Public debt becomes a burden when it grows too fast – UN warns developing countries

Aug 09, 2023 News

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Kaieteur News – A recently published report by the United Nations (UN) is warning developing countries, like Guyana, that public debt becomes a burden when it grows too fast.

The report, ‘A World of Debt: A growing burden to prosperity’ was produced by the UN Global Crisis Response Group and released in July 2023.

The UN group explained that public debt can be vital for development, some Governments use it to finance their expenditures, to protect and invest in their people, and to pave their way to a better future – it was stated in the report. However, it was noted that it can also be a heavy burden.

“It can also be a heavy burden, when public debt grows too much or too fast. This is what is happening today across the developing world. Public debt has reached colossal levels,” it was stated in the report.

According to the UN group two contributing factors to high public debt today, is as a result of loans that were borrowed to fend off the impact of cascading crises on development: including the COVID-19 pandemic, the cost-of-living crisis, and climate change. The other factor, the group said is an inequal international financial architecture makes developing countries’ access to financing inadequate and expensive.

“The weight of debt drags down development. Debt has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth. These factors compromise their ability to react to emergencies, tackle climate change and invest in their people and their future,” the report said.

On Tuesday, Kaieteur News reported that developing countries have to pay much higher interest rates when they borrow monies. The report stated that the burden of debt on development is intensified by a system that constrains developing countries access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises.

In addition, it was said that when developing countries borrow money, they have to pay much higher interest rates compared to developed countries, even without considering the costs of exchange rate fluctuations.

In the report, a comparison was done for the bond yields (2022-2023) between developing countries and developed countries. It showed that countries like the United States and Germany had interest rates of 3.1% and 1.5% respectively. Whereas, for developing countries in Asia and Oceania, Latin America and the Caribbean and Africa, interest rates ranged from 6.5% to 11.6%.

Just last week, the National Assembly approved a US$3 billion hike to Guyana’s domestic public and external debt ceilings, which will allow the country to borrow more money.

Guyana’s domestic public debt ceiling was increased to $750 billion, up from $500 billion, and a new external borrowing ceiling of $900 billion, after its last increase to $650 billion. Notably, Guyana’s previous debt ceilings were last increased by the Government back in January 2021.

Senior Minister in the Office of the President with responsibility for Finance, Dr. Ashni Singh – who tabled the Motion to further raise the debt ceilings – indicated that as Guyana’s ability to borrow more increases the Government will return to the National Assembly to further increase the debt ceilings.

The hike to the debt ceilings was approved following a contentious debate by members of the government and opposition.

Opposition MPs, Juretha Fernandes, in her objection to the Motion, stated that the rate at which the Government is going to incur more debt, it adds a burden on future generations and will be felt the hardest on the working class. She underscored that one of the most significant dangers faced by oil-dependent country is its vulnerability to oil price fluctuations. The MP said, “If oil price plummets like we have seen in the past, we will be struck by a severe revenue shock.”

However, the Finance Minister argued that given Guyana’s economic outlook, these revisions to the external and domestic public debt ceilings are consistent with the country’s long-term debt sustainability.  He highlights that this appreciable growth performance and the country’s robust economic outlook underpin Guyana’s sustainable absorption of the new debt. In sum, the Government said it is committed to harnessing Guyana’s debt-carrying capacity to accelerate its development agenda.

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• Global Crisis Response Group, public debt, UN

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