Commentary and Analysis

Income Tax Threshold

The Government appears to have experienced some difficulty in concluding its Budget for the current year and missed several target dates going back to January 2002. The Budget when measured against expectations would be a great disappointment as it offered none of the wishes or concerns of stakeholders. It seems unbelievable that the Government would leave the threshold of the personal allowance untouched for five consecutive years. The current allowance granted was set in 1997 and is therefore worth approximately G$23,000 which is within the 20% tax rate.

It is hard to believe that the Government’s failure to respond to the popular and universal request as insensitivity. It seems more reasonable to assume that the IMF would have insisted on this position given the state of the economy. This is the price we pay for abandoning our economic sovereignty to an institution where poverty and its alleviation seem to be more concepts than reality. It is also the price we pay for pursuing a policy of debt relief rather than growth and development.

So entrenched are we in the IMF Programme that we have no exit strategy and in that case we simply have to submit to all their conditionalities.

Over the past several years, the country’s economy has deteriorated substantially and the projected growth rate of 2% is inadequate to take us out of our current state of poverty. Our per capita GDP has stagnated against a dream of doubling it within 10 years which would have required a compounded growth rate of 8% per annum. Over the past several years, the Government has developed a warm relationship with the private sector and appears not to have any regular dialogue with the labour movement. While the slowing of the inflation rate protects the workers’ income and savings, even modest increases in income to compensate for inflation can take the income into the taxable bracket.

Failure to address the threshold therefore is likely to be a huge disappointment not only to employees, but to employers as well since they share the burden of meeting workers’ expectations.

Debt

There is much that has been written about the country’s debt problem and much of the credit for the substantial debt relief from which the country has benefited is claimed by the current Government. Indeed, the President claimed that when the PPP/C came to power the debt service ratio was some 90% of export earnings. The reality is slightly different, largely because of the way the numbers were being computed. The IMF insists that public estimates be drawn up as though all scheduled debt services would be met. In practice however, Guyana had for several years not been meeting its obligations to creditors and the Hoyte Administration had initiated action to reschedule maturities of principal and interest payments falling due between January 1, 1989 and December 31, 1994.

In 1989 the country had total debts of US$1.9Bn, of which a significant portion represented arrears. As a result of the approaches to the international community and the buy-back of certain debts, by October 1992 the country had cleared most of its arrears and its debt service ratio would had been reduced to 33%.

Many Guyanese may not be aware as well that for several years prior to 1992, Guyana had not been paying its indebtedness either to the international financial institutions or to commercial creditors. Accordingly, it had not been possible for the Government, particularly during the years 1985 to 1990 to borrow any money or to contract commercial credit. Questions like where did the $2.1Bn go must be considered extremely ill informed since a substantial portion represented interest and penalties for non-payment over several years.

Since 1992, Guyana has made remarkable strides in obtaining debt write-off but the cost has been significant since it required a commitment on the part of the Government to meet its re-scheduled obligations. During the period since 1992, the country has borrowed approximately US$600Mn of external debt while its domestic debt has increased from $18.1Bn to $49.7Bn!

In the process, we have paid out interest of G$39.3Bn on our total external debt and G$40.0Bn on our internal debt for the period 1993-2001. Debt management will remain a critical issue for our policy-makers for years to come. Accordingly, we must follow basic principles that ensure that we utilise borrowed funds on projects and programmes which at a very minimum produce financial and/or economic returns to enable the country to service those debts.

Businesses in Distress

In his 1999 Budget Speech, Minister Kowlessar announced his Government’s intention to assist businesses in distress. Despite systemic business failures affecting rice, lumber, manufacturing, gold and even the commercial sector, the Government has shown a marked reluctance to intervene, even when problems could spill over and threaten the financial system – the very foundation of an economy.

Even as the Minister was preparing to go to Parliament to present his 2002 Budget, he would have noticed that another three leading businesses had been taken to Court because of their inability to meet their obligations to their creditors. About 1,300 borrowers in the rice industry owe approximately $15Bn to the commercial banks of which approximately 1,200 account for about 10% of the indebtedness. Despite the integrated nature of the industry, the Government only assisted the small operators, leaving the large players to make their own case with their bankers. The Minister needs to revisit his stated commitment to distressed businesses and recognize that given the systemic difficulties which several industries are experiencing, only Government intervention and the co-operation of the bankers can stave off further business failures and costly shocks to the economy.

The Investment Code

The Government on numerous occasions had committed itself to a legally enforceable Investment Code and the Minister proudly announced in his Budget Speech that his Government had tabled such a code in Parliament. The Code tabled however was not a legally enforceable document and excluded many of the strong provisions of the Draft Code which had been the subject of widespread consultations. Some of the provisions which were taken out included steps to lend transparency and certainty to the issue of tax concessions which is now purely a matter of political discretion; a more streamlined Go-Invest and clearer rules for investment. The Government appears to have lost a number of points as well as credibility as a result of its failure to honour a commitment made to the international community. In order to restore credibility with donors as well as investors, the Government needs to revisit the Code.

Corruption

The Minister spoke about the need for transparency and efficiency of the economy. In this connection, Parliament has already passed laws to strengthen the Office of the Auditor General giving it not only greater resources, but also legislating for its stronger independence.  Despite taking some steps to deal with corruption, the Government is still perceived to be soft on the issue. Corruption however, is not limited to the Public Sector and while many consider that corruption persists in matters of tender procedures, procurement and tax revenue transactions, some action needs to be taken to deal with corruption in and by the private sector. In this connection, some new forms of audit arrangements, legislation to encourage whistle-blowing and stronger penalties to deal with wrong-doers need to be considered.

Budget Process

Over the past several years, Parliament has been called upon to approve substantial sums of money which had already been expended. While this may be partly due to emergency or failings in the budgeting system, the extent has been so pervasive that it seems to cast doubt on the entire Parliamentary approval system. New forms of constitutional arrangements may be necessary so that a built-in Government majority cannot automatically approve sums which did not fall within the rules. The graph below shows the extent of sums for which Parliament gave subsequent approval:

Total Supplementary Funds Approved (TSFA)

The Role of Parliament

Guyana operates a Parliamentary democracy, but the records show that Parliament has been found wanting. During the entire nine months following the March 2001 elections, Parliament met on a total of 19 occasions with half of those dealing with the 2001 Budget. Guyanese invested greatly in constitutional reform and looked to their Parliament to chart a course for national development. Every Guyanese must feel that he/she has been betrayed by the Parliament. It is time that this situation be rectified since there is no acceptable alternative to Parliament. Our Parliamentarians must get to work.