A Rejoinder to Sam Jackson’s 11/06/2018 Article
By J. Yanqui Zaza
Flipping through the local Internet Web Sites I came across Mr. Sam Jackson’s comment that Liberia’s debt ratio to GDP (Gross Domestic Product) is now 26 percent. In his article, carried in the Frontpage, called “Pro-Poor Agenda for Prosperity and Development: Long on Aspirations but Short on Reality,” Mr. Jackson stated that “…the country’s debt to GDP ratio is sustainable at 26 percent…” This statement implies that Liberia has reduced its total public debts (I.e., the numerator), has increased its GDP (i.e., the denominator) or did both. Most importantly, it suggests Liberia has a good chance to borrow more money since its public debt (i.e., domestic and external) ratio of 26 percent is below the 38 percent benchmark.
His comment that Liberia’s debt to GDP ratio has dropped to 26 percent from 35 percent at the June in 2017 (See page # 14 of the IMF Report No.17/348) inspired me to pen this article. Oh no, I am not suggesting that he should have addressed all of the important issues in one article. Nonetheless, some readers might accept questionable numbers/analysis if left uncorrected or unquestioned. For example, is there circumstantial evidence supporting the number of persons (300,000) who died during the fourteen-year old war? Is it true that poor people are more prone to corruption than rich people?
Before discussing Liberia’s total public debt ratio, what is GDP? Economists say it is the market values of goods (latex, iron ore, diamonds, pepper, rice, etc.) and services (security service, legal service, mechanic service, transport service, etc.) produced within a year. www.tradingeconomics.com.) Equation. “…Private Consumption+ Gross Investment+ Government Investment + Government Spending + (Export-Import).”
Added to the complexity of GDP, there are two types (Real and Nominal). Economists and policymakers use Real GDP to measure a country’s success or failures. An increase in real GDP implies that a country might become prosperous. On the other hand, economists use Nominal GDP. I guess this is so because a larger denominator results into a lower debt ratio, to calculate a country’s debt to GDP ratio. So, the higher the GDP, the lower the debt ratio, especially if the total public debt does not change.
So, what is the difference between Real GDP and nominal GDP? Economists use the base price, for example, US $1.09 on January 1, 2017, to calculate real GDP and they use the current price, for example US $1.32 at December 31, 2017, to calculate Nominal GDP. In short, the rate of inflation or deflation separates nominal GDP from real GDP.
In the case of Liberia, did economists use Liberia’s inflationary rate to calculate the nominal GDP? The inflationary rate was 13 percent in 2017 up from 12.5 percent in 2016, according to IMF Country Report No. 17/348.
Now, let us look at the numbers for real GDP and the numbers for nominal GDP. The Central Bank of Liberia recorded, on Page # 32 of the 2017 Annual Report, that the Real GDP was US $882M, US $904M and US $939M in 2016, 2017 and 2018 respectively. On the other hand, the International Monetary Fund Country Report No. 34/348 reported, on page # 21, that the Nominal GDP was US $2.1B, US $3.3B and US $3.3B in 2016, 2017 and 2018 respectively. (www.imf.org). In each year, the increase in GDP from Real to Nominal was above 100 percent. Why?
Now, let us look at the increase from 2016 to 2017 of the same type of GDP, nominal, even before an adjustment, inflationary rate, is considered. The nominal GDP in 2016 was US $2.1B. In 2017, the nominal GDP was US $3.3B. The difference from 2016 to 2017 was US $1.2B (i.e., nominal GDP US $2.1B in 2016 and nominal GDP US $3.3B in 2017). So, where did the US $1.2 billion come from? Using US $2.1 B as the denominator ($739M/$2.1B), the ratio would be 35 percent.
Also, let us calculate the nominal GDP in 2017 by using the 13 percent inflationary rate to multiply by the real GDP in 2017. The result of the multiplication (US $904M multiplied by 13 percent) US $1.068B. So, how did economists get US $3.3B nominal GDP in 2017 from real GDP of US $0.904B in 2017? Again, using US $1.068 as the denominator ($739M/$1.068B), the debt ratio would be 69 percent.
The inflationary rate adjustment did not support the huge increase in the nominal GDP, so let us use a current price at December 31, 2017. For a sample, let us use the base price US $1.09 at January 1, 2017 and the current price of US $1.32 at December 31, 2017. Again the result is US $1.2B nominal GDP (US $1.32 by multiplied by US $0.904B of real GDP); and it is not US $3.3B nominal GDP in 2017. Also, using US $1.32 as the denominator ($739M/$1.32), the debt ratio would be 55 percent.
Our economists should provide information about how one can get the correct denominator (Nominal GDP). Also, I suggest economists should use the total public debt, not just the total amount of external debt as the writers of the IMF Country Report No. 17/348 did. This is because a reduction in the numerator (total public debt) might result into a low debt ratio.
As stated earlier, the failure to use the correct GDP or correct total public debt might encourage policymakers to make unwarranted decisions. For instance, investors use a country’s income per capital (GDP divided by population) to determine a business location. Also, money lending institutions, including the World Bank, use total public debt to GDP ratio (total public debt divided by GDP) to ascertain if a country is eligible for more loan.
If the ratio is incorrect because policymakers did not include bonds payable or liabilities owed to state-owned entities within the total public debt (i.e., the numerator), the debt to GDP might be lower. The lower debt ratio might encourage policymakers to borrow more money or undertake projects, a recipe for a depreciation of the Liberian currency, etc.