In this section, we summarise, review and comment on the economic and financial performance of the Government for the still incomplete 2018 year. We note that the Preface to Volume 1 of the Estimates offers some limited guidance on how the 2018 data is derived, stating that “revised 2018 figures reflect the latest projected expenditure of the fiscal year”. It would be helpful if readers are informed of the latest month of actual expenditure and whether the statement in the Preface applies to income as well.
Economic Performance
Against a global economy, which the Minister quotes the IMF Economic Outlook as expecting to remain steady in 2018, the Minister projects real GDP of the Guyana economy to grow by 4.6% in 2019. The Speech recounted that the original target for 2018 of 3.8% was revised downward to 3.4% after the first quarter, then revised to 3.7% after a 4.5% growth reported in the first half of the year. He now projects the full year growth to be 3.4%.
Sectoral gains and losses announced by the Minister were as follows:
Ram & McRae’s Comments: It has always been a cause for comment that when major sectors do well, the overall GDP growth is very positive but when they do badly, some of the harder-to-measure sectors always seem to compensate. In this regard, we discussed with persons engaged in those sectors, the growth rate of two sectors – Livestock and Construction. They expressed surprise at the reported growth. In fact, with respect to the livestock sector, our contact questioned the possibility of those numbers in the absence of any livestock data or survey. That person also indicated that given the natural factors involved, a 21.1% increase in one year would be extremely difficult to achieve.
In the case of Construction, a major importer of cement, a key product used in Construction, reported that his Company’s import and sale of cement in 2018 has in fact fallen.
While not directly relevant to this fiscal year, it is worth noting that the Statistical Bureau does not expect a single sector to record negative performance in 2019, a phenomenon that seldom arises, even in an economic bubble.
Inflation
Based on an Urban Consumer Price Index, the expected inflation rate for 2018 was 2.4%. This is now expected to be 2.0% for the full year.
Comment: Regrettably, this number too seems understated in light of the significant collection of Value-Added Tax, a tax borne by consumers and therefore embedded in the cost of the goods and services they buy. To the suggestion that maybe the tax is absorbed by the business, the challenge will be in explaining why income taxes are not adversely affected.
Similar to our comment on GDP Growth, a decline in prices for ‘footwear and repairs’ of 5.8% helped to counter the increases of 3.4% and 4.5% in food and clothing prices respectively.
Source: Annual Budget Speeches (2010 – 2018 percentages represents actual while 2019 is a forecast percentage)
Per Capita GDP
The 2018 per capita GDP, computed by dividing GDP by population, stands at US$4,121, compared with US$4,127 in 2018. By this measure, a nine year streak of annual increases was broken, albeit marginally.
Source: Appendix 1 to Annual Budget Speeches
At US$4,121, Guyana per capita GDP ranks at number 24 of the Latin America and Caribbean countries.
Financial Performance
Current Revenue for 2018 is projected at $216,871 million, exceeding budget by $15,012 million or 7%. Internal Revenue and Customs & Trade Administration receipts are expected to surpass their budgets by $7,413 million and $3,151 million respectively, while Value-Added and Excise taxes are expected to exceed budget by $7,556 million or 9%. In 2017, there was a shortfall of $3,983 million.
More specifically, Corporation Taxes and Income Tax, which includes the self-employed, and other taxes, will exceed budget by $2,164 million or 5% and $3,990 million or 14% respectively.
Value Added Tax (VAT), which was budgeted to bring in $43,165 million is expected to exceed that sum by $5,484 million or 13%, compared with a short fall in 2017 of $4,789 million. Collections of Excise Tax of $40,477 million will exceed budget by $2,071 million.
The GRA is projected to collect $199.5 billion in withholding tax, excise tax, personal income tax and value added tax, an increase of $28.3 billion over 2017. Taxes from international trade transactions including import and export duties and travel taxes are projected to rise to $3.3 billion or 20.5% over the 2017 revenue.
In explaining the collections, the Minister indicated that there were significant efficiency gains arising from the creation of a Large Taxpayers Department within the Guyana Revenue Authority. It should be noted that there was a limited Tax Amnesty for tax returns and payments of taxes submitted or made between January and September 2018, which the Minister announced brought in approximately $7 billion in revenues. An alternative explanation is that the Minister may not fully understand the implications and consequences of his proposed Budget measures or deliberately understates these.
The Minister also announced that the Guyana Revenue Authority will grant remissions of about $73 billion, up from $49.2 billion in 2017, in relation to investments within the Petroleum sector.
On the expenditure side, as almost always happens, Personal Emoluments and Other Goods and Services are projected to be in line with Budget, while transfer payments are expected to exceed budget by $5,132 million.
Interest Expenditure for 2018 of $5,850 million is expected to be less than budget by $889 million or 13%.
The current account balance in 2018 is projected at $17,609 million against a budget of $6,740 million, due in large measure to the higher levels of revenue and lower realised current expenditure.
Capital Revenue and Grants are expected to be $11,933 million compared with budget of $10,719 million while Capital Expenditure is projected at $59,016 million, resulting in a statistically insignificant shortfall of $686 thousand, or 1%. While this suggests better capital projects execution, there is a disproportionately high percentage of the expenditure in the second half of the year as well as payments in advance not commensurate with the completion level of work done.
Debt repayment is projected at $11,821 million which is $451 million less than budget.
The overall balance on financial operations for 2018 is expected to be $41,296 million compared with budget of $54,515 million. The overall balance is expected to be financed from external ($18,833 million) and domestic ($22,462 million) sources.
The Global Economy
The global economy is expected to grow by 3.7% for 2018. The Minister indicated that the Caribbean and Latin America region expects to slow marginally to 1.2% in 2018, from 1.3% in 2017. A significant risk to the regional economies is the unpredictable weather events such as those seen in 2017 with dire consequences to many of the countries.
Domestic Debt
The Minister announced that the stock of domestic debt is projected to decline from US$430.1 million in 2017 to US$386.8 million in 2018, or 10.1 percent. However, domestic debt service is expected to decrease by 28.7 percent, from US$10.9 million in 2017 to US$7.8 million in 2018, primarily due to the lower issuance of treasury bills and declining average discount rate. Domestic public debt for the past 10 years is shown below.
Source: Annual Budget Speeches
The Domestic Debt includes only central government borrowing and therefore excludes any borrowings by public corporations and non-interest-bearing debt, such as the Special Issue of Government of Guyana Securities by the Bank of Guyana.
External Debt
The table below shows that over the period 2009 – 2018, the stock of public debt has been increasing after falling to a five-year low in 2015.
Source: BOG Statistics and Budget Speech – All shown at December 31.
The increase in external debt payments was explained by the Minister as owing to higher principal and interest payments to several international agencies and one commercial bank. He reported that the cost of servicing the external debt is manageable with only 7 cents of every dollar earned by the government going towards debt servicing. Please see Ram & McRae comments #3 and 4 below.
The net international reserves as at September 2018 was US$452.6 million a decrease of $127 million when compared to 2017 of US$579.5 million. Please see Ram & McRae comment #6 below.
Balance of payments
The balance of payments is projected to show a deficit of US$180.7 million in 2018, a substantial decrease of US$111.2 million compared to 2017 balance of a negative $69.5 million. The balance on the Current Account was a negative US$463.8 million, a significant increase of US$166.5 million or 56% over the 2017 balance of a negative US$297.3 million. The Balance on the Capital Account for 2018 amounted to US$283 million when compared to 2017 balance of US$228 million.
In 2019, the capital account is projected to register growth to US$376.2 million reflecting an increase in capital inflows and foreign direct investment of US$148 million, or 65% when compared to 2017 actual.
Source: Estimates of the Public Sector (Vol. 1 Appendix V)
Banking and Interest Rates
Prime lending rate reflected a significant decrease of six basis points as of October 2018, while the 91-day Treasury bills and saving rates are likely to remain stable and is expected to continue trending lower towards the end of 2018 due to more competitive bidding practices and reflected excess liquidity and higher demand for treasury bills.
The following table shows the movement of these rates for the past ten years.
Source: BOG Statistics Abstract taken up to September 2018
For a comment on these rates, please refer to Ram & McRae comments #5 below.
Source: BOG Statistics Abstract taken up to September 2018
Total Deposits, Loans and Liquid Assets all experienced increases by 8%, 5% and 6% respectively when compared to 2017.
The Exchange Rate
The Central Bank exchange rate of the Guyana dollar to the US dollar remains the same when compared to 2018 but declines were seen in market rates. Average market commercial bank mid-rates for the US Dollar depreciated from December 2017 by a marginal 0.02% to $212.61 at September 2018. However, the average market commercial bank mid-rates for the Euro and Pound Sterling appreciated from December 2017 by 2.0% to $231.96 and by 0.34% to $271.80 respectively at September 2018.
Ram & McRae Comments:
1. While the GRA must be commended for the impressive revenue collections, part of this in the case of Value-Added Tax, may be due to late or non-refunds due to businesses not being made in a timely manner, often placing strains on the cash flow of businesses and what the Minister referred to as angst among the business community.
2. There is also a concept in Public Finance known as taxable capacity and no doubt the Minister would be mindful as greater and greater sums of tax revenue are required to finance public expenditure. Managing expenditure is as important in public financial management as tax collections and there is no inherent virtue in bigger and bigger budgets when those have to be financed by borrowings.
3. Both External and Domestic debt service is reported in Budget Speech in US$ which makes it somewhat difficult for the average reader or parliamentarian to relate them to the Estimates which are stated in G$.
4. The Minister in his speech referred only to external debt service in relation to current revenue, stating it as 7 cents of every dollar of revenue. In fact, that figure is 5.45 cents while the combined total of external and domestic debt service as a percentage of current revenue is 8.15 cents.
5. Falling interest rates on loans are typically accompanied by falling savings rates as lending institutions try to maintain their profitability. They can also signal a levelling off of borrowings in the economy and a fall in investments, a key driver of economic activity and job creation.
6. In spite of the Minister’s comment that reserves at the Bank of Guyana are required at an internationally-acceptable level, the reserves are currently below the recommended minimum level of import cover of 3.0 months. At its current level of 2.5 months, the country is in negative territory.
7. Under supplementary appropriations in 2018, the Parliament approved for the GDF the sum of $484 million to supplement the sum of $213 million, for the acquisition of 4 aircraft.
8. Equally seriously, Parliament approved the sum of $788 million, in addition to an earlier sum of $300 million for payment of legal costs of burying the Border Controversy with Venezuela to the ICJ. It appears that Parliament had forgotten that the Minister of Finance had justified stashing away the ExxonMobil signing bonus on the grounds that the money was needed to finance the cost of that case.
The Minister had publicly stated that the signing bonus would have been transferred to the Consolidated Fund before any spending therefrom. This does not appear to have been included in the Estimates for 2018 or 2019.
