The 2019 budget projects a deficit of $4 billion. However the $4 billion deficit was calculated on expenditures net of Sinking Fund payments and Capital Repayments. What is the value of the Sinking Fund contributions and the Capital Repayments? These payments of approximately $4 billion must be added to the projected deficit of $4 Billion to arrive at the true projected deficit. Hopefully, someone in parliament would be astute enough to ask these questions to get to the real deficit which may be closer to $8 billion. If so how will that be funded? The other question of course is why economists allowed this misrepresentation to continue? The implications are too large to ignore and must be corrected at the earliest so that we can determine the true state of economic affairs of the Nation.
THE MISLEADING AND DANGEROUS DEBT TO GDP RATIO TO INDICATE BORROWING CAPACITY:
The Debt to GDP (Gross National Product) ratio is widely used around the world to indicate the borrowing capacity of countries and to compare the financial position of different countries. The IMF and the World Bank also use this ratio extensively so there are reasons for the ordinary citizens to believe the ratio is meaningful. The World Bank (WB) and the IMF are wrong and are the cause of much financial pain in the world today. To those intellectuals, professional economists and country planners who agree with the WB and IMF then to them the world is still flat.
Let me say categorically that debt is serviced by cash flows and not GDP. The only measure for the amount of debt a country can assume is their capacity to service the debt. The servicing of the debt must come from cash flows in the first instant and as a last resort by settling debt with a sale of assets or transfer of assets to the creditors. For completeness we may want to include debt forgiveness as means of settling debt. Refinancing is not settling debt but rather a change in terms and maybe lenders.
Debt is materially understated: Even if we assume the relevance of the debt to GDP ratio there are serious flaws with the calculations. Take the numerator “DEBT”. The debt used by Government is confined to bank debt and is therefore materially understated. The debt must include all liabilities such as the drawdown from the Central Bank, Vat refund outstanding, outstanding payables to contractors, outstanding back pay to civil servants, guarantees of state enterprises, outstanding payments to school children maxi taxi drivers and the list can go on. The simple point is that if the Debt is understated what good is the ratio?
GDP is not Government’s Revenues: The Gross Domestic Product is calculated by adding the income of Government, Businesses, and Individuals plus or minus the net imports/exports. (There are serious problems with the measurement of GDP with this method but I will leave my reasoning for another time.) It is not uncommon for lenders to examine the ratio between the borrowers’ total borrowings over their annual revenues. The lenders do not use the revenues of the family nor that of the village nor that of the country to arrive at the debt to revenues ratio for dividual. If we follow the example
for individuals, and assuming that we give some relevance of the Debt to GDP ratio then the denominator should be confined to the Government’s contribution to GDP rather than the total GDP which also include the income from the corporate sector and from individuals. The bottom line is that the denominator is overstated. Surely by the inclusion of total GDP in the ratio are we to assume that the Government can tax us 100% of all revenues? This is impossible since at some point, regarding tax increases, the citizens would cease to work.
Implications: Quite apart from the meaningless debt to GDP ratio, how can anyone rely on a ratio that understate the numerator and overstate the denominator? The danger is that we are making major decisions on the economy that would sink us into an inescapable debt trap while honestly believing that nothing wrong is being done. We cannot entertain such ignorance any longer in the situation is to be reversed.
Given my analysis above, perhaps the economists in the country can answer the following questions:
1. How the Debt to GDP ratio does establishes our borrowing capacity?
2. For the purposes of the ratio how is debt calculated?
3. For the purposes of this ratio why are the revenues/expenses for the entire country included as the denominator and not just the Government’s contribution to GDP?
4. If there is agreement that the numerator is understated and the denominator is overstated then do we agree that the results would be severely understated?
5. If the ratio is severely understated then is there agreement that decisions were being made on the basis of false and damaging information?
6. If there is an acceptable ratio then does this ratio apply to all countries and if not how do you determine the maximum ratio for each country?
7. If there is agreement that each country should have its own debt to GDP benchmark how do you propose this be calculated for each country? (I do not agree with this ratio so I do not have the impossible task of creating an illusion).
8. The budget expects a deficit of $4 billion before the sinking fund contribution and capital repayment. In the circumstances what is the true deficit for 2019 and how will that be funded? In addition what will be the impact on the debt to GDP ratio.
9. If there is agreement that the debt to GDP ratio is seriously flawed then what do the economists, intellectuals and students at the University recommend?
Our country is in a deep financial crisis and the feeble attempt at an election budget is not acceptable in the circumstances. We need the professionals to come out of their hiding zone and speak their minds in the interest of saving the country. While the politicians may have good intentions their actions are contrary to economic turnaround and diversification.
Hopefully the economists among us would for the sake of enlightening the population answer the above questions. I may be wrong and I am willing to apologize if so proven. The problem is that I may just be right. To know more I can be contacted at 498 7091 email vedseereeram@gmail.com