Latest update April 25th, 2024 12:59 AM
Apr 01, 2015 Features / Columnists, Peeping Tom
Let us say that you decide to start up a small business. A prudent way to approach this issue is to seek seed capital and perhaps working capital.
As your company begins to do well, you may find that there is need to open new branches. This means that you have to borrow more. Your debt increases. But if your business is doing well, the size of the debt should not pose a problem, so long as you can meet payments to your suppliers, keep your workers happy and more importantly, meet your debt obligations. Better yet if in doing all of these things your business can grow and you can show a profit. If however your debt begins to pile up on you and when compared with your total assets, it is prohibitively high, that is a problem.
If, for example, your interest payments cannot even be paid and thus have to become capitalized, there is a problem. If after paying the debts, there is little left to pay the workers and maintain the machinery, then you have problem. If in order to have working capital you have to borrow more, the problem is compounded.
So it is not the size of your debt that is the problem. It is the size of the debt relative to the size of the business. It is the size of the debt relative to the business you are doing. It is your ability to repay the debt on a timely basis that is the problem.
Similarly, it is not the size of a country’s debt that matters. The countries with the highest debt in the world are the United States, the United Kingdom and Germany.
If the size of the public debt was a measure of how well those countries were doing, then they would be in poor state. But we know these are developed economies. They are large, powerful economies and it is the debt that has aided in them achieving this status.
What matters is not the overall debt, but other ratios. What matters is how the debt stacks up in relation to the size of your economy. What matters is a country’s ability to meet debt payments when they are due. What matters is the type of debt that has been accrued. Is it concessionary debt or is principally non-concessionary debt?
There has been a lot of talk about Guyana’s debt increasing. That is expected of any growing economy. The more your country is doing better, the more you are likely to borrow, since you are expanding and you have more capacity. So the size of the debt is not the problem.
Other ratios are more pertinent. What, for example, is the debt to GDP ratio? The international financial institutions pay keen attention to this indicator, because they do not wish a country to carry a higher debt than the size of its economy can bear. There is no indication that the size of the debt is a problem.
What can be a problem is the per capita debt. But in examining this, one has to look at not just the crude numbers, but the movement of this indicator over time. At one time, Guyana had one of the highest per capita debt in the world. Guyana was once considered a HIPC – heavily indebted poor country. It is no longer a heavily indebted poor country. This improvement has proven problematic, because it means that Guyana no longer enjoys as much concessional financing as it once did, and there has been a shift in the new debt profile towards more bilateral sources of the debt. The reason is that Guyana did so well economically, and in terms of reducing its debt burden, that it graduated from a status that would have allowed it to gain more concessional financing. Success has its downside.
But more important is the capacity to repay the debt. There was a time when the country’s revenues were just sufficient to cater for scheduled debt payments. Very little was left for anything else, including expanding the size of the economy, maintaining its infrastructure and productive assets.
We have moved far beyond that and this is why the country can afford to borrow more. It can borrow more because it has the capacity to repay its debt without affecting internal development and maintaining its productive assets.
This is quite unlike the situation in the past when not only could we not do so, but the banks had deemed Guyana non-creditworthy.
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