An economic lesson for Jagdeo

Aug 03, 2024 Features / Columnists, Peeping Tom

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Kaieteur News – When managing external debt, focusing solely on the size of a country’s GDP can be misleading, especially if a significant portion of that GDP is tied to a volatile sector like oil. While a larger GDP might suggest an increased capacity to absorb and service debt, it doesn’t account for the distribution of that debt burden across the population. A high per capita debt means that each citizen, on average, bears a significant portion of the debt load, which can be especially burdensome in times of economic downturn.

The argument that Guyana has a much larger GDP than in 1992 and much larger also in relation to its total external debt overlooks the critical role that per capita debt plays in assessing debt sustainability.

In 1992, the PPP/C rightly criticized the high per capita debt burden, recognizing that it placed an onerous strain on the populace and necessitated debt relief for sustainable growth. The PPP/C’s argument then was that debt relief was an imperative since the country simply could not grow out of its debt burden. In other words, expanding GDP was necessary but without debt relief, the country would not be able to climb out of its deep debt hole.

Today, despite a higher GDP, the underlying dynamics of debt sustainability remain the same. The country’s economic resilience is contingent not just on the size of its economy but also on the stability and diversity of its revenue sources.

With oil being the main growth pole of the economy, a decline in oil prices could lead to a substantial drop in both national revenue and GDP.  When oil prices collapse, it is not only oil revenues that would be affected but also the country’s GDP would contract.

Such a scenario would exacerbate the burden of servicing external debt, as the relative weight of the debt would increase. The per capita debt would once again become a critical issue, as the country’s ability to generate income would be compromised, and the burden would fall disproportionately on its citizens.

Therefore, it is crucial for policymakers to consider per capita debt when assessing debt sustainability. A high per capita debt, coupled with dependence on a volatile sector, increases the risk of a debt crisis. The focus should not only be on the overall capacity of the economy to absorb debt but also on the potential vulnerabilities that could lead to an unsustainable debt burden for the population.

In the context of a potential downturn in oil prices, the size of Guyana’s GDP becomes largely irrelevant to the country’s ability to service its external debt. This assertion is rooted in several critical economic realities.

Guyana’s economy has become increasingly reliant on oil, making it vulnerable to fluctuations in global oil prices. A downturn in oil prices would significantly reduce the country’s export revenues and, consequently, its fiscal income. As a result, the government’s ability to meet its debt obligations would be directly compromised, irrespective of the nominal GDP figure.

While a high GDP may suggest a robust economy, it does not necessarily reflect the real economic activity or the government’s fiscal health. In an oil-dependent economy, a substantial portion of the GDP may be attributed to the oil sector. If oil prices fall, the nominal GDP figure may still appear high due to past investments and infrastructure related to oil production. However, the real economic activity generating government revenue would shrink, making it harder to service debt.

Debt servicing requires actual cash flow, which comes from government revenues. If oil prices fall, the revenue generated from oil exports will decline. This reduction in revenue means that, regardless of GDP size, the country might not have the necessary funds to meet its debt service requirements. The nominal GDP, inflated by past oil production, becomes a misleading indicator of the government’s financial capacity.

In the event of plummeting oil prices, Guyana’s government will increasingly rely on non-oil revenues to sustain its activities, as the primary source of income from oil exports diminishes. If a significant portion of these non-oil revenues must be diverted to service external debt, it will inevitably strain public finances. This diversion will likely necessitate cuts in public expenditure. Consequently, the economic and social development of the country could be adversely affected.

A downturn in oil prices can lead to a depreciation of the local currency, increasing the cost of servicing foreign-denominated debt. This currency depreciation can also lead to inflation, further straining public finances and reducing the real value of any GDP gains. In such a scenario, the nominal GDP figure is disconnected from the government’s real capacity to generate the necessary revenue for debt servicing.

A high GDP does not necessarily translate to a manageable per capita debt burden. If the per capita debt remains high, the burden on individual citizens remains significant. A downturn in oil prices would exacerbate this burden, as the government’s ability to service debt would diminish, potentially leading to austerity measures or increased taxation, further stressing the populace.

As presently exists, our GDP is heavily skewed towards oil production. Therefore, the GDP size, primarily driven by oil, does not accurately reflect the economy’s capacity to handle external shocks.

This is why the size of Guyana’s GDP, inflated by oil revenues, becomes an irrelevant measure of its ability to service debt in the event of rapidly declining oil prices. The critical factor is the actual revenue generated. Without a stable revenue base, a high GDP figure provides a false sense of security and does not safeguard against the risk of a debt crisis.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper.)

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• burdensome, citizen, GDP, Guyana, Peeping Tom, population

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