The Grand Letdown

Mar 12, 2009 Editorial

There are some who have taken the government to task for pursuing loans from multilateral financial institutions such as the IDB and the World Bank, claiming that this practice evinces a “beggar’s” mentality. In our estimation, this criticism in itself evinces a misunderstanding of the realities of financing, international or otherwise.

All monies advanced, except for outright grants, come at a cost – interest. If the money were to be obtained from private sources, the interests would have to come at rates set by the market. For a country like ours that had defaulted on its debt during the previous regime and ruining our sovereign rating, financing, if available at all, would be at a premium. The financing from the multilaterals is loaned at concessionary rates because of our status as a developing country. Not that we would want to remain in that classification forever but while we have it we would be very unwise not to pursue the cheap funding that it makes available. Lee Kwan Yu expressed great regret when Singapore graduated from the classification and thus the concessionary financing.

Against that background, the announcements by the various multilaterals that the quantum of available financing available for developing countries in general, and Guyana in particular, would shrink deserve serious consideration as to its impact on our economy and its possibility for growth.
For instance, the IDB projection that our funding for the next five years will be slashed to approximately US$113 million from the $500 billion of the previous five years cannot be just shrugged off.

We have been heavily dependent on such funding for quite a few years now – especially in fixing our dilapidated infrastructure. The slash in funding is a direct consequence of the financial meltdown in the developed countries that has now morphed into a full-blown recession. There are no islands today. Global growth rates over the last couple of decades had been swollen by sterling performances by several developing economies so that the recent IMF projection of a global downturn to a miserly half percent growth at best means that our hopes of some three-plus per cent growth is going to be very problematical.

It means, for instance, that the attainment of our Millennium Development Goals (MDG) might be threatened, and that of less fortunate countries for sure. Prime Minister Gordon Brown of Britain, to his credit, has been striving mightily to place the issue of the shortfall in concessional funding to developing countries on the agenda of the G-20 meeting scheduled for next month in London. He has called for a “Grand Bargain” to deal with the constraints on developing economies and has called for at least $200 billion for the International Monetary Fund to bail out cash-strapped nations.
Unfortunately the idea has not received much traction from his cohorts even though he has been strongly supported by the leaders of the IMF/World Bank.

Not unreasonably, Brown has asserted, “Every part of the world must be part of the stimulus to the economy, giving support into the economy with investment, getting interest rates down as much as possible.” After all, in a global economy everyone has to buy as well as produce.

Because of the constraints on the effectiveness of monetary policy, fiscal policy must play a central role in supporting demand. And this is where developing economies, bereft of the deep pockets of developed ones, need help.In January, after a meeting with Brown, the IMF had urged G-20 to adopt “more decisive policy action to combat the corrosive global financial and economic crisis”. Unfortunately, there is growing scepticism over Mr Brown’s call especially from the US, which appears determined to focus solely on its own economy.

And with no indication that China would come up with the bulk of the funds, as some in No 10 had hoped, it would appear that we are in not for a “grand bargain” but a “grand letdown” in April. Let’s prepare to tighten our waists.

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The Grand Letdown

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