Central bank financing of Govt spending and the quality of Govt spending in a developing economy context

By: JB

In the previous column, the author outlined the legal features of the Consolidated Fund and Government Deposit Accounts held with the central bank. As indicated in the previous article, today, the author shall examine the Consolidated Fund (CF) balances and that of Government Deposit Accounts.

Having examined data from the Auditor General’s Report for the period 1995-2017, it was noted that the Consolidated Fund has almost always had a deficit balance except for the years 2004-2007 when the new Consolidated Fund was created, those years, the Account recorded positive balances of $6.4 billion in 2004, $6 billion in 2005, $17.4 billion in 2006, and $19.2 billion in 2007. However, when combined with the old Consolidated Balance, the net effect resulted in a deficit, which was not reconciled since 1988. This was in the height of the period when Guyana’s economy was in a bankrupt state. In 1995, the CF recorded the lowest deficit balance of $22.4 billion, while the highest is recorded in 2017 of $136.7 billion. Notably though, for the period 1995-2014, the CF balance remained well below an $80 billion deficit, averaging at $46.6 billion deficit for the period 1995 to 2014.

For the period 2015 to 2017, the CF balance went up from $76.7 billion deficit to $136.7 billion deficit, representing an increase of 79 per cent (it should be mentioned that while the Audit Report for 2018 is not yet published, it is suspected that the CF balance has exceeded or is close to some $200 billion deficit).

To lend a somewhat more comprehensive analysis for the period, it would be prudent to examine the net position of Central Bank Financing to Government. In this respect, reference is made to the overdraft balances on Government Deposit Accounts with the central bank. While the CF is the primary bank account of the Government from which it withdraws monies to fund its social and economic development programme, which ought to be approved through the national budget, the Government Deposit Accounts are also utilised as another form of central bank credit. This trend only started in 2015 which continued to be the case to date.

With the abovementioned in mind, by looking at the net central bank financing in which the balances in the Deposit Accounts are taken into consideration to derive a net effect, the data on these accounts for the period 1995 through 2014 showed that the Deposit Accounts have always recorded surplus balances with the lowest surplus balance in 1995 of $20 billion and the highest surplus balance recorded in the year 2010 of $69.7 billion, while the average surplus for that period was some $38 billion. As such, if these surplus balances were transferred to the CF, it would have ultimately reduced the deficit balances and even swing that Account (CF) into surplus balances for some years. In fact, by working the numbers, the CF together with Balances in the Deposit Accounts would have swung into surplus balances for the years 2006, 2007, 2009, 2010, 2011, 2012, and 2013 of $7.2 billion, $8.8 billion, $12 billion, $18.2 billion, $14.5 billion, $10 billion and $3.3 billion, respectively. In 2014, net central bank financing stood at $55.3 billion deficit, which went up to record high levels of $91.8 billion in 2015 to reach $163.2 billion at the end of 2017 – that is, the CF balance plus the overdraft balance in Deposit Accounts. Moreover, if these central bank deficit balances were to be added to the total stock of public debt, this would give rise to an increase from $345 billion in 2017 to $508.3 billion which would be about 76% of (2017) GDP.

To be continued…