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