Business Page – June 2nd, 2002

Introduction

Business Page continues its review of the Auditor General’s Report on the Public Accounts of the Ministries/Departments/Regions for the year 2000 which began two weeks ago. Today’s BP looks at two of the issues which drew critical comments from the AG and which have implications for the finances of the country. The Executive Summary of the Report includes a review of the performance of the central government’s finances showing the surplus/deficit and how they arise. That Summary provides the essence of the government’s financial and economic policies – its emphasis on taxes or borrowings to raise money and how the money is spent.

Managing the public debt (defined by the AG as those debts which are to be serviced out of the Consolidated Fund and which would therefore not include those debts of the Bank of Guyana and parastatal entities) has been a central theme of the Economic Recovery Programme. This was necessary for the country to be redeemed from its pariah status in the international financial community after it had failed to meet its international debt obligations for several years. Indeed President Bharrat Jagdeo in his first Budget Presentation as Finance Minister in 1996 stated   “that the large external debt which the Government inherited in 1992 continues to play a major role in the definition of our fiscal and economic policies”

Debt Write-Off

Guyana, as one of the severely indebted, low income countries, qualified for a 67% reduction in the net present value of their debt stock. Over the years therefore the country has benefited quite substantially from this and subsequent international initiatives to provide relief to those poor countries in return for their commitment to exercise greater financial discipline, undertake market reforms and open their economies. The extent of the cancellation of the external debt is probably best exemplified by the report by Mr. Jagdeo in his 1997 Budget Speech one year later when he reported that from a level of US$2.1Bn. at end of 1995, the debt had been reduced by over US$0.5Bn. at Dec. 31, 1996! These concessions have come at a cost as the table below shows, but that is perhaps understandable. The worry is that while we have continued to benefit from further relief the country’s policy and quality of debt management is drawing negative comments while the total stock of debt today is higher than it was at the end of 1995, before we benefited from the significant write-offs.

The AG has of course only reported on 2000 and absolutely reliable data on the public debt for 2001 is not immediately available or apparent even from the 2002 Budget Speech. There is some difference in the external debt quoted by the AG’s Report (US$1.066Bn.) and that shown in the Appendix to the Budget Speech (US$1.192Bn.) which is closer to the US$1.195Bn. in the Bank of Guyana December 2001 Statistical Bulletin.

While the Appendix to the Budget Speech includes the amount of the external debt it does not include the domestic public debt and again one needs to look at the Bank of Guyana Bulletin for any comparison with the figures used by the Auditor General. The AG’s Report deals with debts charged on the Consolidated Fund and would include debentures issued to cover losses of the Bank of Guyana and GNCB while the Bank of Guyana figures exclude non-interest bearing securities. Whichever figure is used however two things are obvious: (a) the total stock of public debt expressed in Guyana Dollars has increased despite the substantial concessions received and substantial repayments over the years and (b) that both the policy and the management of the public debt is below the standard that the state of the economy should demand.

It may be argued that the G Dollar value of the external debt is only of nominal interest but all debts are ultimately paid out of revenues most of which derive from taxes raised in G Dollars. In that context there is no doubt that the G$ amount of the debt whether in Guyana or foreign currency is important to debt management and that of the rest of the economy.

As the table shows, during the period 1996-2000, debt servicing amounted to close to G$78Bn. which is far more that the entire Budget for 2001. Debt servicing expressed as a percentage of current revenue which fell sharply in 1997 following a substantial payment in that year has started to rise again and is likely to reach the level it was in 1996, the first year of Mr. Jagdeo as Finance Minister.

The AG notes that there may some duplication in the record keeping relating to the public debt between the work done in the Accountant General’s Department and the Debt Management Division of the Ministry of Finance although he concedes that this could operate as an independent check of each other. According to the AG however the information necessary for the Accountant General to maintain their records is not submitted on a timely basis and any reconciliation has to rely on the records of the Ministry of Finance. This not only defeats the whole purpose separate records but raises the possibility that this “lack of adequate record keeping can result in inadvertent default on loan repayments and related financial penalties”.

Tax remissions

Over the years we have constantly heard complaints about the narrowness of the tax base and therefore the need to widen the net. Yet even the most cursory examination of our tax system will show that it is being destroyed by the irresponsible use of discretionary exemptions and reliefs granted by the Minister of Finance no doubt with the blessing and or on the instructions of the President. Such a misuse of the tax system distorts resource allocation, creates a further erosion of the tax base and makes the best tax incentive – low rates- even more unlikely.

The figures quoted above relate only to remissions under the Customs Act and does not include remissions of income tax and corporation tax which the President by law can give “if he is satisfied that it will be just and equitable to do so”. It is well within recent memory that Beal was granted a 99-year remission under this same provision. Business Page understands that the practice is continuing and incredibly that for a number of months remissions exceed collections.

Again it may be argued that these incentives or gifts are designed to attract investments but there is nothing in the national statistics over the corresponding period to indicate that the country benefited from the remissions. The draft Investment Code in which the private sector participated was intended to remove the scope for such abuse of the tax system by the political directorate and it is therefore no surprise that the Government removed it from the final document.

Conclusion

It is clear that in the two critical areas of the economy dealt with in this article, the management of the economy is woefully inadequate. The government’s policy of borrowing and taxing a few while granting special favours to some clearly do not contribute to a strong economy. Everything suggests that the Government should rethink its strategy about the economy but with the same comments being made year after year being ignored, it is unlikely that we will see any change in the near future.

This series on the 2000 Report of the Auditor general will definitely conclude next week.