Jordan did not consider fundamental variables in his analysis

Dear Editor,

REFERENCE is made to a letter to the editor appearing in the Kaieteur News dated November 8, 2021, in which the former Finance Minister has expressed grave concerns over Guyana’s borrowing spree.

The former learned minister said that “the 2021 Mid-Year Report records the stock of public debt as US$2.905 billion which can easily rise to $5.3 billion within a few years, if one were to factor in the $1.5 billion from China and the undrawn $0.9 billion from the Islamic Development Bank.”

The former Finance Minister’s statement is suggestive that Guyana will not be servicing its national debt for the next few years. What do I mean by this statement?

The former minister adds the total level of national debt which is US$2.9B + the US$1.5B loan from China and the US$0.9B from the Islamic Development Bank to say that in a few years, total debt will reach (2.9+1.5+0.9 = 5.3B). Now, this is cause for worry indeed because 5.3B in a few years represents 96 per cent of today’s GDP.

However, the former minister did not consider two fundamental variables in his analysis – that is (1) over the next few years govt will continue to service its national debt annually, thereby reducing the principal balance, thus creating fiscal space to take on new borrowings, and (2) GDP will continue to grow, thus maintaining a low to moderate debt to GDP ratio which is sustainable. Currently, debt-to-GDP ratio is about 53 per cent, well below the 60 per cent benchmark.

Now, let’s make the analysis a bit more interesting. The former minister did not quantify how many years he considers to be “few years”. So, let’s quantify this and assume that he is referring to the next three years. What is the country’s projected growth in GDP over the next three years and what would be the total sum of principal and interest payment on the national stock of debt by then?

According to the Bank of Guyana report 2020, total debt service was significantly higher by 32.6 per cent to US$420 million and represented 38.5 per cent of government’s current revenue. For this purpose, it is safe to say that annual debt service is US$420 million so in three years, the country will have repaid US$420m X 3 = US$1.3 billion. This means if the govt borrow another US$1.5B + US$0.9B and add to today’s stock of debt, effectively only an additional US$1.1b will be added to the stock of debt which would bring the total to US$4B and not US$5.3B.

At the same time, GDP is projected to grow by 20 per cent in 2021, and according to IMF forecasts, GDP is projected to grow by 26 per cent and 30.6 per cent in 2022 and 2023, respectively.

If we are to be a bit more conservative and project year-on-year growth rates of 15 per cent instead of 20 per cent and 30 per cent as projected by IMF, GDP will move from US$5.5B to US$8.4B, which means, the debt-to-GDP ratio in three years, with the additional US$2.4B loan in the pipeline, will be about 48 per cent, well below the 60 per cent benchmark, and this is projecting growth of GDP at moderate levels.

It is worthwhile to mention that Guyana’s debt-to-GDP ratio is perhaps the lowest in the region, for example, Trinidad & Tobago’s debt-to-GDP ratio is about 83 per cent, Barbados is 133.6 per cent, Suriname is 111 per cent, and notably, projected GDP growth for these countries is in the lower single digits while Guyana will be experiencing double digit growth in the medium term.

Altogether, the additional borrowings of some US$2.4 billion will virtually have minimal or zero impact on the country’s total stock of debt in three years’ time thus resulting in the debt-to-GDP ratio remaining below 60 per cent.

Moreover, Guyana will continue to have double digit growth in GDP over the next three years, and current debt service is about 38 per cent of current revenue or US$420 million which will effectively reduce the stock of debt while the government continues to borrow moderately to facilitate the country’s development agenda.

Or put differently, with an additional US$2.4B in debt in three years will result in a movement of debt-to-GDP ratio from 53 per cent (where it is currently) to 48 per cent, reflecting a decline by five percentage points, based on the analysis presented herein.

Importantly to note, I did not factor in the projected oil revenues in this analysis as I opt to keep the discussion and analysis simple.

I do hope that this essay brings some needed clarity for your readers to understand the full context of the national debt and its growth trajectory in the full context of the development agenda that Guyana is embarking upon.

Yours faithfully,
JC Bhagwandin
Financial Analyst

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