Dear Editor,
A worrying situation grips the nation with Guyana’s first recorded case of COVID-19. Whilst this pandemic is of major concern to the health of the public, I believe there is a dimension which requires urgent attention in Guyana; that is, the likely economic fallouts from COVID-19.
Whilst social distancing is an absolute necessity in preventing the spread of this highly contagious disease, the act has an inherent feature which cripples economies; that is, it results in a decline in sales for entities (referred to as a decline in the aggregate/overall demand for products.) This type of decline is the pre-cursor for an economy to begin a downward spiral.
Most consumers at this time are filling their shopping baskets and carts with food items and pharmaceutical products – very little, if any, beyond that. A simple localized example of this is clear with the closure of one of our main shopping complexes, the Giftland Mall, from April 1st, 2020 with the exception of their supermarket and pharmacy. Many of the stores in other commercial districts who do not sell essential items/basic commodities are already reporting a slowdown.
Recognizing that the heart of the economy is being distorted as a result of the social distancing practice, countries globally are turning to ‘fiscal stimulus packages’ to ensure that the decline in sales (aggregate/overall demand) is quelled and countries will be able to lift their rate of activity immediately after social distancing ends. A ‘fiscal stimulus package’ is a method employed by a government which ensures that an economy has an injection of money which will kick-start the sales of businesses (lift the aggregate demand of the economy). This would usually be done by reducing taxes so an individual or a company will have more money available to spend, increasing the amount that government spends on salaries and other works, amongst other measures. This is referred to as Government’s Fiscal Policy.
Globally, Central Banks will also work on having more money injected into the economy by ensuring that there is a reduction in interest rates at commercial banks and money becomes more freely available for lending, amongst other measures. These measures are referred to as the Central Bank’s Monetary Policy. Both Fiscal and Monetary Policies are done with the intention of kick-starting an economy by injecting money into the cycle consisting of consumers, firms and employees, referred to earlier.
Internationally, three economic dimensions are being monitored by agencies to track how governments are responding to offset the negative effects of COVID-19 on the economy. A simplified version of these dimensions are: 1. fiscal policy responses; 2. monetary policy responses and; 3. foreign exchange balance responses.
Within the Guyanese context, our three economic dimensions ought to be analyzed so that we are able to understand how Guyana will deal with the economic fallouts of COVID-19. The first dimension, Fiscal Policy by the Government is currently crippled given the state of the political economy. A Minister of Finance, in crafting a fiscal stimulus package, will need to table the package to Parliament for approval. In Guyana’s case, such a stimulus package would have been presented as a ‘supplementary appropriation’ in the method prescribed by Section 24 of the Fiscal Management and Accountability Act, 2003. This process involves tabling the Appropriation to Parliament to provide details of the appropriation and to receive approval. As it stands, Parliament is dissolved, and thus, any fiscal stimulus package which is noteworthy, cannot be tabled and approved. Should the Contingency Fund be invoked, this size of the package would be limited to a mere 2 percent of the most recent budget. This amounts to roughly G$6B. There are those who would wish to take the analysis into different dimensions, on whether legally there exists a Minister of Finance. I will not pronounce on this, as that matter is outside the remit of my undertaking and the point of Parliament’s dissolution is sufficient a condition upon which to predicate my analysis.
As regards the second dimension, Monetary Policy by the Central Bank has been lax, with the Bank dependent on moral suasion to reduce interest rates at commercial banks and urging loan repayment deferrals. Whilst this is a measured step in the right direction, the absence of fiscal stimulus to kick-start the economy necessitates a firmer stance by the Central Bank to ensure the sufficient money is injected into the economy. Moreover, whilst loan repayment deferrals are welcomed within the context of a business, as it allows cash flow, it only acts as a buoy and does not aid in stimulating economic activity. These actions by the Central Bank simply will not be enough to restart the economy during or post-COVID.
Homing in on the third dimension, the Foreign Exchange Balance is absolutely critical for maintaining the quality of life of Guyanese and consumer welfare. Most of the goods in the average consumption basket for a Guyanese are imported and as such, at the basic level, foreign exchange is critical for ensuring that basic food commodities reach the Guyanese population. Additionally, forex is essential for the purchase of Heavy Fuel Oils (HFOs) which is used to power the electricity generation plants, another essential commodity. As at September 2019, according to the Bank of Guyana’s Quarterly Abstract, Guyana had US$528.3M as Foreign Exchange Reserve which translates into 1.5 months of import cover; this means that the import bill for Guyana can only be sustained for 6 weeks based on the current reserve of Foreign Exchange. The international benchmark is 3 months import cover. No steps taken in this regard have been made public by the Central Bank to ensure that a situation of a net drain of forex is mitigated. No action also by Guyana in this regard is reported by the International Monetary Fund (IMF).
Therefore, in the three economic dimensions considered above, Guyana is incapable of taking action in the primary method of stimulating the economy, that is, fiscal policy. Additionally, we have taken meagre to no steps in the other two dimensions to ensure that the fallout as a result of COVID-19 does not decimate our economy. We must act now to be able to mitigate the potentially devastating effects which COVID-19 will have on our economy and its existential threat.
As a matter of urgency, we must seek to ensure our election process is completed in a free, fair and credible manner, within the ambit of the legal architecture of the country. This will ensure that a potent fiscal stimulus package can be provided to the Guyanese people which will ensure that their quality of life is not severely eroded. The Central Bank needs to act more decisively as the lead financial institution in Guyana and address the other economic dimensions. This is a time to work together in the best interest of Guyana.
Yours faithfully,
Richard N. Rambarran
Economic & Financial Sector
Specialist
Lecturer, Department of Economics,
University of Guyana