By Mohamed Irfaan Ali
The Bank of Guyana Annual Report 2016 has confirmed the pervasive sense that the economy is not working. As key traditional sectors continue to wilt, with the exception of gold, the lackluster year of 2016 from all indication points to the commencement of a meltdown of our economy. The highly serendipity 3.6% growth rate in our GDP was attributed mainly to the windfall gain in gold through higher price. However as most contemporary macroeconomist would concur, a growth in GDP merely reflects economic growth but not economic development. The latter is the ultimate achievement and would determine if we would benefit from improved access to health care, education, housing etc. Given the starry-eyed feature of this administration, economic development will be more of a longing desire than an imminent achievement.
Tepid is what characterized our key traditional sectors, with the exception of gold. As anticipated, the agriculture, fishing and forestry sector contracted by 10.5%, with sugar, rice and forestry being the biggest looser with 20.5%, 22.4% and 27.4% respectively. Had the government not tried to reinvent the wheel and proceed with policies similar to that of the PPP for the sugar, rice and forestry sector, overall GDP would have increase by 5.7% instead of a meager 3.6% at the end of 2017. The counterintuitive policies cost the nation approximately US$40.4 million, revenues that would have expanded our foreign exchange reserve by approximately 6.7% and help stabilize our exchange rate.
The aftermath of failed amorphous policies is visible and ubiquitous through the country. Take for example, the production of logs and sawn lumber in cubic meters at the end of 2016 dropped by 19.7% and 40.8% respectively in comparison to 2015. This underperformance would spell disaster for our loggers, truck drivers, lumber dealer, and most importantly to our Amerindian brothers and sisters who rely heavily on the timber industry as a mean of income to sustain their livelihood. Hence, this dreary performance will inevitable spell disaster and increase hardship. Endogenous shocks of higher commodity prices will curtail demand and cripple private investment.
In other traditional sectors our small scale miners and farmers are grappling with the predicament of downsizing their investment. As outlined in the BoG Annual Report 2016, credit to mining and agriculture sector fell by 14.8% and 4.4% respectively in comparison to 2015. This figure is even worse in comparison to 2014 with a decline of 24% and 7.5% respectively. The trend is consistent with the withdrawal of concessions and other incentives to miners, and waning of the sugar and rice industry. For example, machinery imported for agricultural purposes reduced by 11.2% to GYD$5 billion. The implication is catastrophic and concurrently conspicuous as non-performing loans spiked and demand for intermediate and capital goods dropped by 17.1% and 5.7% respectively.
Thus, given the abrupt and sporadic windfall of the gold industry, ambiguity and confusion must be removed to allow clarity on the true economic impact. First and foremost, due to the capital intensive nature of the two major foreign mining companies, economic benefits will always fall short with respect to other labor intensive industries such as sugar and rice. Rents generated, even though they are of higher value, will have lesser impact on the lives of our citizen and more on its foreign investors. Moreover, economic pundits are of the view that price for the precious metal will slide shortly given the projected appreciation of the US dollar. Guyana, with a fragmented economy will stand no chance against this exogenous shock given its fragility and feebly macroeconomic framework.
Hence the continuous mundane performance of our traditional sectors will further emasculate the rigorous and vibrant economic foundation the PPP once engineered. The economic consequence will touch every Guyanese, concatenated through a depreciation in purchasing power, reduced disposable income and increased hardship. Not only will savings be wiped out through depreciation in exchange rates, but compounding this phenomenon will be a surge in inflation, an inevitable outcome of the additional tax measures introduced this year.
The sloth implementation of the PSIP is another calamity that is directly linked to the lack of enthusiasm of our public servants. The quixotic approach towards work is attributed to low wages and growing economic burden. The APNU/AFC government, upon occupying office, slaked their desire for immediate wealth with a humungous 50% increase in salary while public servant received a smidgeon 5%. Moreover, interminable selection by intrinsic motivation will continue to hamper the implementation of the PSIP.
Non-performing loans, which represents 11.5% of total loans at the end of 2016, rose by 17.1% as economic hardship continues to ascend to new heights. This bellwether indicator speaks volume to the contemporary onerous economic climate of our country.
The cyclical surge in non-performing loan, mainly from the business enterprise and household, rose by 12.2% and 33% respectively when compared to 2015. This proliferation of toxic loans not only will reduce the banks’ ability to remain solvent through a crisis but will force financial lending institutions to tighten restriction on lending. Access to mortgage, start up business loans etc. will become elusive.
Thus, the high concentration of non-performing loan in the wholesale and retail, and land and real estate subsector, speak to the onerous economic issues facing our nations of which the principal cause is primarily linked to reduced disposable income and purchasing power as a result of increased taxation.
BALANCE OF PAYMENT
The improved performance of our BoP was attributed to the current account surplus. However, underscoring this ephemeral performance, it is worthwhile to mention that import declined by 2.9% or US$43.8 million. The decline, which include motor cars, textile and clothing, parts and accessories, other intermediate gods, agriculture and transport machinery, building materials and other goods, points to the fact that private consumption is on the decline an occurrence that dovetails with high uncertainty, reduced disposable income and counterintuitive policies.
DOMESTIC CREDIT: CENTRAL GOVERNMENT VS PRIVATE SECTOR
Using domestic credit to finance central government deficit continues to perpetuate. In 2016, approximately 75% of central government deficit was financed by domestic borrowing.
The latest monetary survey conducted by the bank of Guyana in February outlined that domestic credit to central government grew by 34.9% to GYD$80 billion with respect to February 2016, while credit to private sector grew by 2.03% to GYD$215.3 billion during the same period. In a mere 2 months’ period (Dec 2016-Feb 2017), private sector credit fell by GYD$3.7 while credit to central government grew by GYD$2 billion.
Hence, a possible outcome could be an increase in interest rate as central government and private investors vie for available finite resource. Usurping of domestic credit by central government will simply deprive private investors of much needed finance. In the long run, interminable government expenditure will lead to crowding out of private investment. Hence, micro, small and medium enterprises will be affected the most as access to credit will be severed.
As government continues to foster procyclical fiscal policies, not only will it further destroy our economy fabric from within but will permanently unravels all of our economic gains thus far accumulated.
Inundated with uncertainties, the slew of tax measures coupled with counterintuitive policies will undoubtedly be the straw to break the camel’s back. Micro, small and medium size enterprises will be affected resulted from the lack of access to financial resources. Overall consumption pattern will be distorted as proprietors shift tax burden onto consumers. As disposable income reduces through added taxation, non-performing loan will surge.
Hence, had the government not tried to reinvent the wheels much needed income could have ben generated, providing additional resources to fund key social projects in education, health and housing. However, due to the incessant microeconomic meddling and fickle policymaking by this administration inflation will be stoked and confidence will be furthered sapped in 2017.