Monitoring Guyana’s monetary supply

Jul 24, 2016 News

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By Kiana Wilburg

Keeping a close watch on the changes in money supply in a country is of paramount importance, simply because it has a direct impact on inflation levels, the exchange rate, and the business cycle. In a nutshell, drastic changes can mean a shift from a nation’s economic growth to contraction.
There are several ways by which economists monitor money supply. It can include using the monetary base, called M1 and M2. The monetary base is the sum of currency in circulation and reserve balances.
M1 is the sum of currency held by the public and transaction deposits at depository institutions which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions.
M2 is defined as M1 plus savings deposits, small-denomination time deposits; those issued in amounts of less than $100,000, and retail money market mutual fund shares.
According to the Ministry of Finance, money and quasi-money (M2) increased slightly in January. M2 rose by 2.1 percent over the 12 months ending in January, compared with an average of 4.7 percent in 2014.
The entity said that slower money growth is associated with lower inflationary pressures, assuming growth in demand for money remains constant. It was noted that the currency in circulation increased by 5.3 percent over the 12 months ending in January, while demand deposits, cashier’s cheques and bank acceptances grew at a meagre 0.6 percent.
Time and savings deposits, which make up a little over 60 percent of money and quasi-money, grew about 1.5 percent over the same period.
Additionally, interest rate movements were mixed in January. In fact, interest rates on Treasury Bills were unchanged, except for the rate on 182-day Treasuries, which fell eight basis points to 1.73 percent. The commercial bank weighted average lending rate raised 46 basis points to 11.02 percent in January. The small savings rate for commercial banks was unchanged at 1.26 percent.
With regard to Private Sector Credit, it was noted by the Ministry of Finance that domestic loans fell to $134.5 billion in January, down from $137.6 billion in December, a 2.3 percent decrease. Compared to January 2015, credit grew 2.5 percent. Loans to private businesses in the services sector fell by 4.9 percent in January. This reflects a seasonal pattern of increased lending to the sector in December, and a return to lower levels of lending in January.
A similar temporary bump occurred in December 2014. Generally, lending to the services sector has been robust, increasing 5.3 percent since January 2015. While loans to private business in agriculture and mining increased modestly in January, lending to these sectors has been tepid over the past year.
Within agriculture, lending to the sugar industry has fallen 20.3 percent since January 2014. Lending in the manufacturing sector fell compared to December, and to the year before. The 12-month decline is largely due to a 19.4 percent decrease in lending to private businesses engaged in rice milling. Lending to households fell by 1.6 percent in January, but remained 12.1 percent above the level of lending in January 2015. Lending to the general government increased 9.0 percent to $48.3 billion in January, representing a more-than 2000 percent increase since last year.
It was noted too that the Bank of Guyana has maintained an exchange rate of 206.50 Guyana dollars to one U.S. dollar since March 2014. The rate was unchanged in January.
With regard to foreign reserves held by the Bank of Guyana, this rose from US$24.6 million in January to US$624.9 million, following a US$9.86 million increase in December. Reserve levels were mostly stable in 2015.
The Ministry of Finance estimates that the Bank of Guyana’s foreign reserves are currently equal to about four months of imports, above the three-month minimum generally considered to be a benchmark for reserve adequacy.
The Bank of Guyana publishes official estimates of reserves in terms of import cover on a quarterly basis. An alternative measure of reserve adequacy is the ratio of reserves to M2. In January, official foreign reserves were equal to 39 percent of M2, well above the benchmark minimum of 20 percent. Guyana’s reserves are well above this benchmark as well as the import benchmark.
With regard to inflation, statisticians noted that prices decreased marginally by 0.18 percent in January, 2016 compared to prices in December 2015. This marginal decrease in price was primarily driven by decrease in food prices while the prices of most other items remained relatively stable compared to their levels in December 2015.
Meanwhile, Central Government current revenues totaled $8.7 billion in January 2016, which reflects a marginal decline of 0.7 percent compared to revenue collections in January 2015. This was mainly driven by a decline in non-tax revenues.
Tax revenues increased marginally by 0.3 percent, reaching $8.54 billion, primarily driven by increases in internal revenue taxes. That was as a result of increases in Pay as You Earn (PAYE) and self employed taxes, by $223.8 million and $27.9 million respectively, comparing January 2016 to January 2015.
Net property tax also increased by $13.6 million. Both withholding and corporation tax declined, comparing January 2016 to January 2015. The decline in non-tax revenues was due to reduced revenues from a few government ministries.
Additionally, total non-interest expenditure reached $7.2 billion in January 2016, an increase of 11.7 percent over the level achieved during the same period in 2015. The lowest levels of expenditure are usually recorded in January, as historically the Budget is usually passed in March.
The rise in non-interest expenditure is mainly attributed to a rise in transfer payments of 77.5 percent, comparing January 2016 to January 2015. The increase in transfer payments is primarily attributed to the addition of the Constitutional Agencies to this category as well as increases in old age pension, statutory pensions and gratuity and payments to local and international organizations. Employment cost also increased by six percent due to the increase in wages and salaries given to public servants in 2015.

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