Analysis and News

Government Debt and its Sustainability

BY GEOCAP's Contributor: Kayshav Tewari

The recent covid pandemic has pushed economies and Central Banks to their limits. Whether governments have over-extended into unsustainable domains is a question that can only be answered with time.  


In order to fund the response to the pandemic and mitigate its effects on economies, the developed nations borrowed at rates rivalling those seen during the World Wars. For example, in 2020, the UK government borrowed £303 billion compared to just £50 billion in 2020 whereas the US borrowed almost 6 trillion USD over the course of 2020-2021 compared to a less substantial sum of 1.3 trillion USD for the year of 2019. 


Guyana also borrowed to fund their COVID-19 response and stimulate economic growth after the effects of the no-confidence vote of 2018 and the devastation brought by the pandemic and recent floods. However, there are many ways this borrowing differs from that of the other nations referenced above. 


Total domestic and external public and publicly guaranteed (PPG) debt was approximately 370 billion GYD in 2019; in 2020, it rose to 540 billion GYD and stood at $600 billion at half year 2021 – this represents a nominal increase in debt of over 60 percent.


This increase, however, must be held against an equally impressive increase in GDP of 43.5 percent from 2019 to 2020 and an additional 14.5 percent from 2020 year-end to mid-2021. Therefore, debt as a percentage of GDP has only moved from 34 percent in 2019 to 47 percent in 2020 and approximately 53 percent mid-2021. For reference, the debt to GDP ratio for the USA, UK, Barbados, and Trinidad & Tobago is 107, 86, 117 and 49 percent respectively. 


The debt to GDP ratio of Scandinavian nations (i.e. Norway, Sweden and Denmark) – renowned for their prosperity and high standards of living – amount to an average of only 37 percent in 2019. Why is it then that we have successful, thriving countries at both ends of the spectrum in relation to debt to GDP ratios: countries with high amounts of debt relative to GDP, to those with very low debt to GDP?


Empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases. In a literature review of 24 studies that cover the relationship between government debt and economic growth, the results of every study except two find a negative relationship between high levels of government debt and economic growth, large government debt has a negative impact on the growth potential of a debt-burdened economy. In many cases, this impact gets stronger as debt increases. Half of the studies found the threshold for this negative relationship to be when debt to GDP is between 75 to 100 percent. Therefore, when countries borrow to such an extent – especially when intended to fund short term obligations, they must be wary of and expect negative returns in terms of growth over time.


Factors that ought to be considered include: Debt repayment and interest rate – while there is a benefit in the now in terms of funding for immediate projects, this debt burden must be funded by future income and future generations, focus should therefore be on boosting the productive, growth-bearing sectors of an economy; possibility of high inflation as more money will now be circulating within the economy; appropriate controls and checks on spending to avoid wasteful expenditure and inappropriate investments. 


Once debts are used to fund productive endeavours that give returns and make repayment possible, and these funds are not mismanaged and wasted, borrowing is to be encouraged. Guyana must nevertheless strive to exert conservative and prudent fiscal and monetary management of its resources against the projected rapid growth of the economy.


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