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Commentary: Smoke and mirrors: A closer look at Guyana's looming debt crisis
Published on April 14, 2014 Email To Friend    Print Version

By Avinash Pulchan, MFM, FQF

According to World Bank data, Guyana's external debt has risen over 117%, US$850,393,000 in 2008 to US$1,845,561,000 in 2012. During that same time period gross national income per capita (purchasing power parity) has increased only 25% from US$2,720 to US$3,400. Furthermore, personal remittances have increased a whopping 34% from US$278,436,000 to US$373,096,197 during the last four years.

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Avinash Pulchan was born in Georgetown, raised in Corentyne, Berbice and attended President's College. He has a Masters in Financial Mathematics, Fundamentals in Quantitative Finance, and Bachelor of Science in Economics from the University of Minnesota. He is now preparing to pursue a PhD in Economics.
A common problem that lesser developed countries (LDCs) face, which Guyana falls into, is that of too much dependence on foreign nations and foreign entities. Guyana’s debt to GDP ratio increased from 44% (US$850,393,000/US$1,922,597,807) to 64.7% (US$1,845,561,000/US$2,850,572,407). A country’s debt-to-GDP ratio compares what a country owes to what it produces and is an indicator of the country’s ability to pay back its debt. Currently Guyana’s debt-to-GDP ratio of 64.7% is very unhealthy.

Now some people are going to argue that other more developed nations have higher ratios but they must take into consideration that these countries are industrialized nations, where a large part of their debt is carried by their citizens and not foreign entities. Secondly, these nations are economies unto themselves and global macroeconomic stress is mitigated through their diverse economic systems.

Guyana’s external debt leaves it at the mercy of its debtors and it definitely doesn’t have a diverse economy; Guyana has shifted to an ill-advised import-based economy, which I will discuss in a moment.

In light of Guyana’s indebtedness it would be a travesty to Guyanese of epic proportions to raise the debt ceiling. Foremost is the fact that, despite the much hyped years of economic growth as measured by GDP, Guyana is still running a budget deficit, meaning the Guyanese government is spending more money than it generates in revenues. As of 2012, the budget deficit is -5.9% of GDP.

Guyanese citizens need to realize that the country’s debt is their debt. They need to ask the government how they plan on repaying the debt; what percent of GDP will be used towards debt repayment? What are the interest rates on loans? Are these rates fixed, variable, capped? Are the loans hedged to the US dollar or Guyanese dollar? How will the government combat inflation in face of a growing external debt?

The opposition should also critically analyze the balance of payments account for Guyana and see why is there a budget deficit? They should do a trend analysis on the balance of payments account to see if there are common factors affecting the current account, capital account, and cash reserve account over the past years. This would lead to better allocations of funds over the long term and curtailment of inefficient macroeconomic policies.

Guyanese should keep in mind that Guyana’s debt has increased 117% (US$995,168,000 = US$1,845,561,000 – US$850,393,000) over the last four years and what has this increase translated to for the development of Guyana?

If the national debt ceiling is increased to allow the Amaila Hydro Power development initiative, how long will it take for the benefits to reach all Guyanese people? Has an independent-neutral party done a cost-benefit analysis on the feasibility of this undertaking? If differences arise from various feasibility studies of this project can they be reconciled? What are the terms of the financing of such a project? What are the positive/negative externalities of the Amaila Project? Will it create jobs for Guyanese? What are the environmental impacts?

Much has been harped on about the economic progress Guyana has made in recent years such as “Guyana on course to record eight consecutive years of positive economic growth: New ECLAC report says Guyana expected to surpass CARICOM partners in economic growth this year” as reported in the Chronicle.

Retired professor at New York University and author of the foremost textbook on Economic Development, Michael Todaro noted, “Economic development cannot be measured solely in terms of the level and growth of overall income or income per capita; one must also look at how that income is distributed among the population – at who benefits from employment and why.”

GDP growth rate is not a true reflection of the economic health of a nation. That is why the United Nations Development Program (UNDP) developed the Human Development Index (HDI), which is used as a holistic measure of living levels. Upon examining the components of GDP and the HDI, one can then decide whether a country is achieving sustainable economic growth.

Gross domestic product (GDP) is calculated as the sum of consumption (C), investment (I), government purchases (G), and net exports (NX), which is exports minus imports. I will focus on all C, I, and NX but only briefly on G because it will require an article unto itself.

Guyana’s GDP growth (annual %) has increased from 2.0% in 2008 to 4.8% in 2012, GDP (current US$) increased from US$1,922,597,807 to US$2,850,572,407, a 48.2% increase. During this same time period its GDP per capita (measured in current US$) increased from US$2,478 to $3,584, a 44.6% increase.

Personal remittances (measured in current US$) increased from US$278,436,000 to US$373,096,197, a 34% increase. Now an observer will say those numbers are great, but if he/she delves deeper, the numbers tell a sad tale. Personal remittances as a percentage of GDP were 13.09% in 2012. What happens to personal remittances? Well, these remittances are pumped into in economy via consumption (C) and investment (I) and these artificially inflate GDP growth rate. Thus the government of Guyana should not take too much credit for the GDP growth rate since some of it is due to remittances.

Many studies, including a study on the impact of remittances on poverty in developing countries conducted by the United Nations Conference on Trade and Economic Development in 2011, corroborate this claim.

An alarming statistic is that of the Guyana’s general government final consumption expenditure (as a % of GDP), which is the G component in the calculation of GDP. Per data from the World Bank, Guyana’s general government final consumption expenditure (as a % of GDP) stayed at 15% from 2008 to the present but during this same time Guyana’s debt increased 117%, from 44% of GDP to 64.7% of GDP.

Where is all of Guyana’s debt going? It is definitely not used to finance government purchases because that has remained at a constant 15% for the last five years.

Finally, the examination of the net export (NX) component of GDP tells an ominous tale of what developmental economists term “growth without development”. Guyana is running a trade deficit, that is, imports exceed exports. In 2011 Guyana exported US$1.18 billion compared to imports of US$1.46 billion (deficit of US$0.28 billion) and in 2012 the deficit increased to US$0.75 billion (exports US$1.311 billion minus imports US$2.065 billion).

In order for less developed countries such as Guyana to sustainably develop and wean dependence on foreign economic entities, they need to foster growth in a local subsistence economy that will actively engage citizens so that they can shoulder some of the development responsibilities. However, the Guyanese government has increasingly increased imports at a higher rate than exports. Thus, more goods and services are being imported to Guyana that can actually be produced locally at a comparative advantage. This type of policy leads to an abhorrent unemployment rate of 21% over the last four years and expounding this statistic will lead to a positive correlation between the increase in crimes and other social problems.

For those detractors of my points above, please let me use a couple of statistics so that irrational arguments and overgeneralizations do not come into play. Ethiopia and Niger experienced GDP growth (annual %) of 8.5% and 11.2% respectively in 2012 while the United States and Germany experienced 2.2% and 0.7% respectively.

Now you don’t see people migrating from the United States and Germany to Ethiopia and Niger to live because the African nations have such high GDP growth rates; the world GDP growth rate was 4.9% in 2010 and 3.7% in 2011 so the world on average has experienced economic growth.

My point is that Guyana’s 4.8% GDP growth rate is misleading and it hides the social and macroeconomic problems plaguing the country.

The government is not implementing development initiatives that will foster a robust local economy that will complement the increase in foreign investments. Their focus on large infrastructure development will not create jobs in the long run or short run because the labour force in Guyana is not being equipped with the tools needed to maximize the potential benefits of these infrastructures.

The opposition should ask the government how many engineers and skilled technicians will be needed to run the Amaila Hydro Power Facility; how many Guyanese possess these skills? Are there training programs, study abroad programs to educate Guyanese in these areas? For instance educating a couple of miners on operating new mining equipment is different than educating them on how to fix the equipment in the case of a breakdown.

The government needs to focus on local development strategies to promote sustainable economic growth and well-being locally. They should use information from all the different case studies by development economists that point out the pitfalls of LDCs and how to avoid them.

The Guyanese government should look at the work of Nobel Laureate and economist Muhammad Yunus of Bangladesh, who pioneered microcredit lending, and the Grameen Bank, which did wonders for that country, and something along those lines will be instrumental for economic progress in Guyana. Now there is a big difference with naming an institution microcredit and having it perform the duties of a microcredit institution. The reason I point that out is because I’ve already investigated microcredit lending in Guyana and it is very different from what microcredit lending needs to be.

Therefore in order for Guyanese to achieve what Mahatma Gandhi called “the realization of the human potential”, they must demand changes to inefficient policies of trade, micro and macroeconomics, fiscal and monetary that foster “underdevelopment” in Guyana.

The Land of Many Waters currently has a budget deficit, trade deficit, a malfunctioning, barely existent local economy, unemployment in excess of 21.00% and a GDP growth rate that is misleading due to the impact of remittances.

The following analogy sums up the pervading mindset of the Guyanese government: what is the use of an economics textbook to an illiterate person? Sure that textbook can be purchased for US$100 but is it worth US$100 to an illiterate person? Definitely not. It could be worth that of toilet paper or fuel for a stove.

The point is why build a bridge over a river, expand an airport, harness a waterfall, when at this moment Guyanese people don’t need them? The enormous amount of funds used for these projects can be used to improve the lives of Guyanese by creating a sustainable local economy that will generate earnings for Guyanese and tax earnings for the government in both the short and long-run?

The government in Guyana needs to stop copying what they see happening in industrialized nations because Guyana is still a developing economy that has different initial conditions of modern economic growth than those experienced by already developed nations. Guyana is unique in its physical and human capital and resources, population size, distribution, and growth rate, etc. Therefore, responsible fiscal, monetary, and macroeconomic policies need to be tailored and implemented for the economic condition of Guyana.

Guyanese who visit Guyana always say that Guyana has changed for the better, everybody has a car now, there are dishwashers and microwaves, and even cane cutters have cell phones. Well, is it really development? I want these same people to Google search cell phones in Africa, or televisions in the Philippines and they will see that people in those places have technology too. In an increasingly global economy, technology transcends borders and Guyanese would’ve experienced these technological innovations regardless of which political party is in power.

The Guyanese people need to know that they will have to shoulder the burgeoning debt of Guyana and should always examine and scrutinize any government projects that require more national debt because a continuous budget deficit, trade deficit, barely existent local economy, an unskilled labour force, high unemployment rate resulting in social ills, etc. are all ingredients of a concoction that will result in a vicious, self-perpetuating cycle of “growth without development” in Guyana where those in power will continue to enjoy a decadent lifestyle while the common Guyanese will continue to languish in mediocrity without achieving their full potential.
 
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