Analysis and News

New Public Debt Policy 2021 - 2024 to help consolidate the long-term

BY GEOCAP's Contributor: Richard Bhainie

The Government of the Co-operative Republic of Guyana has crafted a new Public Debt Policy for the period 2021 - 2024. This policy is intended to aid the country in the determination, establishment and upholding of the legal and institutional frameworks which govern sovereign borrowing and provides a broad framework to help consolidate the long-term sustainability of Guyana's debt.

It is convenient that the policy comes against the backdrop of the country’s total external public debt stock at the end of 2020 amounting to 1 320.8 million USD, a 1.2 percent increase compared to the 1 305.5 million USD at end-2019 and its domestic public debt stock amounting to 264.6 million GYD, a substantial 230.8 percent increase compared to the end-December 2019 figure of 80 million GYD.

After the new People’s Progressive Party Civic (PPP/C) Government resumed office on August 2, 2020, the Senior Minister in the Office of the President with Responsibility for Finance, Dr. Ashni Singh, identified that it is necessary to contract new financing, in order to provide essential relief and services to the populace, invest in growth-promoting infrastructure, and stimulate an overall resurgence of the non-oil economy, as he stated in the Public Debt Report 2020.

The new Government has already set out to undertake several initiatives geared at strengthening all facets of public debt management, namely, prudent adjustments to the domestic and external debt ceilings, from $150 billion to $500 billion, and from $400 billion to $650 billion, respectively.

“These moves were intended to facilitate the securitisation of a large overdraft at the Bank of Guyana that accumulated over the last few years, and to create room to contract new financing for the government's transformative development agenda,” the Minister said in the report.

The efforts undertaken to revamp the country’s public debt is compounded by the new policy which the government envisages would help to ensure the relevant systems and personnel are in place to guide the contracting of debt, negotiations with creditors, among other debt management functions.

The new debt policy addresses both external and domestic public and publicly guaranteed debt management in Guyana, and provides a broad framework to guide decisions that will ensure long-term debt sustainability and efficient portfolio management.

The objectives of the new policy outlines that Guyana’s primary debt management objective is to ensure that the country’s financing needs, and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.

The country’s secondary objective in public debt management is to promote development of the domestic financial market, through the issuance of government securities across a range of tenors. This would provide benchmarks for use by private entities in the pricing of financial products.

The new policy reports that the broad guiding principles for raising domestic and external debt are categorised by type of liability (direct or contingent) and by sector of borrower.

In relation to direct liability, the purposes for which the Government will contract development financing are: to finance budget deficits; to refinance a maturing debt or a loan paid before the redemption date; to maintain credit balances in the government’s bank accounts; for on-lending to State Enterprises and other legal entities; any other purposes approved by the Minister of Finance.

In addition, the financing needs of the Government’s development priorities are intended to be met through debt financing only after fully exhausting the possibilities of obtaining the required financing in the form of grants and resorting to debt financing, the Government also intends to prioritise borrowings from concessional windows over other alternatives.

Further, the debt-financing decisions of the Government intends to be made on a needs basis, taking due consideration of absorptive capacity and requirement, and shall not be motivated by availability, prior commitments and concessions; the Government also intends to ensure appropriate currency composition, interest rate and maturity structure of the debt stock to minimise refinancing and market related risks.

The new policy highlights borrowing by Public Corporations shall be permissible only after the written approval of the Minister of Finance is granted, after borrowings is considered based on a gamut of principles and conditions; and the Ministry of Finance and Public Corporations shall have a shared understanding of the objectives of public debt to ensure the overarching theme of sustainability permeates across the public sector.

Noteworthy, debt contracted by the Bank of Guyana in the execution of monetary policy will constitute a part of Guyana’s total public debt. The Bank of Guyana and the Ministry of Finance shall have a shared understanding of the objectives of debt management, fiscal and monetary policies, and work together to ensure policy consistency and coherence. Government also intends to cease the use of the overdraft at the Bank of Guyana to finance the budget, instead relying on market-based securities to help meet borrowing requirements.

The new policy outlines the Government intention to retain rigorous prequalification criteria for the issuance of sovereign guarantees, so as to mitigate risks and preserve debt sustainability.

Sovereign guarantees shall be provided to public corporations only if their proposed investment serves the public interest and maximises social benefit; supports the development priorities of the government; improves the financial viability of the entity and due diligence and proper risk analysis must be carried out before sovereign guarantees are issued.

It goes on to state that in the event that the guarantee is invoked, the obligation shall be met by the Government as stipulated in the terms and conditions of issuance of the guarantee and any monies paid by the Minister of Finance pursuant to any guarantee shall constitute a debt due to the Government from the public corporation in respect of whom the guarantee was issued.

In terms of external borrowing, the new policy states that the government will persevere with the current strategy of maximising concessional borrowing, which is characterised by low borrowing costs and long maturities.

But as the country progresses further along the development continuum, concessional windows are likely to diminish further, leading to higher borrowing costs and shorter maturities over time, therefore, the Government intends to supplement traditional but increasingly scarce concessional financing with the increased use of domestic sources, as well as 7 sustainable withdrawals from the country’s Sovereign Wealth Fund.

In terms of domestic borrowing, which has so far been focused on Treasury Bills, the new policy notes other securities are being considered and, together with Treasury Bills, are projected to be the main domestic instruments used for government financing.

“In sum, the year 2020 brought its fair share of fiscal and debt management challenges. However, out of these challenges emerged opportunities to improve practices, strengthen systems and revolutionise the existing institutional architecture,” the Minister said in his message in the Public Debt 2020 report.

However, he also mentioned “through the pursuit of several transformational initiatives, along with responsible debt management practices, we endeavour to consolidate the long-term sustainability of Guyana’s debt” and the new Public Debt Policy 2021 - 2024 seems to be in alignment with this agenda.

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