DOES GUYANA REALLY HAVE A BALANCE-OF-PAYMENTS PROBLEM?

Apr 14, 2017 Letters

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Dear Editor,
What reason is there for Guyanese people to be concerned about recent indications of a slide in the Guyanese dollar? Some nervousness about this is understandable, especially on the part of those who can remember the devastating effects of the devaluations of the 1980s and 1990s, which resulted in the Guyana Dollar plunging from an exchange of two dollars and fifty-something cents to one US Dollar to over two hundred dollars to one US Dollar. Then, those on fixed incomes, notably public service workers, took the brunt of the hit as they saw their real incomes slashed drastically virtually overnight.
The present situation is clearly nowhere near that crisis scenario, but this is the kind of situation that needs prompt attention lest a real crisis develops. To grasp the situation fully, it is necessary to look at all the major components of the balance of payments which represent the country’s financial relations with the outside world.
We have to look not only at the trade balance, i.e., the comparison of our exports and imports, but also at the capital account which tells us critically how the trade deficit (if there is a deficit) is being financed. If there is sufficient, sustainable financing for the deficit, we should not have much to worry about.
The main trigger for recent concern was apparently a tightening up in the foreign exchange market, with some people reporting increased difficulty in obtaining foreign currency for their business transactions and the prices creeping up. It has to be understood that a rise in the deficit and fall in reserves do not necessarily indicate a crisis. These things tend to fluctuate all the time.
We have to look at the underlying causes of these changes to see if they are signs of a just passing shower or a gathering storm. In this connection, a critical factor is expectations and confidence. If people feel a growing sense of uncertainty about the exchange rate, this can have a powerful adverse effect, aggravating the problem as people (quite understandably) start to hoard and demand foreign currency in order to protect themselves.
To be sure, trade deficits are not unusual and in fact even large ‘successful’ countries have them. In the Caribbean, all the countries with the exception of Trinidad and Tobago (for obvious reasons: oil, oil and oil), typically run trade deficits. And trade deficits are not new to Guyana either. In fact, it has always surprised me how high our current account deficits tend to be – typically over 10 percent of GDP. This means that we have a perennial dependence on foreign capital inflows, despite our reasonable range of export products.
So what exactly is the cause of the present tightening of the Guyana foreign-exchange market?Unfortunately, recent data are not available to me since the data published on the Bank of Guyana website only go up to September 2015. However, it is possible to draw some conclusions from an understanding of how our economy works.
As far as the current account is concerned, there is not likely to be a major problem of growing imports. In the present climate of an apparent slowdown in the economy, imports would tend to contract. If the trade deficit has expanded it’s because of weakened performance on the export side (reduced gold prices, lower earnings from traditional exports like rice, sugar, bauxite etc.). Add to this a reduction in remittance flows into the country.
With both imports and exports declining, I doubt that the current account deficit is the main source of exchange market tightening. We have to pay attention to what is happening on the capital account. Are the inflows necessary to finance the current account deficit occurring in adequate amounts?
This is where confidence in the direction and performance of the economy plays an important part. From 2014 to 2015 (January to September only), net private capital inflows fell by 16 percent and that slowdown may have persisted. Over that period, government capital inflows also contracted and there was an increase in debt principal repayments.All of these are contributing factors to the tightening foreign exchange market.
So what is to be done to stabilize the market? Evidently, the long-term health of the balance of payments depends on a strengthening of growth performance in the major export sectors. As an immediate response, the Authorities have evidently decided to dip into its stock of international reserves to support the currency, but this is clearly only a short-run measure.
There have to be measures to boost growth and export performance. Additionally, attention has to be paid to fostering a business climate that boosts investor confidence and so encourages foreign investment in the country. As an immediate response, the most important instrument at the disposal of the government is to curb the fiscal deficit in order to contain domestic demand, which can aggravate the trade deficit by encouraging import spending. However, this is certainly not an attractive option at a time when economic performance is already sluggish and needs stimulation.
The Authorities have to do everything in their power to avoid a tipping point being reached because (as this country has experienced in the not-so-distant past) once this ball starts to roll downhill, it is very difficult to stop it. We can enter a downward spiral of falling reserves leading to greater uncertainty, triggering capital outflows, leading to further reserves decline, and on and on. Eventually, attempts to maintain the exchange rate at its current level become unsustainable.
What is the role of the private sector in all of this? The private sector is centrally involved in what happens to the exchange rate. Fundamentally, it is the autonomous actions of private individuals and firms that determine the outcome by their investment and other spending decisions, and portfolio decisions. To this extent, confidence in the overall economic climate and expectations about the balance of payments are critical.
In this connection, it is pointless blaming the private sector for actions that may aggravate the situation. After all, the culprits who are being blamed for hoarding foreign currency now were the same productive citizens when things were going well and their actions are equally rational then and now. The question is to determine what has changed in the economic climate and what to do about it.
But the private sector can and should, for their part, be proactive in taking steps to secure economic stability. There are significant examples from Caribbean countries for the Guyana private sector to take their cue from such as the so-called ‘Butch Stewart Initiative’ in Jamaica and a similar public intervention on a broader scale in Barbados, where private citizens took it upon themselves to take public action to support and stabilize their currencies.
Desmond Thomas, PhD

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