MINISTER of Finance and the Public Service Dr Nigel Clarke says that the country has to “steer clear of the edge of the precipice” in dealing with the debt crisis during 2021/22.
“Due to this crisis, our debt is now at 110 per cent of gross domestic product (GDP). We have been here before. This time, however, it is important that we steer clear of the edge of the precipice, with which we have painful familiarity. Any kind of instability would greatly magnify the existing challenges,” Dr Clarke cautioned, as he tabled in the House of Representatives the 2021/22 budget last week.
“At a minimum, we have to ensure that we cover our interest costs, which constitute a major component of our non-discretionary expenditure, from our own revenue,” the minister noted.
He explained that this means that the country will have to reserve $125 billion of its revenue to pay interest.
He recalled that, with the approval of the Parliament, the country had to suspend the fiscal rules to delay the deadline for reducing the debt-to-GDP to 60 per cent. However, he admitted that the Government had been “greatly aided’ by a substantial opening cash balance, which averted the need to borrow to pay interest.
“Not covering interest from revenue again this year would mean that we would borrow to pay our interest bill which, given elevated debt levels, could quickly put us on an unsustainable path once again,” he warned, noting that nobody wanted the adverse implications for jobs, investment, interest rates, inflation, and other economic variables, complicating the recovery efforts.
According to the minister, debt service costs for the upcoming fiscal year is projected at $130.3 billion, reflecting a reduction of approximately 40 per cent relative to 2020/21. The budget loan receipts comprise domestic borrowing of $90 billion, down 42 per cent, and external inflows of $40.3 billion, which is down 33.5 per cent when compared with 2020/21.
The overall decline in loan receipts is reflecting lower borrowing requirement due to a significant improvement in the fiscal balance and reduced amortisation costs for 2021/22.
He said that prudent management of the public debt is essential to safeguard the gains made in reducing the debt, and to maintain the current downward trajectory towards the legislated debt-to-GDP target of 60 per cent or less by 2027/28.
He added that over the medium term, the debt management strategy will continue to focus on mainly domestic financing, in order to realign the debt portfolio, in favour of local currency and consequently reduce foreign currency risks.
A debt-to-GDP ratio of 100.7 per cent is projected for the end of 2021/22, and is forecasted to decline to 76.8 per cent by the end of 2024/25.