Sunday, November 6th, 2005

Introduction:

Last week we reviewed the performance of the world economy for the year to date and noted that the projections for next year are still very positive despite some obvious risks which require policy action by the political leadership of the world's major economies. The world economy has performed remarkably well over the past several years despite the trauma of 9/11, the constant threat of terror and the spike in oil prices. Driving the world economy have been the world's two largest countries China and India helped by the huge consumer demand in the world's largest economy the United States of America.

While the US debt is a major problem for that country and by extension the rest of the world, it has done remarkably well for which considerable credit must go to Dr. Alan Greenspan who has been the head of the Federal Reserve, the US Central Bank for the past eighteen years and who is rated as the greatest central banker ever, not only in America but in the world. That is a huge accolade.

Reveling in glory:

Greenspan's retirement comes at a critical time for the US. The war on Iraq appears to have reached stalemate while its cost keeps rising. The US housing boom has at best flattened while the reconstruction costs from the devastation form the most active and costliest hurricane season ever are putting further pressure on its budget. Inflation is a recurring prospect and the tax policies that favour the rich create constant fiscal pressure. The challenge facing Ben Bernanke who steps into Greenspan's shoes in January will be how to navigate the dangerous waters to ensure that the economy does not get grounded and take with it the rest of the world.

Languishing in the doldrums:

For us in Guyana the challenge is even greater. While the world has been averaging economic growth of 3-4%, we have been languishing and alternating between decline and moderate growth for several years which means that we are yet to hit a per capita GDP of US$1,000 which places us at the bottom of the economic league table in Caricom. We have maintained the same economic policies for more than fifteen years, policies that are shared by both major parties and that now seem so immanent in our psyche that the thought of any alternative is seen as heretical. The same IMF that was so derided when the Hoyte administration announced that it would submit itself to the IMF's strictures is now seen as the crowning glory of President Jagdeo who was recently elected to the largely ceremonial role as Chairman of the IMF/World Bank.

Below average:

While it is premature to anticipate what would be Jagdeo's legacy, his record as a leader and as a finance manager has been below average if average is taken to mean that of the rest of the world or that of his predecessor. Even as he successfully negotiates and receives substantial debt write-offs he borrows and spends inordinate sums of money on projects of dubious value and benefits while putting the economy at risk by taking us too close to what would be considered a manageable debt servicing capability. While his training and indeed his Party's ideology is for a balanced economy, he subscribes to an almost laissez-faire economic model. While heading a poor country he continues to spend beyond our means and our income. As the head of a country with a dangerous level of brain drain, he shuts out those who disagree with him. Rather than uniting, he demonstrates a macho, confrontational style in dealing with his real and perceived opponents.

Unique style:

While allowance has to be made for the unique style of any individual, it is not irrelevant as an important determinant of what one achieves. Style must also be context specific and the qualities that are required in a subordinate job in the Finance Ministry are not the same as those necessary to perform as Finance Minister and even more different from those as the leader.

Let us look at Mr Jagdeo's performance since he took control of the Ministry of Finance in 1996. In the preceding three years i.e. 1993 - 1995, the economy had grown by an average of 7.3%. In the next three years the economy grew by just over 4% and indeed for the first time since 1991 the economy actually declined by 1.3% in 1998. The average growth for the next three years i.e. 1999 - 2001 was 1.4% and for the years 2002-2004 it was 0.7%. Just perhaps incidentally, the growth rate in 1992 when the PPP assumed the reins of government was 7.7% and in the preceding year it was 6.1%.

Even though Mr. Saisnarine Kowlessar held the post of Finance Minister from 2001, no Guyanese would believe that President Jagdeo is not the de facto Minister and indeed the Poverty Reduction Strategy which under Mr. Jagdeo has replaced the National Development Strategy as the Government's major economic policy framework is administered out of the Office of the President rather than from the Ministry of Finance. President Jagdeo also retains responsibility for the international segment of the portfolio of the Ministry which also partly explains why he, instead of Mr. Kowlessar, holds the chairmanship of the IMF/World Bank.

Other objectives of the economic programme inherited from the PNC were the diversification of the economic base and effecting an improvement in public sector fiscal performance by improving the efficiency of the public enterprises and by 'more careful management of central government resources'. How does the President measure up? Clearly not too keen on bad news, his Government has failed to meet its obligations under the Fiscal Management and Accountability Act which requires it to publish a half-year performance report. But the information is that the performance this year will be the worst in 15 years due in part only to the impact of the January floods on rice and sugar. The economy for the first half of the year declined by 5.9% with rice production 23% below the same period last year and sugar 32%. Not only is the economy stuck in the rice/sugar mode but the capital investment programme is designed to consolidate and concentrate that dependency. We are about to spend over US$150 M. on the Skeldon Project even as we are challenged to deal with an inevitable and substantial sugar price cut.

Fiscal responsibility:

And how fiscally responsible and successful has President Jagdeo been? According to the National Estimates, there have been few occasions when we have not had an overall deficit on the current and capital accounts. In 2005, that deficit is projected at G$6B. And that is only because external loans which obviously have to be repaid in the future are shown as revenue which stretches the definition of revenue to breaking point! Let us look at how the loose definition can mislead.

The 2005 National Estimates gives the overall deficit of the Central Government Revenue and Expenditure as G$5,940M, but Table 3 which provides some details show that this is after Capital Revenue of $28,714M of which $20,000M is receipts from external loans. Table 9 shows that principal repayments on external loans total $2,881M. If these are excluded from revenue and expenditure respectively, as I believe they should be the overall deficit is $23,060M. This is more than double the overall deficit of 2003 ($11,090M) using comparable measures.

Compare this with the $2,019M and $3,932Mn in 1995 (actual) and 1996 (revised) respectively, just before Mr. Jagdeo was made Finance Minister and we have a picture of profligacy and irresponsibility that can only harm the sustainability of the economy. It is not a good prospect and one which might get worse in a second term presidency with no need to bother about personal and political consequences. The privatisation programme has certainly left us asset-poor and having sold the store, lock, stock and barrel we have nothing else to sell. To live beyond our means and run such deficits we must continue to borrow or beg for increasing sums from an international community that must be getting tired of the donor syndrome.

Doing nothing about revenue:

That Mr. Jagdeo sees no difficulty in this flawed policy is strengthened by his unwillingness to deal seriously with the tax issues and his continued penchant for tax holidays. Despite some efforts within the GRA, the merger of the Inland Revenue and Customs and Trade Administration has not been a success and its attention to the tax evaders is being diverted by a host of considerations the latest being its responsibility for dealing with fire crackers while it seems to turn a blind eye on fuel smuggling.

Same difference:

If we turn to international trade the situation is not dissimilar. In 1992, the overall deficit from international trading and capital transactions showed considerable improvement and in 1996 Mr. Jagdeo inherited a turnaround from US$68.9 million deficit to a surplus of US$19.9 million with a consequential improvement in the foreign exchange reserves at the Bank of Guyana. In 2003 we were back in deficit, a situation that continued and worsened in 2004 when the deficit on the current account amounted to US$128 million and the overall deficit was US$45 million.

There is little evidence either in the area of domestic or international finance that the President has had any great success other than in debt relief. It is regrettable that discussion on his achievement in what is his forte has been muted or distorted.

What is clear is that both his style of blaming others for his shortcomings and his major defect of being unable to see the forest rather than the trees is at least partly responsible for the performance of the country.

Next week we will continue looking at some other areas where President Jagdeo has been far from effective and offer some ideas on how he may recover lost ground.