Near-term prospects for the Guyana economy: A tale of ‘falling prices’
(Continued from last week)
Recap
Several persons have expressed consternation to me over the Bureau of Statistic’s data indicating an overall increase in the price level of consumer items for the second quarter of this year of only one per cent (1%). Some are incredulous too that, for the first quarter, the increase was only 4.8 per cent, making for an official inflation rate of 5.8 per cent for the first half of this year. This figure is substantially below the overall inflation rate of 14 per cent and (for food items, 20 per cent) in 2007. Apparently these figures do not accord with their individual experiences.
If true, this is excellent news for the economy. It indicates that, in the midst of global and regional economic turmoil, Guyana stands apart as not being adversely impacted by these external events. This is particularly remarkable because imports of consumer items account for a large share of national expenditure. Indeed expenditure on all imports of goods and services as a percent of GDP was 157 per cent in 2007 and has averaged about 150 per cent of GDP for the period 2005-2007. Import of consumption goods totalled US$270 million for 2007. This was up from recent years when the total averaged $US200 million. This figure represents more than one-quarter the value of all imports. (US$1,062 million in 2007)
External markets slowdown
This takes us to the second area of concern about the near-term prospects for the Guyana economy. If most of the major overseas markets we rely on for exporting our goods and services are engulfed in economic slowdown, or worse, recession and inflationary pressures this will occasion difficulties for our export sales. The export of goods and services/GDP ratio has averaged about 100 per cent over the five years 2003-2007.
Everyone knows that the maintenance of livelihoods in Guyana is also crucially dependent on overseas remittances, in cash and kind. The latter is known proverbially as the ‘barrel-trade.’ With economic difficulties occurring in the countries where our main diaspora resides, it would be reasonable to expect some decline in the inflow of remittances over the near-term. If this occurs it will add further economic pressure to that caused by difficulties in export markets.
Imported inflation!
On the external front we have to consider a third area of concern. Because our currency is tied to the US dollar, its relation to other currencies like the euro, Japanese yen, the Canadian dollar and the pound sterling has followed the downward trend of the US dollar against these currencies. While in theory, this cheapens our exports and could lead to improved sales, the reality is that the transaction currency used for our international sales is the US dollar and the prices of products sold overseas are usually denominated in the US dollar. However, at the same time as other currencies rise against the dollar, this increases the prices of imports from these countries. Usually, one would expect therefore, inflationary pressures to be imported. But as we saw the Bureau of Statistics says otherwise as it did not indicate evidence that this is occurring, since the rate of increase in the overall price level of consumer items is substantially below that which occurred in 2007.
Problems with sugar
A fourth area of concern over the near-term is the difficulty facing the sugar industry. This is our largest employer of labour and foreign exchange earner. The bulk of sugar exported during 2007 (as in other years) was to the European Union (87 per cent). The Caricom market accounted for about 9 per cent and the USA and Canada markets together, the remaining 4 per cent. Current sugar sales to the European Union are to meet our obligations under the Sugar Protocol, which has been recently (2007) “denounced” by the EU with the consent of the region and will expire in 2009 with price declines. This development casts a huge shadow over the industry whose future now is most uncertain. So uncertain is it that the recent expansion of sugar production in the Berbice area, which was explicitly designed to lower the cost of sugar production by increasing the scale of output, is itself proving to be no solution so far. Sugar production and the volume of exports have not responded, and the industry is seriously under performing with total output substantially down on the levels of output achieved four decades ago, with less land and factory capacity. Despite this the projection has been (Bank of Guyana, Annual Report 2007) that the sugar industry will expand in real terms by nearly 9 per cent in 2008. As part of the agreement to abide with the European Union’s denunciation of the Sugar Protocol, the EU provided in 2007 about 5.6 million euros in support of the Guyana Sugar Action Plan. Two threats to the sugar industry have recently emerged. One is inclement weather, which has taken a heavy toll on production. The other is the punctuation of the present wage negotiation cycle with strike action by the sugar workers. In justification of their wage demands the workers are claiming extreme hardship due to rising prices and the impact of the VAT tax!
As long as it continues in the same form and at the same rate, the VAT tax will continue to prove immensely burdensome to the average Guyanese worker and housewife, and those less fortunate. The yield in consumption taxes for 2007 was more than 58 per cent above the yield projected in 2006! The consequential increase of government revenue by more than 28 per cent above budgeted estimates for 2007 tells its own story. These taxes are hugely regressive. And, as a result, the poor, hungry, and homeless are more adversely affected than those who are able to better afford such price increases. Next week I shall conclude the discussion on this topic.