Debt remains burden as free trade looms
-warns workshop
Stabroek News
May 7, 2004
Guyana's long-term debt sustainability, measured by liquidity and solvency, is projected to deteriorate at an accelerated pace with threats looming from possible free trade in sugar and challenges to reform the country's revenue base and control public sector wages growth.
Guyana has received several debt-stock treatments in the past few years but new borrowings, the build up of the domestic debt, potential terms of trade shocks associated with market threats and fiscal pressures locally could make the servicing of the overall debt burden unsustainable.
"It is necessary that new sources of growth are identified to avoid reliance on a few traditional and risk-exposed sectors such as sugar and rice," the recent government-sponsored debt strategy workshop concluded.
It noted that a decline in export revenues from sugar and rice would affect the current account and debt sustainability.
The net present value of Guyana's external debt, (deflated to 1988 levels), will stand at US$499.5M once full relief is obtained under the enhanced HIPC initiative while the domestic debt in nominal value stands at US$309M. Guyana secured a US$334M write-off under E-HIPC last December but not all creditors have provided full relief as yet.
The objective of the recent workshop was to forecast Guyana's debt sustainability prospects over the next 18 years, using three scenarios - base, pessimistic and optimistic.
The three scenarios forecast a fragile debt situation bordering on unsustainability, with Guyana's debt-to-revenue ratio remaining outside sustainable regions in the medium term.
The pessimistic scenario predicts unsustainability for the long-term with consistent greater net present value debt/revenue ratios.
Presenters at the workshop said some of the pessimistic assumptions are "fairly realistic" and see optimism as a goal and not a mindset.
For them, the key issues confronting Guyana would be bilateral non-Paris Club creditors failing to deliver comparable debt relief; the need to increase government revenues; managing the domestic debt in a holistic approach; maximising benefits from new financing and widening access to international donors.
Among the workshop's recommendations were for revenues to be raised through the implementation of the value added tax, slated for implementation after the next general elections in 2006 and operationalising the organic budget act which seeks to streamline expenditure and heighten accountability in the public sector.
Additionally, the workshop recommends that Guyana seeks to obtain grants and highly concessionary credits with grant elements no less than 40%. The need for a more pro-active financing policy was highlighted given that the resources of many bilateral donors, such as Sweden and the Netherlands were not being utilized.
It found that donors and creditors are usually matched with projects based on custom and ease of contact, which presenters say, leads to less effective funding outcomes with negative implications in terms of external financing sustainability.
The workshop found that there was an absence of systemic project evaluation processes including pre-investment analysis of comparative costs and benefits of projects and that there were no uniform monitoring processes in place to allow for transparency or expeditious clearing of bottlenecks.
Domestic debt
The workshop urges that the recent shift from short-term domestic debt instruments to long-term instruments be managed carefully to allow for a sustainable domestic debt strategy. It urges the development of a secondary market for domestic debt instruments by the issuance of long-term bearer bonds.
"There is a need to more carefully manage the build up of domestic debt in light of the risk of a shift towards domestic rather than external borrowing sources," the workshop urged.
The base scenario predicts that the shift of dependence to domestic financing is reduced in the medium to long-term but the pessimistic scenario, projects a potential shortfall in external financing for capital programmes, requiring domestic sources to meet that shortfall.
"Such an outcome would in the long-run jeopardize overall debt sustainability, particularly given the lack of a means of externalizing such a debt burden," the workshop concluded. Support from International Financial Insitutions over the years has seen a reduction in the need for domestic financing of capital programmes. However, current account deficits have been financed from domestic sources.
The workshop highlighted the need to enhance data collection to allow for meaningful debt sustainability analysis, including information on poverty reduction and macroeconomic and lending related data.
The need to develop a macroeconomic forecasting model is one of the recommendations to achieve better macroeconomic planning and management.
And while progress has been made in some areas to realize the poverty reduction strategy goals, sector strategies are not fully aligned to allow for a full sense of ownership. There is also need for additional indicators to better measure progress towards poverty reduction in the areas of economic growth and governance. There is also a need for more frequent poverty assessments to develop the poverty profile.