Dear Editor,
After noting that the Bank of Guyana injected more than US$80M into the foreign exchange market, and stating that there is no interbank market for foreign exchange, the VP went on – according to a recent report – to say “We believe the equilibrium; the rate that is struck now, is right for the economy.” The argument must, strangely, be that the exchange rate in Guyana has a long-term equilibrium (at about G$210:US$1); and that this equilibrium was basically unchanged even after the oil boom, as in 2015, it was about G$207 to the US dollar.
Interventions in the market mean that the exchange rate is not freely floating but that it’s managed. We know this; so this talk of equilibrium cannot refer to “market” equilibirum. The relative stability of the Guyana dollar seems to further imply that the Bank of Guyana is pursuing a policy of exchange rate targeting, as against inflation targeting or price stability – alternative policies that might seem important to ordinary Guyanese. If it were interested in the international competitiveness of our exports, the same result could have been achieved by allowing the Guyana dollar to appreciate somewhat, while at the same time seeking to control inflation. In fact, doing the former might have had salutary effects on the latter. Exchange rate targeting would instead shunt off the costs of adjustment onto ordinary Guyanese consumers and savers (people with deposits in the bank), instead of sharing those costs more widely.
And anyway, why should there be adjustment concerns when there is an oil boom? Assuming that the private oil-sector inflows and outflows balance out in the miraculous way of markets, the foreign exchange rate would be stable. After we add in the government, which spends whatever it withdraws from the Natural Resource Fund (NRF), and whatever it gets from international lending and donor agencies, we again have a stable exchange rate. What we have left are the non-oil sector and the knock-on spending from the oil boom that together are causing net demands for foreign currency.
In all this, it’s important to expand on the idea that government, in its capacity as the fiscal agent, is not an insignificant economic actor in the foreign exchange market. First, it is responsible for inflows of foreign currency when withdrawals are made from the NRF; but it is also a user of foreign exchange when it imports to support the execution of its fiscal stimulus activities. Because of the knock-on effects of the fiscal stimulus package, all sorts of private sector folks are also importing – tons of trucks and excavators for example. (As an aside, we should worry about the rapid and significant increase in Guyana’s capital stock associated with the fiscal stimulus for at least two reasons: First, it’s actually low-technology; and second, the mind-boggling pace of capital works in the country will eventually taper off, leaving in its trail much idle, partially worn-out, low-technology equipment).
I am calling the fiscal expansion a ‘fiscal stimulus package’ to make the point that, ironically, the historic fiscal expansion comes at a time when the economy is already booming because of oil production and exports. In view of the foregoing, this is a point that must be made, as increased government activity in an economy has benefits as well as costs. In particular, debt sustainability should not be our only concern. Hopefully the commentators, and especially those who only care about politics, would add to the discussion in a meaningful way.
Sincerely,
Thomas B. Singh
