The previous column explored the question of money ‘printing’ and inflation. I explained using the official statistics that the inflation rate in Guyana has been fairly muted over the past decade, in spite of the expansion of money supply owing to the government’s overdraft at the Bank of Guyana (BoG). The latter result ought not to be a surprise. Inflation in Guyana is determined by domestic and external factors, with money being one of the least important variables. Indeed, authoritative academic research on this topic by Ramesh Gampat, Kevin Greenidge and Dianna DaCosta (in separate studies) found that the money supply had at best very weak statistical association with the inflation rate in this country. These authors found that variables such as the exchange rate and oil price better explained inflation dynamics in Guyana.
Externally, globalisation – namely global supply chains, just-in-time management and large-scale containerised shipping – played an immensely important role in keeping prices subdued in the United States, other advanced economies, and in the developing world in the twenty years preceding the pandemic. When major world economies experience low inflation, those on the periphery – such as Guyana – often import lower prices, and vice versa. The relatively low price of oil, another external force, played a role in keeping prices under control in Guyana since 2011.
Internally, there has been a gradual and crawling depreciation of the Guyana dollar since 2014. This was not like the steep and sudden devaluations of the late 1980s and early 1990s. Devaluation, in those days, generated a higher pass-through to inflation because of the uncertainty and suddenness of the process. As economists have known for a few decades, a gradual depreciation allows economic participants to adjust their beliefs and contracts, enabling them to better absorb the higher costs.
In addition, the government, through its control of Guyoil, has always adjusted the price of gas at the pump. That has had some effect in dampening imported inflation – since gasoline is a key item of the consumer price index – when the world price spiked. In that sense, the government’s ownership of a profitable state-owned entity, Guyoil, helps it to manage the macroeconomy. In a sense, the price mark-up by Guyoil above its operating cost acts as an implicit tax, which government can adjust downward or upward depending on the oil price in the international market.
The implementation of the value-added tax (VAT) in 2007 did cause a one-time spike in the price level throughout the economy. The inflation rate, which I calculate using the consumer price index, was approximately 14% in 2007. The inflation rate fell to 6% in 2008 and kept falling for a few more periods. This is what economists call transitory inflation – a term that has become popular in the American financial press for the past six months. Therefore, the VAT caused a short-term or transient spike in prices across the Guyanese economy. On a parallel but important matter, the short-term price spike gave then opposition forces a reason to vehemently disapprove of the VAT. However, this is the only way to tax those who smuggle, impose social costs on others, and do business off the books. A more cohesive society would have kept the VAT at its original rate and make adjustments, such as redistribution to the poor and vulnerable, via the tax code.
Some of the factors discussed above are now in reversal mode. The global pandemic has disrupted the international supply chains, which were already being disrupted by the Trump-induced trade wars. Aspects of globalisation were found to be wanting when faced with a global pandemic shock. The developed countries, especially the United States, realised that they have to maintain certain critical manufacturing capabilities at home – particularly in areas such as vaccines and medical devices. They discovered the hard way that it is not good enough to just design of vaccines and let another country – for example, India – do the mass production.
Supply-chain disruptions have adversely affected the production of consumer durables, such as washing machines, coffee makers, televisions, smartphones, automobiles and hundreds of others that need to have a microchip. These goods essentially have built-in computers running them – hence the need for microchips. Only a few areas, such as South Korea and Taiwan, have the capability to manufacture the chips on a large scale. Businesses in the United States still design most chips that are fabricated in Taiwan and South Korea. However, the USA have ceded significant foundry capacity to other countries. Foundries are where these chips are made in large amounts.
Covid-19 disrupted the shipping and mass production of these chips. Just-in-time manufacturing meant that various producers did not have chips stored away. As a result, auto makers, as one example, cannot produce new cars, trucks and SUVs at full capacity. While auto makers like Ford, General Motors, Honda, Toyota and others have not increased their price of new vehicles, they have had to cut production. This has sent the price of used or pre-owned vehicles skyrocketing in the past few months – contributing significantly to the recent spike in US inflation since used cars form a major aspect of consumer expenses.
The chip shortage will also have spill over effects elsewhere. This will be felt in Guyana as retailers pay more to import television sets, refrigerators, washing machines and numerous other household appliances. They are likely to pass on to consumers the higher import cost. Guyanese pre-owned auto dealers, also, will most likely have to pay higher prices to import their cars. Analysts believe these disruptions will not work themselves out for another year, at least. The Biden administration is back to old-fashioned industrial policy, providing subsidies for chip makers to rebuild foundries in the USA. Several have already signed on.
The price of oil is on the rise again as it tends to do after a major recession ends. OPEC and Russia do not want the increase to get out of control since it will again attract the shale producers of the USA. Nevertheless, Guyana’s import bill will rise in the coming months because of the higher price of oil. It is yet to be seen how the government will adjust the gas price at the pump via Guyoil. On the other hand, the government will receive a greater amount of revenues from ExxonMobil and its partners, which is why I mentioned in the previous column that the nascent oil sector will be a double-edged sword. There is no short-term fix for the two-edged contribution of oil and gas. The Jagdeoian PPP is on the right track, blunting, to some extent, one edge of the sword by investing in the gas-to-shore project, a process that will take some time. We, however, still have to wait and see whether the political climate will make allow it. There is increasing sabre rattling on the political front in recent weeks, on top of that which already existed since the no-confidence vote.
Food prices will rise in the coming weeks and months because of the great floods of 2021. The flood is a classic example of what economists call a supply shock. This is unlikely to produce permanent inflation, but it will be very painful and will require months to work itself out.
On closing, Guyana is nowhere near hyperinflation, which is always associated with major civil conflict and breakdown of production capabilities.
Comments can be sent to: tkhemraj@ncf.edu