(Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice President of the Lending Services Division.
Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.)
A Paradox of Sorts
Anyone being attentive to the plight of the Guyanese consumer knows that the current economic and financial hardships did not appear overnight. A look at the 2007 Half-Year Report of the Bank of Guyana (BOG) would reveal that the inflationary pressure has been building overtime. In that report, the BOG, also known as the Central Bank, pointed out that consumer prices had grown by over 13 percent between June 2006 and June 2007. This increase was on top of an 8 percent increase from a year earlier. Yet, after being aware of this hurtful trend for nearly two years, little effort has been made to put the Guyanese consumer in a comfortable position. Moreover, according to the BOG, signs of the current upward trend in prices had begun to rear its ugly head earlier in 2007. Normally, inflation occurs when demand for goods and services outstrip the supply of those goods and services.
Put another way, when people have lots of money to spend and few goods and services to spend it on, prices tend to rise. In essence, consumers drive inflation. Yet, judging from the 2007 Half-Year Report of the BOG, it does not appear that inflation resulted entirely from the collision of the unequal forces of supply and demand, or from ordinary Guyanese being awash in money. That report states clearly that the money supply in the country, made up primarily of currency in circulation and deposits in checking accounts, went down by over 7 percent. Consequently, there is very little chance that there was too much money chasing too few goods.
At the same time, Guyanese seem to be putting as much extra money as they could in the commercial banks, a paradox itself in an environment of high inflation and arguably high unemployment. Knowing their circumstances, there are many Guyanese who, upon reading this article, would disqualify themselves from the ranks of the savers. Be that as it may, Guyanese individuals and businesses increased their savings in the commercial banks by 13 percent in 2007 without much incentive to do so. Almost all of the increase in savings (83%) came from individuals. Admittedly, borrowing expanded by 22 percent suggesting that Guyanese spent more than they saved. However, most of the borrowing (78%) was done by businesses, signifying that there might have been more investment spending than consumption spending- not the stuff that causes inflation. As added proof that Guyanese consumers were not overspending, the BOG reported that the supply of goods and services grew faster than money was changing hands.
Based on the numbers, Guyanese consumers should be praised for acting in ways that help to keep inflation in check. Yet, it looks as if no one appreciates the responsible behaviour of those consumers. Instead, many Guyanese consumers have been left defenceless on their own to face an economic brigand that repeatedly robs the kitchen cupboard, the children’s lunch boxes, the vanity and the wardrobe.
With the help of the 2007 Half-Year Report of the BOG, I could see some of the phenomena that are at work against the Guyanese consumer. The culprits feeding the undesirable inflationary trend were implementation of the VAT, pricing strategies of business owners, the Cricket World Cup event and an albatross that has been hanging around the neck of Guyana for the last 35 years, unaffordable oil prices. The Cricket World Cup was a temporary event and as of today, it is the only cause that has gone away. But it has left behind, according to the BOG, higher rent that is now the burden of struggling Guyanese to bear. The impact of VAT and global oil prices are undeniable and there has been some recognition by public officials of their deleterious effect on consumers. No explanation was given for the rise in medical costs but in a 2006 report the BOG noted that higher healthcare costs were driven by cost increases in medical technology, equipment and supplies.
Whatever the reason, the steep price movement in healthcare should be a warning to all Guyanese, stay healthy for even people with money can get sick and run the risk of going broke before dying.
Aggressive Policies
Inflation has haunted Guyanese consumers before and it will haunt them again if steps are not taken to remove its current causes and prevent their dangerous consequences in the future. While by no means a simple task, the issues that need to be addressed to solve the current inflation problems should be obvious to everyone. Ironically, the entity responsible for controlling inflation is the BOG. The BOG carries out this responsibility principally by manipulating, its most widely used instrument, the discount rate on government treasury bills with 91-day, 182-day and 364-day maturity in what is called open market operations. A committee of the BOG called the Money Market Committee meets every week to decide whether or not inflation is a problem and if to change the discount rate. For 52 weeks it met and the Money Market Committee did not change the discount rate on the shorter-term treasuries (91-day & 182-day) for the last six months of 2007 and only increased the rate on the 364-day treasury in the final quarter of the year. The reluctance to change the shorter-term discount rate signals to me that the BOG felt that the policy instruments at its disposal are ineffective against the real causes of inflation. It also reaffirms my view that the factors that caused inflation hardly had anything to do with overspending by Guyanese, especially since there was not much to spend anyhow. Clearly, monetary policy alone will not do the trick at this point in the game. That puts the ball in another court.
Time and space do not allow me to explore in this article the range of issues that could be used alongside monetary policy to control inflation. One thing that should be clear to everyone is that the Guyanese consumer needs immediate relief. In recognition of this imperative, there has been some movement on VAT where, in March 2008, the tax has either been reduced or taken off of some food, household products and medical supplies and on inputs used in producing some food and household products. The administration needs to do more soon.
The longer-term view on inflation requires that Guyanese have predictability and stability in their lives. It is not just for Guyanese to wake up everyday and find themselves living at the mercy of economic events that prevent them from properly structuring their lives and from exploiting and enjoying the fruits of their labour. It is true that Guyana cannot control global oil prices but it can take strategic steps to help mitigate the impact of oil prices on consumers. At the heart of the effort should be an energy policy that sincerely pursues alternative forms of energy that can be produced from Guyanese resources even as it considers more conventional forms of energy. Not only is this prudent but it is environmentally responsible. An open mind would lead to new thinking on the subject and to existing initiatives that sit in the energy archives and institutions of Guyana.
In addition, I do believe that aggressive policies that could lead to increased productivity and better living conditions for Guyanese are needed. Private investment on scientific and development research aimed at developing and introducing new technologies, modernizing production systems and increasing efficiencies is needed. Investment of this nature could help bring down production cost, thereby helping to keep prices low and removing the need for excessive wage increases that could fuel inflation. Old and new businesses need incentives to get them moving in that direction. In this way, Guyanese consumers could help build a country that they could also enjoy and appreciate and in which the monetary instruments for controlling inflation could work better for them. The bottom line is the Guyanese consumer needs immediate protection and relief from the deleterious effects and future threats of rising inflation.
