Beg, borrow and buy

Nov 02, 2023 Features / Columnists, Peeping Tom

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Kaieteur News – The same old discredited economic philosophy of the Jagdeo presidency is being pursued under the Irfaan Ali administration. The fastest growing economy in the world, one which is expected in a few years to be producing more than a billion barrels of oil, is begging, borrowing, and buying its way towards the dream of economic prosperity.

This week it was announced that oil-rich Guyana is going to borrow US$ 500M from Afreximbank of Africa.  Also, on the cards is a Local Content Facilitation Fund Darexaban that is likely to be financed by the same bank. We just recently borrowed US$92 for the education sector and of millions of US dollars are being borrowed for the health sector.  But why should a country rich in oil, be borrowing so much in so short a period?

The justification for the establishment of the Local Content Facilitation Fund is the long time that it takes for the oil companies to pay their suppliers. This period we are told, can be as long as 90 day (the standard industry practice) and this creates problems for small suppliers. But the government ought to have predicted this because it was one of the issues which was raised during the discussions prior to the passage of the Local Content Bill. It was Vice President Bharrat Jagdeo who had indicated that the Local Content Bill would cater for shorter payment periods.

One year ago, it was reported that the government had imposed a requirement of a maximum of 45 days as part of the supply chain management strategy which has to be provided by the oil companies and its sub-contractors. It is not clear whether this measure is being implemented or enforced. This measure has the appearance of trespassing on the freedom of the contracting parties to set their own payment terms.

If, however, the government has mandated a 30-45 days payment period, then there can hardly be a justification for establishing a Local Content Facilitation Fund. So is this borrowing spree a case of a government, weaned on begging, borrowing and buying? Is it a case whereby the government simply wants to borrow from Afreximbank because the line of credit is available? If this is so, then it mirrors the approach of the government which rushed to borrow from China when a senior Chinese official had come to the Caribbean waving tons of credit. Is the government addicted to borrowing?

Those small suppliers who believe that they will obtain working capital and even seed financing from the Fund are not likely to oppose its creation. But what needs to be asked is why if the government knew all along that such Funds were effective in Africa, it did not make provision for the oil companies to contribute 100% to the creation of the Fund.

Ghana has such a Fund and it is supposed, according to one source, to receive contributions, as mandated by the Production Sharing Agreement, from the oil companies. These funds are then supplemented by proceeds from oil revenues and levies.  In the first 10 years of the Local Content Fund in Ghana, the Fund only received  about US$5M from the oil companies. Local content suppliers in Guyana therefore should not become too enthused by the proposal, by the government, to establish a Local Content Facilitation Fund in Guyana. Local Content Funds are most often devoted to training, education and research and development.  There is hardly any evidence of massive success stories of local content funds in Africa.

What Guyana needs is not a Local Content Facilitation Fund. What Guyana needs is for the local content laws to be immediately revamped to insist that a local company is one with 100% local ownership as opposed to at least 51% local ownership. That will create a paradigm shift  towards all-local companies. But this does not answer the question as where the financing for local businesses will originate.  Ideally, the financing should come from the oil companies and the local banking sector which is flush with liquidity. Has the government considered that it is ‘crowding-out’ the local financial sector by presumably going to the Afreximbank for financing for a Local Content Facilitation Fund?

The world’s fastest economy is also going to borrow half a billion United States dollars from the said bank to push its infrastructure development. What are the projects into which these funds will be sunk? Did somebody say something about a hydroelectric fall? It is easy for the President to boast that Guyana has the lowest debt to GDP ratio in the world. Actually, there are more than a dozen countries which have lower debt to GDP ratios that Guyana. The government sees this low debt to GDP ratio as an incentive to borrow, borrow and borrow. Other leaders see it has a means to move faster towards a debt-free status.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions and beliefs of this newspaper and its affiliates.)

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• Afreximbank, Irfaan Ali, Jagdeo, Peeping Tom, philosophy

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