Guyana can use COVID-19 effects to restructure macro economy – local Economist

Jun 16, 2020 News

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Opportunities exist for macroeconomic restricting in the wake of the impact of the novel coronavirus a local economist is arguing,

A recent United Nations (UN) Special Report on the economic impacts of COVID-19 on Latin America and the Caribbean has pointed out that the region can face an expected fall of 1.8% in its Gross Domestic Product (GDP) in 2020 due to the pandemic.

The region had a projection of a maximum of 1.3% growth in 2020. However, this changed due to the current crisis. The report pointed that the final economic impact will however; depend on the actions taken at the national, regional and global levels. Each country’s level of impact depends on its economic structure.

Economist Joel Bhagwandin is of the belief that Guyana can use this crisis to its advantage to restructure its economy and create fiscal stability.

The report highlighted that the region has been affected through five external transmission channels. Beginning with the decline in economic activity of the region’s main trading partners and the effects of that; the report pointed out that the region is heavily dependent on exports and a Global recession will reduce both the volume and value of these. But, this again is dependent on the sectoral structure of each individual country.

The second factor listed in the drop in commodity prices. The Report noted that “the deflation in global demand will play a huge role in the decrease in commodity prices. The sharp decline in commodity prices and in the terms of trade will have a heavy negative impact on the income levels on economies that depend on those exports. These impacts however, will vary based on the country affected.”

Further, the geopolitical crisis in the oil market led to a 24% reduction in prices in less than a week early March. The interruption of global value chains is the third factor that is considered in the report. The disruption of supply chains starting with Chinese suppliers followed by producers in Europe and the United States, would mainly affect Mexico and Brazil, whose manufacturing sector are the largest in the region.

The report further stated that “lower demand for tourism services will also create a huge blow on
Caribbean Small Island Developing States (SIDS).”

Greater risk aversion and worsening global financial conditions is the final factor listed as responsible for the projected decline in Latin America and the Caribbean. “This leads to higher demand for safe assets (for example, rates of return for on United States Securities have reached historically low levels), lower demand for the region’s financial assets and significant depreciation of its countries’ currencies, as is currently the case,” the report said.

Taking these factors into consideration Bhagwandin told Kaieteur News that “the COVID-19 pandemic necessitated closure of the borders and a halt, more or less to global trade except for essential items such as medical and food supplies. This, together with low oil prices, effectively would have allowed for savings in fuel imports which is usually in excess of US$500 million. More so, a decline in imports on other consumer goods and with the upsurge in gold price is helping to stabilize the economy, inter alia, maintaining a stable exchange rate.”

He added that “The policymakers ought to recognize, henceforth, the opportunities present to rebuild the economy starting with food security.”

Bhagwandin went on to say that despite not knowing when the current crisis will come to an end, “the growing demand for food in the region presents opportunity to scale up the country’s productive capacity and channel the appropriate investments in this sector. “

Additionally, he pointed out that “on the fiscal side, the opportunity for government to negotiate debt forgiveness and restructuring to create the much-needed fiscal space to facilitate the rebuilding of the economy – ought to be of paramount recognition and importance.”

The economist has over the past few months contended that Guyana could be on the verge of bankruptcy should government borrowing from the central bank and spending on consumption goods continue at the rate it was.

“This coupled,” he argued, “with a significant widening of the balance of payment deficit driven largely by imports of capital goods for the oil and gas related activities and a dwindling international reserve from the equivalent of 4 – 5 months’ worth of import cover to less than two months’ worth of import cover. These trends would have certainly induced a sharp depreciation in the exchange rate, depletion of the reserve, and a mountain of domestic debt that ought to be repaid from tax revenues, and, the inability to service external debt if the international reserve is depleted to record low level.”

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