As we approach first oil…

Jul 24, 2018 News

The first quarter report on the economy by the Bank of Guyana, paints a worrying picture that Guyana may enter 2020 in difficult economic circumstances. Thousands of Guyanese are looking forward to becoming rich by the end of 2020- compliments of first oil. But given the state of the country’s economy, the revenues from first oil may have to go to rebalancing the country’s financing which are not as healthy as most people feel.
Guyanese therefore have to be careful as to how they manage their finances. They have to be careful about wasteful spending because the indications are that the foreign exchange market is contracting due to the deficit on the country’s merchandise trading account. If this situation continues, it can lead to run on foreign exchange.
Already, yet another devaluation has crept up on the nation. The US dollar has been buying and selling at G$210 and $G213 respectively. This will increase further the cost of imported items and drive up further the cost of living. The official inflation rate does not however reflect the increases in prices in the market, and more so at the petrol pump.
The problems within the foreign exchange market are not due to activities of the underground economy. There is no evidence available to massive underground transactions. In fact, the difficulties in the foreign exchange market can be traced to the deficit between imports and exports.
Exports are falling far short of imports resulting in a higher deficit than usual. For the first quarter of 2018, Guyana earned almost US$85M in export earnings. This is just over a 5% decline.
It is more than possible therefore, if these trends continue, for there to be a further contraction of exports, which could lead to a worsening of the merchandise trading balance and additional but smaller devaluations.
The only corrective surgery to this problem is to increase exports and reducing imports. But to what extent can this happen?
The good news is that the economy grew in the first quarter of 2018. Rice, forestry and poultry also enjoyed growth but, as anticipated, sugar contracted. Rice is major foreign exchange earner. Output increased by more than 67% due to increased production, driven in part by higher yields, a positive sign for the future.
The bad news is that even though rice production increased for the first quarter, there are signals that the second crop may not be as promising hoped. Already some exporters are preparing to import rice in order to meet their export commitments.
The decline in sugar means that sugar workers have reacted to the downsizing of the industry by abandoning the industry, making it now even more impossible for the sugar industry to even produce 125,000 tons per annum.
More bad news is that gold production, the country’s largest foreign exchange earner contracted. It means that gold exports are likely to be less, unless there is a reversal for the remainder of this year, a strong possibility given the presence of large-scale producers in the sector.
If gold production continues to decline, even marginally, it can place further pressures on the Guyana dollar, triggering mini-devaluations.
While all of this is happening, private sector credit to the construction and engineering sectors is down, a sign of a sluggish economy. The construction sector has a feed through to the rest of the economy and helps to create more jobs. If this decline continues, there is likely to be a negative impact on disposable income in the economy.
Central government spending presented some difficulties. The Bank of Guyana reported that government spending on capital projects declined by 27.8% for the first quarter due mainly to lower disbursements to construction by 37.4 percent, power generation by 95.2 percent, social welfare by 12.2 percent, education by 6.9 percent and health by 19.3 percent.
The Bank of Guyana is supposed to play a stabilizing role in the availability of foreign exchange. Most interesting is that, according to its first quarter report for 2018, the bank actually bought more foreign currency than it put back into the market.
The prognosis does not look good for 2018. The economy will grow but unless exports can be increased, this growth will not translate to higher spending power to workers and with taxes continuing to increase the Guyanese consumer can anticipate greater difficulties over the next five months.

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