Latest update April 19th, 2024 12:59 AM
Jan 01, 2020 Features / Columnists, Peeping Tom
Carl Greenidge should know something about debt. After all, he did admit in his Christmas Day letter in the Stabroek News that both Guyana and Nicaragua were among the most chronically indebted countries in the world in the mid-1980s.
If memory serves me right, Mr. Greenidge was Guyana’s Finance Minister during the mid-1980s. He would therefore have had more than a passing acquaintance with the country’s debt problems. And I am sure he recalls admitting in V. V. Ramanadhan’s (ed.) “Constraints and Impacts of Privatization”, 1993 (at page 153) that in 1989 Guyana’s external debt/GDP ratio of 902.7 per cent was the highest in the world.
It was therefore more than a tad surprising that he would wish to highlight what he views as this newspaper’s recurring theme of a link between petroleum and chronic indebtedness without, what he says is, a factual basis for the assertion.
A factual basis has long been established for the link between petroleum production and indebtedness. A study entitled “Drilling into Debt: An Investigation into the Relationship between Debt and Oil” which covered the period 1992-2003 had confirmed the relationship between oil production and increasing debt, and between oil dependence and debt burdens.
It did also find that oil production does allow for better servicing of debts. But we all know what can happen when oil prices crash in countries too dependent on oil production.
The study’s findings are part of economic orthodoxy. For example, it is now accepted dogma that increased oil production tends to promote increased spending in anticipation of higher export earnings and this can have an adverse effect on debt.
Also, increased oil revenues increase the credit rating of oil-producing countries thus allowing them greater access to foreign credit and stimulus to more borrowing and the accumulation of higher debts.
Oil dependence has been found to make oil-producing states vulnerable to macroeconomic shocks, which can force further borrowing and the ability to service debts. The decline in oil prices in 2014 had a severe impact on the oil-producing economies of Nigeria and Angola.
Both countries suffered a reduction in the value of their exports. Venezuela also suffered and found itself in difficulties servicing its debts.
According to a report published at the end of October by the Committee for the Abolition of Illegitimate Debt, Africa’s oil-based economies saw an increase in debt servicing from an average of eight per cent of revenues in 2013 to 57 percent in 2016.
Earlier this year, the Brookings Institute warned that since 2015 Africa’s median debt-to-GDP ratio as a percentage of GDP rose by more than half. It found that the increase in debt was particularly rapid in Africa’s oil exporting regions.
The evidence exists of the undeniable link between oil and debt in Africa and elsewhere. Mr. Greenidge would do well to reexamine his position on oil and debt.
About one and half months before Mr. Greenidge’s Christmas letter, the International Monetary Fund highlighted the adjustments, which had to be taken to stabilise debt ratios in Sub-Saharan Africa since 2016.
These adjustments, including cutting public investment and primary expenditure, measures which I am sure Mr. Greenidge agrees hurt the poor more.
Kaieteur News has been demanding stronger scrutiny of the oil companies operating in Guyana. It has been highly critical of the agreements entered into between the government and ExxonMobil and partners.
It has been using the experience of other countries to warn about what can happen if there is not greater accountability. The newspaper has called for a renegotiation of the oil agreements.
Kaieteur News should be congratulated for its bold stand in trying to ensure that Guyana gets a better deal from the oil producers and to caution about the dangers inherent in our oil agreements.
Kaieteur News had forewarned about the threat of a debt trap from increased borrowing and investment from China. It used the experience of other countries, including those in Africa, to point out to the obvious dangers to national sovereignty posed by Chinese economic penetration.
Guyanese are excited by the start of oil production. But if they had been reading the newspaper, they would have known by now even before a single drop of oil was pumped, Guyana has accumulated pre-contract costs of more than US$900M.
That is close to 50% of Guyana’s total external debt in 1989, which was the highest debt/GDP ratio in the world at the time.
While Guyana’s ability to pay off its debts is now far superior to what existed in 1989, it should insist that every cent for which it is billed in pre-contract and cost recovery costs, are fully accounted for. Otherwise, it may find itself with lots of oil but even higher levels of debt.
Where is the BETTER MANAGEMENT/RENEGOTIATION OF THE OIL CONTRACTS you promised Jagdeo?
Apr 19, 2024
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