(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.)
By Rawle Lucas
Imagine having G$204 billion to spend with the potential of it becoming larger each year. No doubt imaginations are running wild as to what could be done with that kind of cash. Some people might think of buying 87 hotels like Buddy’s and reselling them for handsome profits. Others might look to bring a Disney style theme park to Guyana for fun or buy 11,000 S Class Mercedes Benz and drive a different one in cozy and sensuous comfort each day for the next 30 years. I know that there are still others who would prefer to take it easy and sit at the road corner and sip some beers with willing friends blissfully unaware of where the money was going.
By now readers must be asking where this money is or wondering if this is another tale like that of El Dorado? Believe it or not, this money is real. The money to which I refer is trapped in the banking system in Guyana, unable to free itself to make your wildest dreams come true. It is money whose creation is subject to the policies of the Bank of Guyana (BOG), the strategic self-interest of lenders, the vision and intent of borrowers and the competence of political leaders.
The BOG, also known as the Central Bank, in its role of controlling the money supply in Guyana, requires that all the licensed depositary financial institutions (LDFIs) in the country keep part of their money under its control. The LDFIs include entities like the commercial banks, the New Building Society (NBS) and the trust companies. The major players are the commercial banks which account for over 85 percent of all deposits. The BOG sets the rules and, at present, the banks have to maintain a minimum of 12 percent of their customers’ deposits in reserve. This reserve requirement leaves banks free to create money that is 8.3 times the amount of their excess reserves. They create the money by making loans and advances to households, businesses and the government.
When credit is in the hands of businesses, it turns into physical capital such as machines, buildings, computers and tractors. It turns into inventory like shirts, shoes, eggs, chicken, rice and biscuits. Credit also turns into jobs and training of new and existing workers. According to the BOG, as of 2007, only 31 percent of bank deposits are part of such business investments. With an additional 12 percent in reserves, the untapped 57 percent of deposits or about G$100 billion represent the core value of economic opportunities lost in Guyana. This is where a portion of the G$204 billion is sitting. Cast in Treasury Bills, foreign claims and other property, this money is doing nothing to bring unemployment down from the 40 percent level at which it stands.
Further evidence of this lost opportunity is all around, but is most glaring in the farming communities that have been scrunching for money to carry on vital farming activities. With the elimination of the Guyana Agricultural and Industrial Development Bank (GAIBANK) and the unavailability of a suitable replacement institution, agricultural credit is hard to obtain. To make matters worse, the commercial banks have been reducing the supply of credit to farmers by 24 percent each year since 2000.
Consequently, credit to the agricultural sector now makes up 4 percent of all private sector credit. The administration receives the Annual Report of the BOG and some of its own agencies even supply information for inclusion in the report. The unresponsiveness of the administration to an agricultural financing crisis that has been unfolding right before its eyes is disappointing to say the least. This less than stellar leadership on an issue of such vital national interest helps to explain why Guyanese are struggling to find jobs and to put food on the table.
This struggle is best described by the statistics of the 2007 BOG report. That report reveals, for example, that Guyana produced over 30 million eggs in 2000. Since then egg production has declined progressively each year and was down 79 percent by 2007 to just over 6 million units. I cannot understand how an administration could feel pleased with itself knowing that Guyanese have gone from eating 3 eggs per month in 2000 to eating only half of an egg once a month.
The list of lost economic production and its impact on food and nutritional intake goes on. It includes bora, cereals and legumes, prawns, plantains, yam, sweet potato, dasheen, eddoes, bananas, mangoes, pineapple, eschallot, tomatoes, cassava and coconuts. Production of all of these commodities has fallen by over 50 percent of what it was in 2000. Add flour, biscuits and clothes to the mix and a rather grim production picture emerges in 2007 for Guyanese who could no longer obtain or afford the basic essentials for survival or good health. These unresolved annual revelations of the BOG are unfavorable examples of leadership.
The under-performance of the economy reveals the depth of the distress and frustration being felt by many Guyanese all over the country, even though there is a real opportunity to relieve their economic burden through the just and equitable provision of credit to worthy businesses. It also exposes flaws in the economic priority and policies of the administration and the way in which it is handling the economy.
When the National Development Strategy (NDS) was under preparation, an overarching concern of the administration was the under-utilization of funds in the banking industry. There was legitimate frustration with the several deficiencies in the banking industry that stifled credit creation. The consensus was that the lack of competition led to unacceptably wide spreads between the rate of interest on deposits and the prime-lending rate of commercial banks. According to BOG data, the interest rate spread was 8.7 percentage points in 1994 and it was 9.5 percentage points in 1996, at the time of the preparation of the NDS. These spreads represented 44 and 55 percent margins on the respective prime lending rates of the two years. Given the fuss made by the administration about the spread back then, everyone expected it to do a better job of preventing the spreads from remaining or becoming too high by encouraging competition.
It appears now that the administration no longer favours strong competition in the banking industry. From 2000 to 2007, the spread increased to an average of 11 percentage points with margins jumping to as high as 77 percent of prime. The spread ranged from a low of 10.4 in 2000 to a high of 12.5 in 2002. At no time during the last 8 years has the spread been below what it was in 1994 and 1996. The administration now appears satisfied with this level of spread even though it is worse today than it was a decade ago.
Even so, when the administration wanted to expand construction activities, it gave the banking industry, since 2004, the generous concession of making mortgages without reserve restrictions and without having to pay taxes on those mortgage earnings. The administration has done nothing to show similar concern for a critical sector like agriculture even after witnessing more than 8 years of ruinous decline in financing and production. Maybe the administration has forgotten that it is people who are at risk and that their lives are worth something.
Until alternative funding arrangements are developed, the commercial banks need to be engaged in this process. With excess reserves averaging G$5 billion, the commercial banks had the potential to add an additional G$42 billion to the money supply in 2007 through credit but instead they added a mere G$12 billion to their loan portfolio. There is plenty room for additional credit and the banks should not be allowed to recoil from creating it in the face of glaring economic need and opportunity and, here is why.
At the current level of economic activity in Guyana, business credit produced factor incomes of G$126 billion in 2007. This credit yielded G$3.36 of factor income for each dollar outstanding in 2007. In comparison, equity financing, as reflected in the market capitalization of the Guyana stock market, earned G$3.03 in factor incomes in 2007. In addition, over the four year period of 2004 to 2007, business credit earned an average of G$3.54 per annum as against $2.75 by equity financing.
Returning to the promises of our imagination, a G$3.54 average rate of return on credit would yield a maximum of G$275 billion in factor incomes, an amount equivalent to 2 times the factor income actually earned by the private sector in 2007.
If only Guyana could get to, or near, this level of economic activity, it could significantly increase its output of food, clothes and other goods. The rich could become richer and ambitious and hardworking Guyanese were likely to be twice as better off than they are now. For now, Guyanese have to settle for less or nothing at all, in some cases.
. Just imagine how different things could be with greater access to credit.
Permission required © 2008 Rawle Lucas
