DRAFT October 8, 1996
The Public Loans Acts grant the Minister of Finance the authority for public sector borrowing (both domestic and external) and the Financial Administration and Audit Act makes the Accountant General (AG) accountable for all government expenditures. The Bank of Guyana, as fiscal agent and banker to the Government registers, monitors, and maintains the database of the domestic public debt while the Debt Management Division of the Ministry of Finance is responsible for the management of the external debt. With authorisation from the Ministry of Finance, the Bank of Guyana issues new government securities and services the domestic and external debt.
Since 1989, the total stock of debt increased steadily and peaked at about 588 percent of GDP in 1992. Of this, external debt accounted on average for 93.4 percent or 549 percent of GDP although through reschedulings, debt forgiveness and stock of debt operation, this component of the debt at end-June 1996 had been reduced to about 235 percent of GDP. Between 1991 and 1995, external interest payments also declined from 28.7 percent to 11.4 percent of recurrent expenditures. Similarly, domestic debt(1)
also fell from 90 percent of GDP in 1989 to 31 percent of GDP in 1991 before rising to about 40 percent of GDP at end 1995. Although domestic interest payments declined from 38 percent to about 21 percent of recurrent expenditure over the same period, since 1993 the higher cost of borrowing has switched from external to domestic debt.
The growth in the domestic public bonded debt until 1992 was caused by deficit financing of the overall fiscal balance. Since then sterilisation of excess liquidity in the banking system and, indirectly, accumulation of gross international reserves through foreign exchange retention have been the major determinants of its growth.
Between 1987 and 1991, Government revenue collections were low. Revenues averaged about 33 percent of GDP due in part to (i) small revenue base; (ii) low tax compliance; (iii) poor tax administration; and (iv) negative GDP growth rates. At the same time, expenditures were not contained.
Table 14-1
Debt Indicators, 1989-1995
| 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | |
| Domestic debt |
89.8 |
62.4 |
30.7 |
38.6 |
47.0 |
42.1 |
39.8 |
| External debt |
365.9 |
459.3 |
532.3 |
549.4 |
453.9 |
370.8 |
318.8 |
| Total debt |
455.7 |
521.8 |
563.0 |
588.0 |
501.0 |
412.9 |
358.6 |
| Memorandum items | |||||||
| GDP, market prices (G$ billion) |
10.3 |
15.7 |
39.0 |
46.7 |
59.1 |
74.7 |
88.1 |
| Exchange rate |
27.2 |
39.5 |
111.8 |
125.0 |
130.2 |
138.2 |
140.0 |
Source: Ministry of Finance; Bank of Guyana.
Table 14-2
Key Fiscal Indicators, 1987-1993
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | |
| Current revenues |
36.3 |
41.6 |
31.1 |
34.1 |
22.9 |
26.6 |
29.1 |
| Current expenditures |
-63.5 |
-52.0 |
-35.9 |
-48.7 |
-41.3 |
-40.2 |
-33.3 |
| Current account balance |
-27.2 |
-10.3 |
-4.8 |
-14.6 |
-18.4 |
-13.6 |
-4.2 |
| Overall balance |
-42.4 |
-31.6 |
-7.0 |
-21.7 |
-25.1 |
-22.4 |
-9.6 |
| Financing |
42.4 |
31.6 |
7.0 |
21.7 |
25.1 |
22.4 |
9.6 |
| External |
2.9 |
-5.9 |
2.8 |
17.4 |
20.4 |
10.8 |
7.1 |
| Domestic |
39.5 |
37.5 |
4.2 |
4.3 |
4.7 |
11.6 |
2.5 |
| Banking system |
45.5 |
34.6 |
-0.5 |
0.7 |
2.5 |
13.4 |
1.5 |
| Non-banking system |
-6.0 |
2.9 |
4.7 |
3.6 |
2.2 |
-1.8 |
1.0 |
Source: Ministry of Finance
Personal emoluments and capital expenditures increased by 40.7 percent and as a result the overall fiscal balance deteriorated. Over the same period, the deficit of the overall balance averaged about 25 percent. In the absence of access to external financing, especially before 1990, the main recourse to financing the deficit was through the sale of government securities, i.e., treasury bills and debentures. As a result, the domestic debt which stood at G$5.3 billion at end 1985 rose rapidly to about G$18.1 billion in 1992.
Since 1992, central government fiscal balances have improved. The deficit of the current account has steadily improved from 13.6 percent to 0.3 percent of GDP in 1995. As a result of the Government's drive to rehabilitate infrastructure and improve water, education and health facilities, capital expenditures over the last four years increased, averaging about 12.4 percent of GDP. Even so, between 1993 and 1995 the deficit of overall balance has largely been externally financed, leading to public sector net lending to the banking system.
Table 14-3
Excess Reserves of the Commercial Banks, 1987-1993
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | |
| Required reserves |
296.9 |
476.7 |
1,840.7 |
2,871.5 |
3,582.5 |
5,835.9 |
7,208.5 |
| Actual reserves |
224.1 |
536.4 |
1,599.8 |
3,157.6 |
3,895.7 |
5,898.7 |
8,872.2 |
| Excess reserves |
-72.8 |
59.7 |
-240.9 |
286.1 |
313.3 |
62.8 |
1,663.7 |
Source: Bank of Guyana.
Between 1992 and 1995, rapid growth, expansion of trade, and reforms of the exchange system and especially of the financial sector led to excess liquidity in the banking system. Deposits at the commercial banks increased by 55 percent. In particular, time and savings deposits increased by 53 percent over the same period and this trend is expected to continue in the future. At the same time, as loans and advances did not match the sharp rise in deposits, commercial banks persistently over-subscribed for treasury bills. The reluctance of the commercial banks to lend for long-term investment even in the absence of limited opportunities for government securities led to increasing excess liquidity within the banking system. In order to maintain its targets in the areas of monetary management, prices and the exchange rate, Government issued securities to mop up the excess liquidity within the banking system.
Gross international reserves increased from US$123 million to US$269 million between 1991 and 1995. This sharp rise was attributable to Government maintaining a high import cover ratio of about 4 to 5 months in order to establish credibility in the foreign exchange market. The major sources of reserve accumulation were balance of payments support and foreign exchange surrender requirements. While balance of payments support was for the most neutral to the growth of nominal debt, foreign exchange retention was not. Thus, as the Bank of Guyana credited the accounts of exporters with Guyana dollars in exchange for their foreign currency, this implied an injection of liquidity into the financial system which had to be sterilised to maintain monetary, exchange rate and price targets.
But sterilisation could be a costly measure depending on the level of interest rates, as commented in Chapter 10. Thus, over the last two years, the Government paid interest on more than G$10 billion to maintain its macroeconomic targets. This represented a heavy cost of borrowing for maintaining these targets. Clearly, with the reluctance of the commercial banks to lend actively both short- and long-term for productive activities, Government had no choice but to adhere to this policy.
Table 14-4 provides an estimate of the domestic public bonded debt. Two observations are worth noting. First, this debt does not include inter-enterprise debts and overdrafts with the commercial banks. The complex web of outstanding payments within the consolidated public sector has the potential to: (i) frustrate the divestiture programme by making it difficult to bring some enterprises to the point of sale; and (ii) erode the profitability of other enterprises in terms of the additional debt burden to be serviced. Second, securities issued in respect of Bank of Guyana losses accumulated as a result of exchange rate changes in the bank's operations are not included. This factor and public enterprises' debts and overdrafts should be integrated to the domestic public debt to give a comprehensive picture of debt outstanding.
Over the last 8 years, the structure of domestic bonded debt has changed. Treasury bills, which accounted for 38.5 percent of the total debt outstanding in 1988, have replaced debentures as the main debt instrument, with a share of 75 percent in 1995. Apart from the growth of the stock of treasury bills arising from the accumulation of international reserves and mopping up of excess liquidity, the conversion of commercial banks' special deposits into treasury bills in 1994 also led to an increase in the stock of this class of debt. As the composition of the bonded debt changed, so also have the maturities of debt instruments. Maturities for existing debentures average about 3.5 years, while the longest-maturing treasury bill is 365 days. Even so, about three-quarters of maturing treasury bills are 90 days, implying a higher interest burden and less flexible terms for the Government.
Of the total holdings of domestic bonded debt, the banking system at end December 1995 held G$16.2 billion or 53.3 percent. The stock of government interest-bearing bonded debt held by the Bank of Guyana was G$7.5 billion or 24.6 percent. The Bank of Guyana now holds about G$525 million of Government bonded debt of which G$350 million are interest-bearing treasury bills. Since 1989, the importance of the Bank of Guyana as a holder of Government paper has diminished. At the end of December, 1995, the share of the central bank holdings in domestic debt outstanding was only 2 percent. This is attributable mainly to (i) the elimination of debentures in 1990 as a major source debt instrument; (ii) excess demand for government instruments by new financial institutions; and (iii) adherence to strict monetary and fiscal policies. Building societies and statutory bodies have also become important holders of public domestic bonded debt instruments. Together, they account for about G$6.1 billion or 20 percent of the stock of public debt but their holdings are solely concentrated in treasury bills. The main issue is that financial institutions find it easier and convenient to invest in government paper rather than in long-term productive activities.
Table 14-4
Stock of Domestic Bonded Debt, 1988-1995
(G$ billion)
| December | ||||||||
|
1988 |
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 | |
| Treasury Bills |
4.8 |
7.3 |
8.2 |
6.6 |
13.0 |
22.8 |
23.9 |
22.9 |
| Debentures |
5.8 |
19.4 |
2.2 |
6.1 |
5.9 |
5.6 |
7.9 |
7.6 |
| Total stock |
10.6 |
26.7 |
10.4 |
12.7 |
18.9 |
28.4 |
31.8 |
30.5 |
|
(percentage shares) | ||||||||
| Treasury Bills |
45.3 |
27.3 |
78.8 |
52.0 |
68.8 |
80.3 |
75.2 |
75.1 |
| Debentures |
54.7 |
72.7 |
21.2 |
48.0 |
31.2 |
19.7 |
24.8 |
24.9 |
| Total |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
Source: Bank of Guyana
Interest payments on the debt have declined steadily over the last five years as total interest as a share of GDP fell from 16 percent to 9 percent. Underlying this trend is a combination of factors. First, the smaller costs of external interest payments reflected the inability of Government to service part of its external debt; that is, these represent only actual but not scheduled interest payments. Second, although domestic debt accounts for 11 percent of total debt outstanding, interest payments on these debt are twice as high. Clearly, the high cost of the domestic public debt has offset fiscal "gains" in not fully servicing external debt.
The decision to sell bearer bond debentures worth over G$1 billion in 1994 further increased interest costs as payments from this exercise cost the Government over G$400 million. These were financed by sizeable primary surpluses, but it also implied crowding out of other types of public expenditure. Over the next several years, it will be important to lower interest payments; this may create room for possible increases in other types of public expenditure. More importantly, high growth in the stock of domestic debt would have to be avoided. Otherwise the pressure for tax increases or cuts in other expenditures such as the government financed component of the PSIP and materials and supplies would intensify.
Table 14-5
Holdings of Central Government Securities, 1988-1995
(G$ billion)
| December | ||||||||
|
1988 |
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 | |
| Stock at end of period |
10.7 |
26.7 |
10.4 |
12.8 |
18.9 |
28.4 |
31.9 |
30.4 |
| Bank of Guyana |
7.7 |
20.8 |
2.3 |
0.2 |
0.2 |
0.9 |
2.7 |
0.6 |
| Treasury bills |
3.7 |
3.2 |
1.8 |
0.0 |
0.0 |
0.7 |
2.5 |
0.4 |
| Debentures |
4.0 |
17.6 |
0.5 |
0.2 |
0.2 |
0.2 |
0.2 |
0.2 |
| Commercial banks |
0.8 |
2.9 |
4.4 |
7.4 |
12.7 |
20.9 |
16.4 |
15.6 |
| Treasury bills |
0.5 |
2.6 |
4.1 |
2.8 |
8.1 |
16.5 |
10.8 |
10.1 |
| Debentures |
0.3 |
0.3 |
0.3 |
4.6 |
4.6 |
4.4 |
5.6 |
5.5 |
| Other financial institutions |
0.5 |
0.7 |
1.1 |
1.6 |
2.5 |
3.1 |
5.4 |
6.1 |
| Treasury bills |
0.2 |
0.4 |
0.8 |
1.4 |
2.3 |
2.9 |
5.4 |
6.1 |
| Debentures |
0.3 |
0.3 |
0.3 |
0.2 |
0.2 |
0.2 |
0.0 |
0.0 |
| Public sector |
1.4 |
1.7 |
1.8 |
1.6 |
1.5 |
1.8 |
2.9 |
4.2 |
| Treasury bills |
0.4 |
0.5 |
0.7 |
0.7 |
0.7 |
1.1 |
2.2 |
3.8 |
| Debentures |
1.0 |
1.2 |
1.1 |
0.9 |
0.8 |
0.7 |
0.7 |
0.4 |
| Non-financial private sector |
0.5 |
0.7 |
1.0 |
1.7 |
1.9 |
1.6 |
4.5 |
4.0 |
| Treasury bills |
0.2 |
0.6 |
0.9 |
1.6 |
1.8 |
1.6 |
3.0 |
2.5 |
| Debentures |
0.3 |
0.1 |
0.1 |
0.1 |
0.1 |
0.0 |
1.5 |
1.5 |
Source: Bank of Guyana.
Given the state of the capital stock and public sector wages and salaries, Table 14-6 only shows marginal increases in non-interest recurrent expenditures. Unless the decline in interest payments is accelerated and growth in the local component in the PSIP contained, decay of economic and social infrastructure and lack of essential supplies may result.
The most feasible options in the short- to medium-term in managing the domestic public debt are to (i) design an empirical framework for liquidity forecasts; (ii) lower inflation; (iii) reduce the stock of debt; (iv) maintain the foreign exchange reserves at the equivalent of 4 months of imports; and (v) issue bonds denominated in U.S. dollars.
Table 14-6
Composition of Central Government Expenditures, 1989-1995
(as percent total expenditure)
| 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | |
| Wages and salaries |
8.5 |
7.6 |
7.3 |
9.2 |
13.0 |
14.9 |
14.8 |
| Interest payments |
53.5 |
58.9 |
49.4 |
47.6 |
34.6 |
34.9 |
32.8 |
| External |
15.7 |
21.6 |
28.7 |
25.6 |
14.3 |
13.4 |
11.4 |
| Domestic |
37.8 |
37.4 |
20.7 |
22.0 |
20.3 |
21.5 |
21.4 |
| Operations and maintenance |
27.4 |
24.4 |
31.6 |
33.4 |
36.8 |
29.2 |
31.5 |
| Materials and supplies |
2.7 |
1.5 |
1.5 |
1.6 |
3.1 |
3.4 |
3.2 |
| PSIP a/ |
8.0 |
7.6 |
10.2 |
8.2 |
12.5 |
17.6 |
17.8 |
| Total |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
a/ This is only the local component of the investment programme.
Source: Ministry of Finance.
1. An Empirical Framework for Liquidity Forecasting
A key to containing the stock of domestic debt is to develop a consistent framework for liquidity forecasting. At present, forecasting is not related to growth in the central bank's balance sheet or the monetary targets established under the IMF programme. Reliance on indirect instruments requires that the central bank improve its capacity to maintain monetary control. Developing a liquidity forecasting framework or reserve money programme will:
(i) link growth in the balance sheet of the Bank of Guyana with liquidity conditions and allow for a more appropriate debt issue. Until recently, all liquidity changes have been sterilised and this contributed to excessive growth in domestic bonded debt;
(ii) also ensure that foreign exchange reserves are more closely managed; this will provide an improved control over their domestic currency counterpart and the debt issue required to manage this;
(iii) deliver improved monetary control and greater price stability; and
(iv) facilitate improved coordination between monetary and fiscal authorities to strengthen the fiscal position and thereby assist in retiring public debt.
2. Lowering Inflation
A key measure for turning the corner on debt service is to control inflation and keep it at low levels. The benefits of a lower inflation and nominal interest rates are shown in Table 6 where on the basis of past data, we assume a real interest rate of 3.5 percent. Since budgetary allocations have been made for interest payments in the current fiscal year, the analysis considers the effects of interest rate changes on the stock of debt for the period 1997 to 2000. The analysis further assumes that Bank of Guyana will be issued G$7 billion in interest-bearing securities to eliminate part of its losses in 1997. The results of the various scenarios of interest rate reductions are striking.
Even so, the discounted prices of treasury bills are low in part accounting for over-subscription of government securities. This means that the Bank of Guyana will have to set a higher discount floor price for competitive bidding of government securities, thereby reducing future interest payments. Second, with the amount of over-subscription, the Bank of Guyana should alter the mix of its treasury bill portfolio and issue longer-term 365-day securities. At present, the share of this component is about 20 percent of the total treasury bills outstanding. Finally, government paper with longer-term maturities probably will have to be developed in the medium term to minimise pressure on fiscal balances. The issue of the composition of the stock of treasury bills and its accompanying maturity structure is therefore relevant. A more diversified maturity structure may prevent crises of confidence. Nonetheless, in the final analysis, management of monetary, fiscal and exchange rate policies to reduce inflation and interest rates and maintain them at low levels will be crucial.
Table 14-7
Inflation, Interest Rates, and Interest Payments
| 1997 | 1998 | 1999 | 2000 | |
| (Pessimistic Case) | ||||
| Inflation (%) |
7.5 |
8.0 |
8.0 |
8.0 |
| Interest rate (%) |
11.0 |
11.5 |
11.5 |
11.5 |
| Interest payments (G$) |
4.6 |
4.8 |
4.8 |
4.8 |
|
(Base Case) | ||||
| Inflation (%) |
6.5 |
6.0 |
6.0 |
6.0 |
| Interest rate (%) |
10.0 |
9.5 |
9.5 |
9.5 |
| Interest payments (G$) |
4.2 |
4.0 |
4.0 |
4.0 |
|
(Optimistic Case) | ||||
| Inflation (%) |
5.0 |
4.5 |
4.5 |
4.5 |
| Interest rate (%) |
8.5 |
8.0 |
8.0 |
8.0 |
| Interest payments (G$) |
3.6 |
3.4 |
3.4 |
3.4 |
| Memorandum item | ||||
| Stock of debt (G$ billion) | 42 | 42 | 42 | 42 |
Source: Ministry of Finance.
3. Reducing the Nominal Stock of Debt
The high interest costs associated with the domestic debt are excessive and efforts should be made to gradually retire part of the debt although it is also true that a reduction in interest rates as shown in Table 14-7 will save the Government a modest amount of interest payments. The present analysis assumes that Government will run surpluses on its current account in 1998 and beyond and will use part of the surplus to gradually retire the stock of debt. If the assumptions of fiscal surplus hold and fifty percent of the surplus is applied, domestic public debt can fall by G$13.4 billion over three years, saving the government at least G$2 billion in interest payments.
Table 14-8
Reduction of Domestic Bonded Debt and Interest Payments
| 1997 | 1998 | 1999 | 2000 | |
| Current Account Surplus (% of GDP) |
-7.5 |
2.8 |
7.5 |
10.0 |
| Current Account Surplus (G$ billion) |
-8.2 |
3.3 |
10.2 |
15.2 |
| Debt before reduction (G$ billion) |
42.0 |
42.0 |
42.0 |
42.0 |
| Interest payment before reduction (G$ billion) |
4.4 |
4.4 |
4.4 |
4.4 |
| (Utilising 50% of fiscal surplus) | ||||
| Debt stock after reduction (G$ billion) |
40.3 |
35.2 |
27.6 | |
| Interest payment after debt reduction (G$ billion) |
4.1 |
3.4 |
3.0 | |
Source: Ministry of Finance.
The next scenario to be examined is the effect of a combination of lower interest rates induced by lower inflation, and debt reduction following surpluses on the current account. Table 14-9 assumes that 50 percent of the fiscal surpluses will be applied to debt reduction. The net savings in interest payments to Government in simultaneously pursuing both policies amounts to G$2.7 billion in the worst case scenario. The savings under the same assumptions in the best case scenario is almost G$6 billion. Even so, a caution is in order as this analysis is only indicative and provides levels of magnitude of the impact of domestic debt reduction policy on interest payments.
4. Restoring Positive Net Worth to the Bank of Guyana
Since 1984, the Bank of Guyana has accumulated foreign exchange transactions losses of over G$132 billion. Losses in 1995 alone amounted to G$7 billion. As a result, the net worth position of the Bank is negative. In order to restore a positive net worth to the central bank and also ensure its independence, it is essential that the Bank of Guyana be reimbursed for the transaction losses undertaken on behalf of the Government. Clearly, Government does not have the resources to meet the entire losses of Bank of Guyana over the years. Therefore, in 1997 as part of reimbursing the Bank of Guyana for its 1995 losses, Government will also (i) discount Bank of Guyana debt to a point where it would make its net position positive; (ii) issue a mix of interest-bearing securities with maturities ranging from 2 to 7 years to cover the discounted losses; and (iii) beginning 1999, Government will reimburse Bank of Guyana fully for foreign exchange transactions undertaken on its behalf.
Table 14-9
Combination: Lower Interest Rate and Domestic Debt Reduction Policies
| 1997 | 1998 | 1999 | 2000 | |
| Current account surplus (% of GDP) |
-7.5 |
2.8 |
7.5 |
10.0 |
| Current account surplus (G$ billion) |
-8.2 |
3.3 |
10.2 |
15.2 |
| Debt before reduction (G$ billion) |
42.0 |
42.0 |
42.0 |
42.0 |
| Interest payment before reduction (G$ billion) |
4.4 |
4.4 |
4.4 |
4.4 |
| (Utilising 50% of fiscal surplus) | ||||
| Debt stock after reduction (G$ billion) |
40.3 |
35.2 |
27.6 | |
| Interest payments (interest rate at 9.5%) |
3.8 |
3.3 |
2.6 | |
| Interest payments (interest rate at 8.0%) |
3.2 |
2.8 |
2.2 | |
| Interest payments (interest rate at 11.5%) |
4.6 |
3.9 |
3.1 | |
Source: Ministry of Finance.
5. Issuing Long-Term US Dollar-denominated Bonds
Issuing U.S. dollar-denominated bonds will reduce interest rates and debt service. In exchange, the Government would have to bear the exchange rate risk associated with these bonds. Initially, such bonds can be backed by excess reserves from the banking system. Apart from the reduced interest burden on public resources, this mechanism also offers opportunities to the private sector to diversify its portfolio and permits a more efficient hedging against exchange risk.
Even with declining interest payments on domestic debt over the last few years, those payments are still very high. Already, the increasing share of interest payments in the recurrent budget has crowded out other important public sector programmes, almost all of which require purchase of materials and supplies and expenditures on personal emoluments. The Government has maintained a fairly stable level of foreign exchange reserves over the last six months, and in the medium term would have to maintain an import cover of about six months. The need for this measure arises because of the vulnerability of the economy to uncertainties in Guyana's export arrangements. Also with the scheduled elimination of foreign exchange surrender requirements next year, the Bank of Guyana may have to buy foreign exchange to meet its foreign exchange targets. By maintaining a modest import cover, pressure on the exchange rate would be reduced at the outset of the new policy, thereby avoiding a crisis of confidence in the market. But the key to reducing debt service is (i) better forecasting of excess liquidity in the system and the appropriate levels of treasury bills necessary to mop up this excess liquidity; (ii) prudent fiscal and monetary policies to lower inflation; and (iii) reduction of the domestic debt itself.
One of the major consequences of Guyana's economic difficulties in the late 1970s was the incapacity to service its external indebtedness. This resulted in an accumulation and capitalisation of arrears. In the absence of access to international financing, and with low levels of export earnings and depleted foreign exchange reserves, the stock of external debt ballooned to about US$1.9 billion at the end of 1988.
Since 1989, Guyana's external debt burden has sharply declined and the debt structure has also changed. First, the ERP and subsequent policies, which together moved Guyana towards a market economy with sound macroeconomic management, generated significant growth in GDP and exports. GDP growth averaged 4 percent per year during 1989-95, while merchandise exports went up from US$204.7 million to US$479 million. Second, debt and debt service reduction efforts carried out by the Government together with the donor community resulted in a significant change in the debt structure and a reduction in debt service obligations.
Specifically, private and short-term debts, including interest arrears, declined from US$761 million or 40.8 percent of the total debt outstanding in 1988 to just US$72 million or less than 3.5 percent in 1995, while official debt (including debt to IMF) went up from US$1.1 billion or 59 percent to US$1.8 billion or 89 percent. The debt-export ratio declined from 760 percent in 1988 to about 467 percent in 1995, while the nominal debt stock rose from US$1.9 billion to US$2.1 billion during this period. Nonetheless, Guyana's debt burden, measured in terms of debt-export ratio, remains one of the highest among the 29 severely indebted low-income countries, whose average debt-export ratio in 1995 was about 488 percent.
Between 1989 and 1995, the net increase in Guyana's debt stock was about US$500 million, of which US$287 million took the form of new borrowings from international financial institutions. Write-offs of bilateral debts amounted to about US$260 million while US$97 million of commercial debts were bought back through the IDA Reduction Facility. About US$558 million or 66 percent of the increase in the debt stock was due to the accumulation and capitalisation of arrears.
Apart from the rise in arrears, the increase in the nominal stock of debt was the result of high levels of financing required to finance the public sector investment programme and support the balance of payments. At the beginning of the ERP, Guyana's infrastructure was in a state of considerable disrepair. In addition, power generation capacity was at an all-time low, and education and health facilities and water and sewerage had deteriorated to such a degree that it would have been difficult to turn the economy around without addressing these urgent needs. Through financing from the international financial institutions, Government continues to rehabilitate both economic and social infrastructure although additional efforts would be required to further upgrade the infrastructure.
Debt management in Guyana until recently did not have the flexibility found in other severely indebted countries because of the structure of the external debt. Although 54 percent of Guyana's external debt is owed to bilateral creditors, it is noteworthy that Trinidad and Tobago, a middle- income and also severely indebted country, was owed more than half of the total bilateral debt.
1. Rescheduling with Official Creditors
Since 1989, Guyana has entered into four rescheduling agreements with its official bilateral creditors under the auspices of the Paris Club. Under the Venice terms, the Paris Club creditors in 1989 did not offer any concessions to Guyana. Instead, the accumulated stock of arrears and debt service payments were consolidated and rescheduled on non-concessional terms with 20 years maturity, including 10 years of grace, for medium- and long-term debts. Short term debts were also capitalised with 10 years maturity, including 5 years of grace. In 1990, Guyana was extended further relief by the Paris Club under the Toronto terms in which the participating creditor countries offered a menu of three options. First, 33 percent of debt service obligations were written off and the remainder consolidated at market rates of over 14 years, including 8 years of grace. Second, 100 percent of the debt service was extended over a period of 25 years, including 14 years of grace. Third, 100 percent of the debt service was consolidated at preferential rates with a repayment period of 14 years, including 8 years grace.
In the third Paris Club rescheduling, Guyana benefited from (i) 50 percent writeoff of payments due on non-concessional loans and credits while the remaining portion was consolidated at market rates over a period of 23 years, including a grace period of 6 years; (ii) a consolidation of 100 percent of the amount due at concessional rates to reduce by 50 percent the net present value of all payments; and (iii) a 100 percent consolidation of the amounts due at market rates over a repayment period of 25 years, including 16 years of grace. The Paris Club creditors also agreed to consider Guyana for a stock of debt reduction in 1996.
2. Debt Forgiveness
In addition, Guyana has received debt forgiveness from several countries to alleviate its debt burden. Canada, the United Kingdom, the United States, Netherlands and Brazil forgave debts in excess of US$342 million while the World Bank through the IDA Debt Reduction Facility provided US$11 million to buy back commercial bank debts of U$94 million.
In May 1996, Guyana received a stock of debt reduction from its Paris Club creditors. Under the "Naples terms," Guyana received a 67 percent cancellation of the corresponding obligations, or a reduction of the debt's net present value of US$807 million, and additionally US$110 million in a "topping-up" of previously rescheduled debts. The total debt relief for Guyana achieved as a result of the May 1996 agreement is estimated at US$585 million. Consequently, the share of bilateral debt fell from 43 percent to 22 percent of the total, while the share of multilateral
debt increased from 40.9 percent to 56.4 percent. The willingness of Trinidad and Tobago -a non-Paris Club creditor- to join the Paris Club in order to extend Naples terms to Guyana mainly accounts for the country's success in these reductions of the stock of debt. Trinidad's participation was crucial especially in the context of (i) the comparability clause contained in the Agreed Minutes of the Paris Club; and (ii) the requirement that Guyana maintain debt sustainability in the medium term.
In spite of these developments, Guyana's debt and scheduled debt service payments remain high. The ratio of external debt to GDP at end-June 1996 was 227 percent while the ratios of debt service to exports and revenues were 24.6 percent and 50.4 percent respectively. The key issue is whether Guyana is now in a position to completely service its external debt while at the same time borrowing to finance its public sector investment programme and institutional and public sector reforms.
Two issues are important in Guyana's future borrowing, that is solvency and creditworthiness. Solvency concerns a country's ability to meet its external debt obligations and it is linked to the non- interest current account, real rates of interest and output growth. To remain solvent, a country should not spend more than its discounted current and future income less its initial debt. This implies that the non-interest current account surplus should at least equal the initial debt times the difference between the real cost of foreign debt and the real output growth rate.
Based on the medium-term macroeconomic projections, it appear that external debt will increase by about US$186.2 million, or at average annual rate of 2.1 percent between 1997 and 2004. With interest rates of concessional financing projected at between 2 to 5 percent, the smaller growth in external debt implies that Guyana will remain solvent after it contracts loans to finance its development programmes. Even so, this is an untenable situation.
The key to debt sustainability will be Guyana's creditworthiness in the medium term. This is true in part because debt servicing will require not only an increase in gross national product high enough to allow repayment but also the ability to generate a surplus of production over consumption of traded goods. This means that in the medium term, growth will have to be export-oriented to generate sufficient foreign exchange to meet debt servicing requirements. Debt-export ratios are therefore relevant in assessing creditworthiness in the medium term.
Based on the GDP growth and export volume assumptions shown in Table 14-10, the debt service ratio would decline gradually from 39 percent in 1995 to 15.4 percent in 2002 while the ratio of public external debt to GDP is projected to fall from 326.8 percent in 1995 to 130.3 percent in 2002. On the assumption that the ratio of government revenue to GDP stays slightly above the current level of 30 percent, the ratio of total debt service to government revenue would decline from 81 percent in 1995 to 22.8 percent in 2002. In net present value terms, the ratio of public external debt to exports of goods and services would decline from 233 percent in 1995 to less than 200 percent by 2004. Thus, if Guyana's export performance meet expectations, its external debt burden would reach "sustainable" levels by 1998. Nonetheless, with total debt services commanding about a third of public resources, the debt burden is still serious. At present Guyana's per capita social sector in education and health is one of the lowest in Latin America.
Table 14-10
Medium-Term Macroeconomic Indicators
Source: Ministry of Finance. See Chapter 16 of this Strategy.
The outlook for "debt sustainability" is quite sensitive to the underlying assumptions about key variables, including export volume growth, prices, and marketing opportunities. Changes in the basic assumptions could affect the capacity of the Government to service its debt in the medium to long-term. For this purpose the financing gaps that result from lower growth in export volumes or prices are assumed to be covered by non-concessional lending. The impact would be most significant in the event of a slowdown in the export growth rates and if new debts were financed on non-concessional terms.
If growth of export volumes was 1 percentage point lower on average than the high case scenario, the yearly financing gaps on average would increase by US$19.4 million in 1997-2002. Non-concessional borrowing in the amount of the additional financing gaps in 1997-2002 would raise the debt service ratio on average by about 8.3 percentage points above the projected level. If in the absence of corrective measures, these financing gaps are met with run-down of reserves, Guyana's gross international reserves would drop from 7.3 months in 1995 to about 5.5 months of import cover in 2002.
If the average increase of export prices was 10 percent less than assumed, the current account deficit would be 1 percent of GDP higher on average, and the yearly financing gap would average US$25 million higher. Thus, a lower than projected increase in export prices would have a more devastating impact on key debt and balance of payments indicators than would a decline in export volumes.
Where does Guyana go from here? The purpose of developing a debt management strategy is to reduce the cost of external debt service, including interest payments and amortisation, to the maximum extent possible. In turn, the objective of seeking further debt relief is to reduce the debt burden, maintain debt sustainability in the long run, and release budgetary resources for other priority activities. The elements of the strategy will include the following measures:
(i) maintain sound policies to generate rapid growth so as to further reduce the debt burden. The elements of these policies will include providing an improved policy framework for supporting exports and policies to promote competitiveness;
(ii) as part of the May 1996 agreement, Guyana committed itself to securing comparability of treatment for the debts owed to other external public or private creditors. The comparability of treatment would be assessed on the basis of reductions in the face value of debt and/or the terms of repayment on debts not cancelled in net present value terms. The application of Naples Terms to the debts owed by Guyana to the main non-Paris Club creditors would result in additional write offs worth an estimated US$145 million. The Government has already approached a number of these bilateral creditor countries to seek equivalent debt relief.
(iii) although the stock of debt operation under Naples Terms was meant to represent a permanent exit from rescheduling, Guyana can still make a case that debt service represents an undue stress on its resources and apply for a second stage operation. In this respect, Guyana will need to have maintained a good track record of macroeconomic performance and be prepared to approach the Paris Club in the event that the decision is taken to offer severely indebted low-income countries additional write-offs, which are believed to be of up to 90 percent.
It is in this context that the outcome of the present discussions on the sale of some IMF gold reserves is of major interest to Guyana. Nevertheless, concrete decisions on such a facility and the definition of instruments are not expected soon, in part because the nature of commitments to ease the burden of debt and how the roles of various creditors and donors would have to determined. Even so, a 100 percent write-off of the debt owed to the Paris Club would not significantly reduce the debt burden. We need relief from multilateral agencies. The only reason the May 1996 Paris Club agreement proved possible was that Trinidad and Tobago joined on an exceptional basis. However, it unlikely that Trinidad and Tobago could generate the political will to bilaterally reduce the debt obligations of Guyana for a second time.
For Trinidad and Tobago to participate in a second debt reduction facility for Guyana, it may have to be offered a triangulation deal, whereby it could repay its own debts to the Paris Club with debt owed to it by Guyana. At that point, the Paris Club donors could apply a second stage Naples Term operation to the new debt owed to it by Guyana.
In addition, the Government will (i) continue to borrow at concessional terms and retire some non-concessional debt with concessional borrowing; (ii) avoid the accumulation of arrears so as to maintain Guyana's creditworthiness and reduce its country risk in the international financial community; (iii) seek to reduce the cost of debt servicing through schemes such as redemption price, debt for nature swap, debt for aid, debt for equity swaps, and other local currency debt swaps; (iv) link the ongoing privatisation programme with the domestic and/or external debt reduction through swaps and other mechanisms. The justification for using privatisation revenues for the repurchase of debts is that the public companies themselves contributed to the accumulation of these debts in the past.
The Government will also consider options in swapping foreign debt for domestic assets and for concessions for the exploitation of natural resources. Considering the narrow domestic financial market and the need to inject new technologies into the production process, direct foreign investment will be crucial in generating sustained growth. A divestiture programme will provide one of the vehicles for this. Further, like Costa Rica, Bolivia and Surinam, Guyana will continue to seek assistance from the international community in debt reduction operations which swap existing debts for a commitment to preserve unexploited selected areas with high environmental value. Under such agreements, environmental groups buy, usually at a large discount, part of the outstanding stock of debt and exchange it at a lower discount for Government bonds paying an agreed-upon interest rate. The proceeds of the payments are used to finance monitoring and management of the protected areas. (In this regard, see also the proposal for an endowment to finance non-timber concessions, developed in Chapter 18.)
Finally, with respect to the use of debt relief and privatisation revenues, the Government will review and rank debts by their term structure. For instance, the Government will need to know whether the highest economic rate of return derives from the rapid repayment of external or internal debt. While it accrues at a lower rate of interest, the external debt is dollar-denominated and carries an exchange risk. That is, the domestic debt, although currently accruing at higher nominal rates of interest, must be weighed against the foreign interest rate plus the expected rate of exchange depreciation in the medium to long term. In the simplest of cases, the Government, for example, may choose to sterilise privatisation revenues with the repurchase of external or domestic debt.
1. 0/ Throughout this chapter, domestic debt refers to bonded debts.