This week I shall consider the remainder of the downside risks facing the economy over the short-to-medium term. These are 1) further stalls in major projects, which are scheduled to come on-stream soon 2) social-political-macroeconomic instability in the context of near-term national elections and, 3) financial risks facing the National Insurance Scheme.
Stalled Projects
In relation to the risks of stalled projects, which are scheduled to be in operation, I had indicated last week the situation of the Sugar Modernization Project. This project has been on-going for at least a decade now and remains extremely doubtful of being able to fulfill its original targets in the near future. Since my intention is to present a fuller discussion of the morass in which the sugar industry finds itself, I will defer further comment at this stage.
There are, however, other projects in a similar state of uncertainty. These include 1) the road to the Amaila Falls site and the Amaila hydropower project 2) the drainage/irrigation and flood control works, which should have followed the Great Flood of 2005 and 3) project payments for Guyana’s avoided deforestation under the Guyana-Norway, Memorandum of Understanding (MOU).
At last reporting the road to the Amaila Falls project is just about one-fifth concluded. According to the timelines and schedules for completion of roadways, bridges, river crossings, and access way for transmission lines the Contractor is legally bound to maintain, at this point of time the project should have been about two-thirds completed.
Further, recent press reports indicate that the East Demerara Water Conservancy (EDWC) studies planned to be completed under the Conservancy Adaptation Project are only now getting underway; five years after the Great Flood of 2005, which generated the need for the studies to guide interventions in the East Coast flood control system.
Finally, years after brokering the Guyana-Norway MOU, which provides compensation for Guyana’s avoided deforestation, no significant payments have yet been transferred to the Guyanese Authorities.
It is reasonable therefore, to infer that, if these difficulties with projects due to come on stream in the short-to-medium term persist, the prospects for Guyana’s future economic performance remain in jeopardy.
Social-Political-
Macroeconomic
Stability
Under this broad category I would single out two areas of significant risk. The first area is that macro-economic stability, as the economy goes forward, is dependent on at least four crucial considerations. One is that investment bubbles do not occur in Guyana; the most likely areas for these are in the commercial and residential real estate sectors. A second is that, after the collapse of the CL Financial and Stanford Groups, there will be no repeat in other exposed financial firms. Great importance therefore has to be attached to financial soundness and banks’ stress indicators published by the Bank of Guyana and the IMF. A third consideration is that the recent upsurge in the growth of public debt does not become uncontrollable. The external public debt projected for the end of this year in the National Budget is US$1.2 billion. This sum is about 45 percent larger than it was five years ago in 2007 (US$0.7 billion)! Fourthly, the single best antidote to the growth of public indebtedness is economic growth. But, as I have pointed out economic growth in Guyana during the 2000s, has been anemic; it did not contribute significantly to public debt stabilization. Fortunately for the Authorities, the 2006 rebased national accounts series has resulted in a considerable increase in the accounting size of the country’s GDP, thereby making the data on debt-to-GDP ratios more “palatable”.
The second area of risk I would single out is the social/political threat posed by the forthcoming national elections. This threat lies in 1) the course of the political campaigns and 2) the aftermath to the elections. Whichever political grouping wins the elections, it is important that no doubts are harboured about whether the elections were free and fair and free from fear. If doubts persist the incoming administration could well be faced with protracted instability.
The National Insurance
Scheme at Risk
Readers would be aware from press reports and various economic commentaries that the national insurance (social security) scheme is at risk of turning to the state for bailouts with which to fund its outstanding liabilities. If this eventuates then the pressure it would put on government finances will adversely affect the country’s economic performance.
Just after the mid-2000s it was reported that the contribution rate to the NIS Scheme equalled its expenditure rate (see the 38th Anniversary Press Release of the NIS.) Given this circumstance, reforms/adjustments to the Scheme have become urgent. Indeed, this was recommended in both the 2001 and 2006 actuarial reviews of the Scheme.
Since then it has been reported that 1) the Scheme’s investment portfolio has been further weakened because of the huge losses associated with its holdings in the CL Financial Group in Trinidad and Tobago and The Stanford Group in Antigua and Barbuda 2) non-compliance in payments into the Scheme of workers’ contributions by businesses; these have reached humungous proportions (recently estimated around G$500 million), and 3) the Scheme is foundering in a bureaucratic morass of backlogs, delays, verifications and challenges to the settlement of entitlements (resulting in a torrent of users complaints).
Concerns have also been voiced about mismanagement, corruption and negligence. Recently, the Georgetown Chamber of Commerce had pledged to put peer pressure on local businesses, which are not complying with the NIS regulations. The government has also indicated that it will not accept contract-tendering from non-compliant businesses. Such actions reflect the serious difficulties that lie ahead for the NIS. It is also instructive to note that the IMF in its recent Public Information Notice (PIN) (March 2011) echoed concern about the NIS Scheme as the economy goes forward.
Next week I shall begin to discuss the upside potential/expectations for the Guyana economy.
