Dear Editor,
Stabroek News editorial on Saturday August 5 entitled ‘the changing shape of our economy’ refers. The editorial focused on Guyana’s economic performance in the first quarter of this year based on Bank of Guyana (BOG) report highlighting the fact that output growth was completely dependent on oil. However, an important point of departure in its discussion was defining Guyana’s exchange rate as fixed and arguing for a strong Guyana dollar policy. Quite the contrary, Guyana does not operate a fixed exchange rate regime.
Guyana operates a de-jure exchange that is a floating regime but the de-facto exchange rate regime is a stabilized arrangement with foreign exchange intervention and capital controls aimed at addressing disorderly market conditions and smoothing out short- term fluctuations in the nominal rate when these are not related to fundamentals (IMF 10/2023). The foreign exchange market in Guyana is dominated by five commercial bank and twelve non- bank cambios that trade in three main instruments – telegraphic transfers, travelers’ cheque and currency notes and set their rates freely for each instrument. However, telegraphic transfers accounts for more than 90 percent of forex transactions in Guyana. In March 2023, BOG Forex reported that the commercial banks purchased telegraphic transfers at an average GYD 212.52 and sold at GYD 215.17 for the US dollar. Each bank set its own rates at which it clears its transactions in the market.
Apart from the fixed exchange rate issue, the editorial argued for a strong Guyana dollar. In the 80’s Guyana operated a fixed rate valued at 10 GYD to the US dollar, however, the parallel market rate was $47 to the US dollar. When the currency was devalued to GYD 33 to the US dollar in1989, the parallel market rose and again in 1990 the devaluation of the Guyana dollar to $45 saw the parallel market rate increasing to over 100 dollars to the US dollar. The fixed exchange was eventually abandoned and the free float Cambio regime was introduced in 1991. An interesting case study was Venezuela’s revaluation of its currency when then President Hugo Chavez introduced the Strong Bolivar to replace the existing currency in 2008. This action was followed by a series of devaluations. Managing a fixed exchange requires discipline, especially fiscal. Barbados was able to hold its rate when workers agreed to a wage cut to defend its anchor. A strong currency is sustained by high labour productivity and production.
The investment of the windfall from oil in human resource development and physical infrastructure should enhance the diversification of the economy. Agriculture in the non-oil-sector promised the greater value added in economic diversification. Countries that had successfully transformed this sector was those that ensured that the integration cycle that involve framers who plant, reap and sell, intermediaries that store, process, package and transport, distributors that sell and export, service providers that provide inputs, technical assistance, information and finance has to work in tandem with one and another, any broken link can derail the whole process. This is the means by which Guyana can become self- sufficient in food production. In fact, apart from flour, Guyana can produce the majority of food it consumes.
Finally, it is Real Exchange Rate (REER) that matters in a strong currency, whether it is a fixed or floating regime since it reflects the country‘s competitiveness. An artificial appreciation of the exchange rate can have serious consequences for the financial sector and companies integrated in the global economies. It should be noted that Guyana has now been classified as a High-Income Country by the IFI’s, this means it no longer has access to concessionary financing or grants and will have to borrow on higher terms. Early this millennium, the World Bank refused to provide loans to Barbados and Bahamas due to their High-Income classification. Guyana has to finance its development from internal resources. Fiscal profligacy was the main reason for exchange rate instability in both developed and developing countries.
Sincerely,
Rajendra Rampersaud
