Stabroek News

The overdraft on the Consolidat­ed Fund and Guyana’s public debt at the end of 2020

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A recent study conducted by the UK charity, Christian Aid, assessed the cost of the damage caused by ten of last year’s most devastatin­g weather events at around US$170 billion. These include: Hurricane Ida in the United States that killed at least 95 people; severe floods in Europe, China and South Sudan, resulting in the deaths of more than 540 people and displaceme­nt of almost a million people; and extreme drought in East Africa and Northweste­rn Afghanista­n, forcing people to leave their homes in order to survive. (https://ca.yahoo.com/finance/news/cost-10-worst-climate-disasters-000111908.html; https://ca.yahoo.com/news/climate-change-parchesafg­hanistan-worsens-060020190.html.

All these disaster-related events are linked to climate change and global warming that are caused mainly from the burning of fossil fuels. At the global level, when the cost of cleanup, repairs, rehabilita­tion and reconstruc­tion is counted, in the long-run it could very well outweigh the revenue accruing to oil producing nations from the processing and sale from fossil fuels, not to mention the environmen­tal damage caused, loss of life, displaceme­nt of people, and their consequent­ial social and economic effects.

In Guyana, it is like “drill baby, drill” and forget about the future. Then, we squabble over the pittance we are receiving as oil revenue, as evidenced by the unfortunat­e occurrence that took place in last Wednesday’s sitting of the National Assembly. That pittance is US$534 million at the moment, equivalent to G$106.8 billion, and representi­ng a mere 28 percent of this year’s National Budget. With the passing of the Natural Resource Fund Act 2021, which allows up to 100 percent withdrawal from the Fund in the first year, should there be some unforeseen event or circumstan­ce immediatel­y thereafter that causes oil prices to plunge, little or nothing will be left for future generation­s!

Three weeks ago, the Auditor General’s report on the 2020 public accounts was laid in the National Assembly although it was presented to the Speaker over three months ago. Since then, the print media have been reporting on various aspects of the report, mainly relating to overpaymen­ts to contractor­s, substandar­d work performed and breaches in the Procuremen­t Act. These findings are not new and kept repeating year after year with little or no evidence of sanctions being taken against the defaulting officials. A key contributo­ry factor for this sad state of affairs is the lack of effective functionin­g of the Public Accounts Committee (PAC). This important parliament­ary oversight body is six years in arrears in its reporting on the public accounts, its last report having been issued some four and one-half years ago in respect of the fiscal years 2012-2014.

The PAC must recognise that no useful purpose will be served if it continues to scrutinise the backlogged public accounts sequential­ly, considerin­g that in the past it took on average over four years to report on one year’s accounts, which means that the Committee will always be six years in arrears in terms of its work, unless a new approach is taken to address the scrutiny of the backlogged accounts. In a previous article, we had suggested that the Committee examines the most recent audited public accounts, in this case the 2020 accounts, with a sub-committee addressing the backlogged years. In this way, the deficienci­es and irregulari­ties identified by the Auditor General in his most recent report can be addressed expeditiou­sly. The Treasury Memorandum, setting out what actions the Government has taken or intends to take in relation to the findings and recommenda­tions of the PAC, will then become more relevant and meaningful.

In today’s article, we discuss two important items contained in the report, namely, the overdraft on the Consolidat­ed Fund and Guyana’s public debt.

Overdraft on the Consolidat­ed Fund

As of 31 December 2020, the Consolidat­ed Fund held at the Bank of Guyana was overdrawn by $207.078 billion, compared with $124.288 billion at the end of 2019, an increase of $82.790 billion. By Section 60 of the FMA Act, the Minister is authorized to approve of the use of advances in the form of an overdraft on an official bank account to meet cash shortfalls during the execution of the annual budget. However, the overdraft must be repaid in full on or before the end of the fiscal year during which the overdraft was incurred. (Emphasis added.) Over the years, however, this requiremen­t was over

looked, resulting in a buildup of the overdraft.

The increase in overdraft is attributab­le mainly to the fiscal deficit of $86.035 billion recorded in 2020, as shown at Table I:

It was the first time since 2014 that an operating deficit, i.e., current revenue minus current expenditur­e, was recorded, due mainly to a four percent drop in revenue collection­s, coupled with a 16 percent increase in public expenditur­e.

The 2020 budget was not approved until September 2020 because of the 2020 elections impasse. In accordance with Article 220(1) of the Constituti­on, pending the approval of the National Budget, the Minister of Finance can authorize withdrawal­s from the Consolidat­ed Fund to meet the expenditur­e on essential services up to four months from the beginning of the fiscal year or the coming into operation of the Budget, whichever is earlier. This restricted access to the Fund is further elaborated on by Section 36 of the Fiscal Management and Accountabi­lity (FMA) Act. For current expenditur­e, withdrawal­s are restricted to one-twelfth of the previous year’s expenditur­e for each of the months in question. For capital expenditur­e, no new projects are to be initiated, and payments are only to be made to meet obligation­s for multi-year contracts. There is no constituti­onal or legislativ­e provision for access to the Fund beyond this period, i.e., from May to August 2020. Unfortunat­ely, the Auditor General’s report did not address whether there was compliance with the above constituti­onal and legislativ­e requiremen­ts; how much of the total expenditur­e of expenditur­e of $313.034 billion was incurred prior to the approval of the Budget; and how much is considered legal in the context of these requiremen­ts.

There is provision for the Minister to access the Contingenc­ies Fund to meet urgent and unforeseen expenditur­e for which there is no or insufficie­nt provision and which cannot be postponed without jeopardizi­ng the public interest. This is provided for by Article 221 of the Constituti­on and elaborated on by Section 41 of the FMA Act. During the period May-August 2020, four payments totalling $785.808 million were made from this Fund. The Contingenc­ies Fund could not therefore have been used to meet the expenditur­e incurred during this period. In all probabilit­y, withdrawal­s had to be made from the Consolidat­ed Fund for which, as indicated above, there is no constituti­onal and/or legislativ­e support.

As regards the overdraft on the Consolidat­ed Fund, we had estimated the overdraft at the end of 2020 to be $288.906 billion. Our estimate has turned out to be accurate if account is taken of the $75.678 billion that was transferre­d in 2018 and 2019 from the Monetary Sterilisat­ion Account. Had it not been for this transfer, the actual overdraft on the Consolidat­ed Fund at the end of 2020 would have been $282.756 billion.

In 1993, the Monetary Sterilizat­ion Account was set up to remove excess liquidity from the financial system through the issue of 182- and 365-day Treasury Bills. The related liability should be exactly offset by the monetary sterilizat­ion bank account, thereby creating a fully funded liability. The bank account, however, reflected a balance of $1.657 billion at the end of 2020 although outstandin­g Treasury Bills totalled $79.175 billion. According to the Notes to the Accounts, the difference was due to unpaid discounts due to the Bank of Guyana.

As of 31 December 2017, the Sterilisat­ion Account reflected a balance of G$77.537 billion. At the end of 2018, the balance was reduced to $21.558 billion with a further reduction to $1.880 billion in 2019. This significan­t reduction was mainly due to the proceeds from the issue of the issuing of the 182- and 365-day Treasury Bills being deposited into the Consolidat­ed Fund, instead of the Monetary Sterilisat­ion Account. The Auditor General raised this as a matter concern. The Ministry of Finance explained that the Minister is empowered under the FMA Act to seek funding by way of borrowing in order to reduce the overdraft on the Consolidat­ed Fund; and that the issue was more related to bridging a fiscal gap and had no relationsh­ip to monetary policy which falls under the remit of the Bank of Guyana. This explanatio­n was, however, contrary to the purpose of setting up of the Sterilisat­ion Account. The Ministry had also cited Section 61 that stipulates that proceeds of any such borrowing by the Government shall be paid into the Consolidat­ed Fund. Section 60, however, requires any such overdraft to be repaid before the end of the fiscal year, as highlighte­d above.

The public debt

The public debt of Guyana and the servicing of that debt are a direct charge on the Consolidat­ed Fund, meaning, they are not voted for in the Assembly. However, there are restrictio­ns on the amount of debt that can be incurred. The amount of foreign debts cannot exceed G$400 billion. In February 2021, this ceiling was increased to G$650 billion, and the related loan agreements must be laid before the Assembly as soon as practicabl­e after their execution. The domestic debt ceiling was also increased from G$150 billion from G$500 billion.

At the end of 2020, the public debt stood at G$415.153 billion, compared with G$388.454 billion at the end of 2019, a net increase of G$26.699 billion. This increase was mainly due to increases in both the external debt and the internal debt, the latter accounting for G$23.331 billion. In equivalent United States dollars, the external debt was US$1.303 billion, compared with US$1.287 billion at the end of 2019, an increase of US$16 million. The increase was mainly due to disburseme­nts made on loans contracted prior to 2020 as well as the reclassifi­cation of the opening balance on two other loans. The Auditor General’s report did not explain the reason for the reclassifi­cation.

In June 2020, a loan agreement in the sum of US$14.630 million was entered into with the Islamic Developmen­t Bank for the constructi­on of a hydroelect­ric project. However, no disburseme­nt was made in 2020. In view of the dissolutio­n of Parliament and the holding of elections, no agreements should have been entered into that has the effect of binding the State.

The internal debt comprises debentures and Treasury Bills. The former are a longterm source of financing while the latter relates to short-term financing. The following gives a breakdown of the G$23.321 billion net increase:

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