Is Guyana facing an economic meltdown?

Nov 11, 2018 Features / Columnists, Peeping Tom

Guyana’s politicians are notorious for scaremongering. And when it comes to the economy, there is no shortage of persons who will drive fear in the hearts of Guyanese about a possible economic implosion.

The decline in Guyana’s international reserves is being used as a fuel to ignite fears about possible economic instability, especially in our foreign exchange markets.

The state of Guyana’s international reserves was first brought to the nation’s attention by the Leader of the Opposition, Mr. Bharrat Jagdeo, in a press conference last week. He even said that given the continued decline in the reserves, Guyana may have to use the revenues from first oil to rebuild its declining reserves.

A financial analyst has also expressed concerns about the decline in Guyana’s net international reserves. But while both the Leader of the Opposition and the analysts may genuinely be concerned about Guyana’s international reserves, they may be overstating the problem.

Guyana’s net international reserves have indeed declined by US$200M since the end of 2014. The Bank of Guyana is reporting that as at September 30, 2018, Guyana’s net international reserves stood at US$452M as compared with US$652M in 2014.

The decline has resurrected fears about whether Guyanese will be asked to ‘tighten their belts’, be subject to import restrictions, witness a further decline in the value of its dollar and experience greater capital flight.

Despite the promise of oil riches by 2020, many Guyanese are not taking chances. There has been massive capital flight, because people are concerned about vindictive economic policies and heavy taxation. People have therefore been shipping their monies outside of Guyana because when they hear about the solution to employment being about making plantain chips, old fears of a socialist economy are resurrected.

The Minister of Finance will soon have a chance to address fears of an impending economic meltdown or the imposition of involuntary import restrictions. But this should not be beyond him, since the international reserves numbers, which he will be called to explain are not as frightening as they are being made out to be.

Countries import and export. They earn foreign currency through exports and they use that foreign currency to pay for imports of goods and services. This means that countries must have a system to cater for their international payment obligations. Holding international reserves allows countries to meet their international payment obligations. It also acts as a cushion in times of rapidly rising and falling import or export prices and other shocks.

During the oil shocks of the 1970’s, long lines for food and other basic items could have been seen across Guyana, because the country began to use larger amounts of its foreign currency earnings to pay for imports, which then had to be cut, since the reserves were unsustainable.

International institutions such as the International Monetary Fund, usually recommend that a country holds at least three months of imports as a reserve. But some countries hold higher reserves and others slightly lower.

Guyana’s net international reserves may be falling, but it is quite sufficient at its present level to satisfy three months of imports. The fear, therefore, should not be about whether Guyana’s international payment systems can crash, but whether the decline can be arrested.

If the decline continues, Guyana will reach a stage whereby it will be forced to return to some of those painful policy prescriptions – import restrictions and foreign currency rationing, which destroyed the economy from mid-1970’s right through to the end of the 1980’s.

With oil revenues on the horizon, the Minister of Finance can afford to gamble with declining net international reserves. He can always use oil revenues to rebuild the international reserves. Which is what the Leader of the Opposition suggests can happen.

The economy is strong. What is weak is its management.

Guyana is gambling with its future by maintaining a declining net international reserves level. But it is a gamble which may not be costly over the short-term. But if it continues, then not even oil will save us.

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