Dear Editor,
On July 5, 2020, Stabroek News carried a letter titled `Smooth economic expansion associated with a new-born oil economy is absent’ in which the author, a regular writer, once again, sought to mislead your readers with what he tries to pass off as deep economic analysis. While many have become wary of his ramblings, I am concerned that young, impressionable readers, especially, may be led astray by what the writer tries to pass off as fact.
I begin by examining the writer’s claim of the absence of smooth economic expansion purportedly evidenced by the deterioration in the productive sector, the state of aggregate demand, runaway public expenditure and increasing lack of investor confidence.
Deterioration in the productive sector
Deterioration is a process by which something becomes progressively worse. Given this simple definition, of the productive industries, only the sugar industry, which contracted in the past 4 years due to the closure of the 4 sugar estates, and forestry can be so classified. All other productive industries expanded, on average, in the past 5 years. There was notable growth in other crops, gold, other mining and quarrying, petroleum and gas, and support services; rice manufacturing; electricity supply; accommodation and food services; financial and insurance activities; professional, scientific and technical services; and human health and social work. These expanded, on average, in the past 5 years, by 5.5 percent, 12.7 percent, 14.9 percent, 119.4 percent, 6 percent, 4.2 percent, 4.5 percent, 4 percent, 4.1 percent and 4.9 percent, respectively.
Further, the respective real Gross Domestic Product (GDP) level for each industry, from 2014 to 2019, increased, except for the sugar, forestry, and rice industries (which contracted by a mere 0.1 percent) and sugar manufacturing. Noteworthy are the industries which recorded significant growth over the 2014 to 2019 period. These include other crops; livestock; gold; other mining and quarrying; petroleum and gas, and support services; rice manufacturing, electricity supply; water supply and sewerage; transport and storage; accommodation and food services; financial and insurance activities; professional, scientific and technical services; administrative and support services; public administration; and human health and social work. These increased by 28.6 percent, 15.4 percent, 63.8 percent; 72.7 percent, 3,679 percent; 19.8 percent; 22.8 percent; 17.4 percent; 17.9 percent; 24.5 percent; 21.6 percent; 22.4 percent; 18.9 percent; 17.7 percent; and 26.8 percent, respectively. One could hardly call this a deterioration. These trends continued into the first quarter of 2020, but the presence of COVID-19 in Guyana and the ensuing measures to contain its spread, has slowed economic activity.
The state of aggregate demand
Using real GDP as an indicator of aggregate demand, which holds true in the long run, it should be noted that this grew by 3.6 percent, on average, over the past 5 years. Further, growth was more vigorous in the past 3 years, rising from 3.7 percent in 2017 to 4.4 percent in 2018, and 5.4 percent in 2019. Aggregate demand has not deteriorated over the past 5 years, as portrayed by the author.
Additionally, if one examines the non-oil GDP growth, it is evident that this increase is not driven by growth in the oil and gas sector alone. Over the past 5 years, average non-oil GDP growth was 3.2 percent, with an increasing expansion in the last 3 years, rising from 3.5 percent in 2017 to 4 percent in 2018 and 4.3 percent in 2019. Importantly, non-oil GDP growth in 2019 was 2.6 percentage points higher than in 2014.
Runaway public expenditure
Without presenting a shred of evidence, the author claims that there has been “runaway public expenditure”. While expenditures have increased, as is to be expected, these have been in the context of strategic plans and developmental needs. Prudent financial management has ensured that our fiscal deficit, over the past 5 years, has remained within the bounds of what is expected of a country at our stage of development. The Government responded positively to meet the needs of our people, evidenced by the budgeted numbers for current expenditure growing by 30.1 percent and capital expenditure by 32.8 percent, from 2016 to 2019.
Increases in current expenditure were largely attributed to increases in wages and salaries, old-age pensions and social assistance. For instance, total employment costs increased by 40.6 percent in 2019, when compared with 2016, reaching $70.9 billion in 2019, with significant growth in the public sector minimum wage. The increases led to higher household income, particularly among those earning within the lowest income brackets, thereby reducing poverty – the public sector minimum wage increased by over 70 percent between 2015 and 2019, to reach $70,000. In addition, expenditure on old-age pensions and social assistance increased by 26.4 percent in 2019 when compared with 2016, reaching $14.8 billion – between 2015 and 2019 old-age pensions increased by 56.2 percent to reach $20,500. The Government is unapologetic in pursuing a policy to redress the historical wrong and neglect of those most in need.
Lack of investors’ confidence
The average 12-month growth in the money supply consistently strengthened in the past 3 years. That is, on average, the 12-month growth rate was 3.2 percent in 2016; this rose to 4 percent in 2017, 6 percent in 2018, and 11.7 percent in 2019.
The question may be asked: How does the money supply give an indication of investors’ confidence? The money supply is linked to lending. That is, total domestic credit makes up the largest share of the money supply, accounting for 62.8 percent, on average, over the past 3 years. An examination of lending to the private sector revealed that there was robust growth, especially in real estate mortgages for industrial and commercial properties. The 12-month growth was consistently double-digit since June 2019, growing on average by 20 percent over the months. Lending to private incorporated businesses also recorded double-digit 12-month growth, ranging from 11 percent in January 2019 to 20.2 percent in December 2019. Lending to the “other services” category in the services sector also grew rapidly. Most of the lending for the oil and gas projects is captured under this “other services” category of lending to business enterprises, by sector. The 12-month growth, on average, was 24.2 percent, in the last 9 months of 2019. In December 2019 alone, for instance, growth was 44.6 percent.
These give some indication of businesses’ appetite to invest, through borrowing, and the banks’ willingness to lend.
Additionally, while some vocal businesspersons continue to push a narrative that their businesses have suffered from 2015 to 2019, many indicators discussed here show differently. For example, there were no increases in the corporate income tax between 2015 to 2019. In fact, there was a decrease in the income tax for non-commercial businesses, from 30 percent to 25 percent; and a reduction in VAT, from 16 percent to 14 percent. Amid no increases in the rate, collections from company income taxes grew by 23.7 percent to $40.1 billion in 2019, when compared with 2016, additional evidence that businesses were thriving from 2015 to 2019.
These figures are all in the public domain, but they do not quite fit the author’s narrative, who next turned his attention to Guyana’s foreign reserves. Figures are presented and twisted to paint a picture of doom, but one only has to scratch the surface to unearth some truths. Our country’s foreign reserves are used principally to service our external debts, pay for fuel imports for GPL and intervention in the foreign exchange market, periodically.
Since 2015, our imports have been distorted and dominated by several goods such as chemicals, parts and accessories, other intermediate goods, and mining machinery for the oil and gas sector. For the cumulative period, January to March 2020, total imports amounted to US$609.4 million, of which the oil and gas sector imports accounted for 34.4 percent.
These oil and gas sector imports are financed almost exclusively by foreign direct investments. Why then should we assess our reserves against the total value of these imports? Would such a comparison truly capture the adequacy of our reserves? From January to March 2020, total non-oil imports amounted to US$397.5 million or US$132.5 million on average per month. The foreign reserves of the Bank of Guyana totalled US$499.2 million at end March 2020, covering 3.8 months of such imports.
If oil companies were mandated to remit foreign exchange earned from export sales of their share of petroleum, our foreign reserves position would be improved, but such measures would certainly limit the interest of reputable oil companies in investing in our nascent sector. This is why the economic and fiscal policies of the past five years, and those envisaged in the Green State Development Strategy, focus on the diversification of our economy, recognising the need to continue to invest in, and grow, our non-oil sectors so that should oil prices collapse, as they did earlier this year, our economy is firmly grounded.
Yours faithfully,
Winston Jordan
Minister of Finance
