BoG overdraft, central bank independence and corruption

The previous column (April 4: ‘BoG government overdraft, fiscal deficit and corruption’) explained that the government’s fiscal deficit – which should not be confused with a current account deficit as one online starter did – must be financing from (i) borrowing, (ii) seeking foreign grants, (iii) using previous savings, and / or (iv) generating money from its deposit at the Guyana Bank (BoG). Nothing prevents the government from using a combination of the four sources of funding. However, the funding out of the BoG account in a given year cannot exceed the total fiscal deficit (revenue without expenditure).

As I have shown previously, the amount of money leaving the BoG account exceeded the fiscal deficit in 2015 and 2018. In other years, central government used some combination of BoG debt and finance. For example, in 2014, 88.3% of the deficit was funded by running down the BoG account, while in 2019 the number was 51.8%.

The BoG account is the most special account in the land. The government cannot create money out of spending from the Consolidated Fund, for example. It does not mean that the Consolidated Fund cannot be used under certain circumstances for financial management, as is the case with the U.S. Treasury’s Tax and Loan Accounts (TTLA). The law prohibits the US federal government from spending out of the TTLA. However, the Treasury (their Finance Administration) often transfers funds from the TTLA (their Consolidated Fund) to the Federal Reserve’s Treasury account (their BoG account). The federal government can only spend out of its account in the Federal Reserve.

This raises an interesting question. Is the government of Guyana getting discretionary spending from the Consolidated Fund? We know that any expenditure from the account must be approved by Parliament. Many shenanigans can be made through the Consolidated Fund (CF). As some readers may remember, I complained a few years ago in this column space that the Communities First summary table was removed from the Estimates.

A better-designed governmental accounting system would allow the Consolidated Fund to be the recipient of all tax and other revenue (as required by the Guyana constitution), including revenues drawn from the Natural Resources Fund Proposed (NRF) (whatever happened to the NRF?). Absolutely no money should be spent from Communities First, approved or optional. However, all government expenditure can and must be made from the BoG account. The Minister of Finance may direct the transfer from the CF to the BoG account, as is done with the corresponding accounts in the United States and other economies. This provides an improved tracking system, as well as another tool for financial stability in times of financial crisis. Moreover, such an accounting system will provide for better integration of monetary and fiscal policies.

Observers raised another question about my April 4 column: isn’t the central bank independent? It seems that mainstream macroeconomics usually throws the light in directions it does not want us, especially marginalized people, to look. Central bank independence is a misleader. The central bank is never truly independent as it is a government bank. That is why one of the first acts of independence is the establishment of a central bank. The Chairman of the Federal Reserve, for example, cannot withhold payment from the federal government approved by Congress. The Chairman cannot prevent the transfer of funds from the TTLA, which is in commercial banks, to the government’s Fed account. Financial sovereignty means that there is deep liaison between the central bank and the Ministry of Finance.

Central bank independence means that the Bank must be free to set its target variable such as the exchange rate and / or interest rate. It must be free to take contradictory measures to prevent excessive government spending destabilizing the economy. There are a number of ways in which central banks can accomplish this task and must be free of political pressure as it seeks to stabilize the economy. However, once Parliament approves spending, including withdrawal from the NRF, the BoG is not in a position to resist the payment.

In particular, as it relates to the overdraft in the BoG, the Governor and his staff can only discover that an account is being used that exceeds the deficit when the data is aggregated . It would be difficult to figure this out in advance. Around the world, spending from a government central bank account is standard operating procedure. What is not standard procedure is the expenditure, even parliamentary-supported expenditure, directly from the various ‘pooled funds’.

Let us return to 2015, one of the years when the withdrawal from the BoG exceeded the deficit. Mr David Granger was sworn in as President on May 16, 2015, meaning the year was split almost half and half between the PPP / C government and APNU + AFC. We would like to answer the question of which party was most responsible for the negative balance exceeding the deficit. This outflow does not include the expenditure that may have occurred from the CF.

To accomplish this task, we are required to look again at the change in the account balance from one month to another, and not the month-end balance. That is, we have to look at the leak from the bathtub, not the water level. This is shown in the table showing the data between Jan: 2015 and Dec: 2015.

Summarizing the monthly changes between January and April shows that the PPP / C is responsible for G $ 5.54 billion, while APNU + AFC is responsible for G $ 12.79 billion. We’ll let the reader decide how to apportion May, and the pull down at the level was G $ 5.43 billion. Is that a PPP / C or APNU + AFC month?

However, there are two interesting pieces of information in the public domain. The first relates to Amerindia Community Support Officers (CSOs) under the previous PPP / C government. Despite all the ruckus in Parliament over nearly 2000 CSO officials that the APNU + AFC was allegedly funded, we learned that these people were not official government employees (SN : August 20, 2015 ‘PPP / C did not budget for paying Amerindia aid officers beyond April’). The CSOs were not contract or state employees, they were offered recurring salaries that were not fully accounted for (cash was the key word here).

The second relates to the D”rban Park fiasco, a sin far in excess of PPP / C cash payments to the CSOs. The Auditor General’s report (AG) stated that a large percentage of the funds used for the project were not approved (see SN: February 3, 2019: ‘Audit Office still awaiting response from Ministry of Infrastructure on Park expenditure D’Urban ‘). The unapproved expenditure related to 2015 checks paid.

Finally, and concerning the negative change of 2018 that also exceeded the deficit. Another AG report noted that the previous government failed to account for G $ 800 million (SN: January 5, 2020: ‘Gov’t failed to account for over $ 800M spent in 2018’). All of these examples account for only part of the observed discrepancies. They scratch the surface of an overspend associated with a broken accounting system.

There is a 0.85 probability that I cannot write a column this week. That means I’ll be back in two weeks, when I present some impressive data for the last two columns on this issue.

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