REVIEW 1999

 

Target 2000

Actual 1999

Target 1999

Real GDP growth/(decline)

3.0%

3.0%

1.8%

Inflation rate

9.5%

8.6%

5.5%

Current account deficit of the balance of payments as a % of GDP

(26.7%)

24.7%

Not Stated

Increase/(decrease) in the money supply

Not stated

(4%)

11.8%

The Economy

After recording negative growth in 1998 and the first quarter of 1999 following seven years of positive growth, the economy recovered particularly well from the second quarter of 1999 with a 6.8% growth for that quarter.

The crippling 57-day public sector workers’ strike in the early part of the year had seemed certain to ensure further negative growth. However good performances by the sugar (39.1%) and rice (37.7%) sectors in the first half of 1999 neutralised the effects of the strike and in fact recorded net positive growth for that period of 2.1%.

Growth was reported in fishing, forestry, mining, quarrying, transport, communication, manufacturing, rent of dwellings, financial and other sectors. There was decline in the distribution, engineering and construction sectors.

The improvement in the economy continued thereafter to record GDP growth of 3.0% for the year whilst inflation ended the year at 8.6%. Mid-year inflation had been reported at 5.8%.

Sugar production, the highest since 1978 and rice production were the principal contributors to growth during 1999. Comparatively better weather conditions, the introduction of new varieties of cane and the use of artificial ripeners for cane contributed to improved yields for both crops.

Sugar production increased by a massive 25.8% to 321,438 tonnes surpassing the projected output rate by more than four times. Rice production increased by 7.6%, 4.6 percentage points more than the projected output for 1999.

Forestry products rebounded with production being more than 12.9% over 1998. Fisheries fell short of the budgeted increased output of 1.9% by 0.9%. Livestock production increased sharply by 10.2% while egg production increased by 7%. The Budget Speech did not comment on the performance of traditional crops.

The mining and quarrying sector and the engineering and construction sector continued their decline. The mining and quarrying sector registered a decline of 8.4% compared with a projected decline of 3.6% due to falling gold prices and an 11.8% decline in production by Omai Gold Mines Limited. There was a slight overall increase in the production of bauxite though the higher-value grade declined significantly.

Despite a 10% decline in the engineering and construction sector compared with projected growth of 4%, the manufacturing sector made remarkable recovery growing by 6.8% against a projected 1% growth.

Growth in financial services and transport and communication was 2%, in Government 1% and other services 1.7%. There were declines in land transport and distribution services of 20% and 8% respectively.

Other services which include tourism and hospitality grew by 1.7%.

Banking and Interest Rates

The 91-day treasury bill rate climbed to 11.07% from 8.84%. This followed the removal of the interest rate ceiling on treasury bills which had previously constrained bidders to no more than 2% over than the previous auction as a measure to stem the slide in the Guyana dollar.

As is now a familiar refrain in Budget speeches, the Minister lamented the high intermediation spreads of the commercial banks which the Government had sought to address by a lowering of the statutory reserve applicable to all liabilities and deposit-taking financial institutions from 14% (time liabilities) and 16% (demand liabilities) to 12%.

The weighted average lending rate declined to 18.08% while the average savings increased from 7.06% to 8.12% in 1999.

Loans and advances to the private sector increased by 7.7%, the manufacturing sector being the main beneficiary averaging 27.9% over the last three years. Mortgage loans grew dramatically by 44.6% reflecting the demand for housing loans arising from the accelerated distribution of house lots.

Budget Performance

Central Government finances improved significantly in 1999. Collections increased from 1998 by 10.5% to $34.9Bn, 4.7% more than the budgeted amount. Increased production of the two principal crops, changes in customs valuations rate and a switch in method of assessment of companies by the IRD accounted for surpassing of the target.

Collections by the IRD increased by 13.2%, 7.5% more than budgeted. This included collections of $850M more in personal income taxes and $795M more in company taxes. Customs revenue collection was short of the budgeted target by almost $200M, although it exceeded collections for the previous year by 6.1%. Again it seems as though the public sector strike which affected the operations of the Customs and Excise Department during that period had little overall effect on its revenues.

Though revenue collection was significantly higher than in 1998, there was also increased expenditure. Non-interest expenditure in 1999 was $24.1Bn (an increase of 22.5%). Personal emoluments increased by 20.8% from $9.8Bn to $11.8Bn. Expenditure on other goods and services was $6.9Bn and transfer payments $5.4Bn. Domestic interest was $3.6Bn ($200M less than budgeted) whilst scheduled external interest payment amounted to $6.5Bn but under the HIPC Initiative only $3.9Bn was actually paid.

There was a decrease of $600M in capital expenditure and net lending. Overall total expenditure was $46.5Bn, approximately $3.5Bn less than projected for 1999. This was despite the fact that Budget 1999 did not provide for increased wages for public servants which were being negotiated with unions at the time of presentation of the Budget.

The overall deficit before grants improved to $9.9Bn and after grants $3.3Bn.

Slower growths in imports accounted for the merchandise trade deficit narrowing from US$54.2M in 1998 to $25.2M in 1999. The Balance of Payments suffered from falling prices in the country’s major export products - sugar, rice, bauxite and gold.

Whilst merchandise exports declined by 4% to US$525M, merchandise imports declined by 8.5% to $550M, both in consumer and capital goods.

The overall balance of payments reduced from a deficit of US$22.7M in 1998 to a deficit of US$4.4M in 1999.

Inflation

The inflation rate recorded for 1999 was 8.6% against a target rate of 5.5%. The Minister cited the reasons for the increase being:

  • the weakening of Guyana dollar

  • quarterly increases in electricity tariffs

  • significant increases in fuel prices

He also noted two observations:

  • the rate of the price level was not uniform and there was slower growth in the second half of the year

  • movements in the food-sub group of the Consumer Price Index were marginal

Ram & McRae’s Comments

Inflation close to double digits appears to be returning to the economy destroying one of the macro-economic fundamentals, a pillar of the IMF Programme. Inflation discourages savings and creates uncertainty for investors. Measures need to be put in place urgently to remove this specter.

The importance of Government’s contribution to the economy is emphasized by the more than coincidental and equal decline in the Public Sector Investment Programme and the negative growth in the engineering and construction sector.

Economist Dr. Kenneth King had criticized the rationale for reducing the interest rate cap on treasury bills as “confused” pointing out that “you can’t increase the value of the Guyana dollar by limiting its supply, but only by increasing the supply of the US dollar.”

Whilst interest rates in the economy have by definition to be market determined, the commercial banks operating in Guyana display all the signs of a cartel and firmer Government persuasion may be called for if businesses are to enjoy more acceptable interest rates.

As a professional services firm with regular contact with the Inland Revenue Department, we are unaware of any switch in the method of assessment of companies and find it difficult to speculate what the Minister might have meant.

Omai’s production will necessarily start to decline in another year or two and the country badly needs major, medium-scale and small investments with a focus on value-added exports and/or import substitution.

The business community has lamented the falling value of sales which is confirmed by the Balance of Payments statistics. The suggestion is that consumers do not have sufficient disposable income to maintain their needs.

The Balance of Payments statement tellingly reflects the vulnerability of Guyana’s economy, with its focus on primary products to the vagaries of the international commodity market. Despite all the talk about added value the over dependence on our primary products will forever stultify our growth.

The Government has noted the increases in fuel prices internationally and has reduced the consumption tax on fuel to reduce the price at the pumps.