The government overdraft (negative balance) at the end of February 2021 was G $ 139.7 billion. At the end of 2020, the number was negative G $ 135.4 billion. The current government inherited a negative balance of G $ 92.8 billion in August 2020. One can think of this balance as the water level in a bath tub. The water level increases in the tub when the inflow from the faucet exceeds the drain at the bottom of the tub. If the discharge or outflow exceeds the inflow, the water level will drop.
Similarly, the government has its core account in Guyana Bank which it uses to make payments to other sectors of the economy, namely private sector homes and businesses. The government, of course, cannot make payments to foreign nationals from this account as they would not receive Guyana dollars as a settlement. Foreigners will want US $, Euros or some other major currency in the world. Nevertheless, if there are excessive payments from the said account, it can rise steeply in demand for US $ and other hard currency, as well as foreign goods. Excessive use of the account would cause scarce hard money to leave Guyana.
When the government puts in more money than it spends, the balance increases as the water level in the tub. The fact that the balance is continuously negative means that the inflows into the account are less than the outflows or discharges. The inflows and outflows are linked to the fiscal balance we define as revenue (taxation, etc.) without expenditure (public sector wages and salaries, road construction, building maintenance) , financing of previous debt, etc.).
If a household in a given month spends more than its salary and other earnings, then the household has a deficit that must be financed by using previous savings, asking a relative for a cash donation and / or borrowing using a credit card . Similarly, a government deficit must be funded each year by borrowing, seeking foreign grants, and / or using money from its central bank account (the BoG). In general, expenditure from the BoG account should not exceed the deficit. At least, according to accounting, economic, and mathematical logic.
However, we are talking about Guyana where politicians across the divide have taken control of all aspects of society. Politics is controversial because of the objective to seize the government. Those who control government are able to direct goods to agents – foreign and local – who fund election campaigns and to their confirmed ethnic base. Of course, this sponsorship flow is not the whole story. The PPP / C government is spending huge sums of money in communities outside its basic ethnic base in the hope of expanding votes in the future. On the other hand, the core partner, PNCR, in the APNU + AFC coalition, was not too ready to expand beyond its ethnic base, except for a few business people who funded its election campaign. In a few columns, I will supplement this statement with mind-blowing data.
Today’s column has only one task: to highlight a link between BoG’s overdraft and the government’s fiscal deficit.
The table on the left below presents data from the official accounts I put together. Various observers and I have in the past shown the silver stock (water level in the tub) in the account. However, for the purpose of this essay what is important is the change in the amount of money in the account from one year to the next (the flow of water draining out of the tub compared to the inflow).
As can be seen, in the years 2008, 2009 and 2010, the change in the account balance sheet was positive, suggesting that the government was giving more than it was deducting from the account. However, the change in balance turned negative since 2011 when the PPP / C was in government. This means more money is going out than flowing into the account. The year 2011 is pivotal in Guyana’s political economy after 1992. The PPP / C lost the majority in Parliament but retained the presidency.
The table shows that the PPP / C addressed the fiscal deficit from G $ 16.4 billion 2011 to G $ 34.9 in 2014. How did the then government fund this? It did so by expanding money creation more than selling debt (T-bills). Money can be created out of thin air when the government spends from its account in the BoG, making it the most special bank account in the land. This is what financial sovereignty means, although Guyana’s sovereignty is much narrower compared to telling Japan or the United States. More on this in my forthcoming academic paper.
Important to our purpose, however, is the strong desire to regain the parliamentary majority that would lead to considerable political patronage in this period. In a future column, I will provide some data to show on which items the PPP / C spent generating money. In the year just before the 2015 election, a G $ 34.9 billion fiscal deficit was financed by generating funds to a G $ 30.8 billion level. This means that 88.3% of the deficit was funded by creating thin air.
As can be seen, the year 2015 is very interesting. First, the PPP / C lost government to a historic coalition under APNU + AFC. Second, and more interesting from my point of view, the deficit was less at $ 9.3 billion, possibly due to the disruption to the budgeting process. However, the expenditure did not stop. The government account moved into a deeper overdraft by an amount of G $ 23.7 billion. This is what I meant earlier by breaking accounting, economic, and mathematical logic. Is this a statistical error? Well, it happened again in 2018 under the APNU + AFC government when the overdraft of G $ 28.7 billion exceeded the fiscal deficit of G $ 26.8 billion.
2015 and 2018 suggest that money was created outside the budget process and extended to political groups. Indeed, there have been numerous reports that money is being paid to various groups who are not official government employees. Many were PYO, YSM and other party members. Liberal employment was under the early PPP / C government, but much more under APNU + AFC. Finally, the year 2015 was also interesting because of the Grangerian D’Urban Park fiasco and the possibility that a few elements inside the PPP / C could have received a percentage of these funds as exit sponsorship.
Imagine how this narrow financial privilege could be used if there were a more cohesive society. There would be no more homeless people, help with mental health will be available to those who need it, and pensioners would be well looked after. However, these funds have disappeared and there is nothing to show, perhaps with the exception of a few fancy SUVs (which must be imported) and homes in poorly drained neighborhoods with lots from rum and noise shops, but without green spaces and space for physical activities. In conclusion, it will take several more essays to fully explore the angles. Hope you stay tuned.
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