is a sudden burst of the oil bubble? We are told that the traditional economy can be able to sustain the debt payments. Really? Which genius said that?

Economic growth does not necessarily address underlying structural vulnerabilities within an economy. If a country’s growth is driven by unsustainable factors, such as speculative bubbles or excessive reliance on a single industry, the country may be more susceptible to economic shocks. In such cases, borrowing to sustain growth could lead to greater vulnerabilities in the long run.

What Guyanese need are sound economic policies, not ‘Jagonomics’. What Guyana needs to see are sound medium-term fiscal policies grounded on a proper understanding of Guyana’s economic landscape and its ability to absorb increased investment and borrowing.

Years ago, the PNCR had come up with a national infrastructural plan which required the incurring of no additional debt and which it was believed would have been funded by private sources. The plan was being pushed by businessman, Stanley Ming and was titled as the ‘Guyana 2030 plan’.

Then President Jagdeo rejected the plan on the grounds that the country did not have the ‘absorptive capacity’ to assume such high levels of investment. ‘Absorptive capacity’ refers to a country’s ability to effectively utilize borrowed funds for productive purposes without causing negative economic consequences.

But it seems as if the PPPC government has now assumed that the country has overridden this deficiency and now has the absorptive capacity not only to absorb more public-guaranteed borrowing but also for the billions of US dollars that are being invested by private enterprise. Whatever happened to the notion of ‘absorptive capacity’?

While it is true that an expanding economy might suggest an increased potential for absorbing borrowed funds, this relationship is not automatic. Increased borrowing beyond the absorptive capacity of the economy can have detrimental effects, and relying solely on economic expansion to justify higher borrowing is a risky approach.

We are already witnessing signs of the economy sagging under the weight of increased investment. The spike in prices of building materials, including sand, suggests that local supply cannot keep up with the increased demand generated by the massive private and public investments in the economy.

During the debate on the debt ceiling, one Opposition member asked a pertinent question: what are the projects for which we are borrowing?  He cautioned against the dangers of borrowing for another investment such as the Skeldon Sugar Factory.

We are told that much of the monies which the government is borrowing will be for infrastructure. But has Guyana not been borrowing for the past 30 years for infrastructure. Where has this gotten us?

This is why borrowed funds must be allocated efficiently to projects and investments that generate sustainable economic returns. If funds are misallocated or used for projects such as roads and hospitals which have low productivity, the economy’s absorptive capacity will be exceeded, leading to future financial instability.

When borrowed funds are used to stimulate demand without a corresponding increase in the production of goods and services, it can lead to demand-pull inflation. This occurs when the increased demand outpaces supply, driving up prices and eroding the purchasing power of consumers. This is already happening in the economy.

But even more fundamental is why should Guyana be borrowing so much given its oil and mineral wealth? Instead of borrowing, Guyana should be insisting that investors in the mining sector pay their fair share so that Guyana does not add to its debt in improving living standards.

But do not tell that to the disciples of ‘Jagonomics’. As far as they are concerned, Guyana can afford to beg, borrow and buy its way to economic prosperity.

Disclaimer: The opinions expressed in this column are those of the author. They do not purport to reflect the opinions or views of Kaieteur News.

 

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