What is the impact of the introduction of the $2k note?

Feb 01, 2022 Letters

---

Dear Editor,

Kaieteur News – I have noted several comments by persons on certain social media platform (s) suggesting that the introduction of the new $2,000 note will lead to inflation. These comments and social media debates led me to believe that the average person is concerned whether the introduction of the new $2,000 note is indeed a signal of inflation. In this regard, I am inclined to pen this letter to contribute to this topical discussion. The notion that the introduction of a particular denomination of the currency will lead to inflation is a misperception. Also, there is simply no credible evidence to support this hypothesis. The introduction of a new currency note whether a high denomination or low denomination has nothing to do with driving inflation.

Let’s understand what is inflation

Inflation is the decline of purchasing power of a currency over a period of time. The rise in general levels of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Up to the period prior to the COVID-19 pandemic, the inflation rate in Guyana was stable at levels below and equal to 2%, which is often a desired inflation rate to ensure price stability. With the pro-longed effects of the pandemic and the unpredictability of when the pandemic would end, one of the major impacts of the pandemic globally was and still is supply chain disruptions, and rising shipping costs globally. These are the main culprits for rising inflation rate not only in Guyana but across the globe.

There are generally three types of inflation:

1. Demand pull inflation: this occurs when total demand for goods in an economy outweighs the supply of goods, so you have a shortage (like in the case when we had the flood and the price for basic things like plantain, shallot (scallion) and other Agro produce went up).

2. Cost push inflation: this occurs when overall prices increase due to increase in the cost for wage and raw materials.

3. Built in inflation: this form of inflation occurs when workers expect their salaries or wages to increase when prices of goods and services increase to help maintain their living costs.

The inflation that we are experiencing in Guyana and will continue to experience in the medium term will be driven by a combination of all three types of inflation as described above; where for example, the larger driving factor of Guyana’s inflation is described by the economists as imported inflation. The reason for this is because of rising shipping costs and increases in the cost of production for the goods we consume and raw materials to produce some of the final goods we consume, as a result of the global supply chain disruption. These are goods that we import wherein about 80%-90% of the goods, which we consume are imported and hence, once there is supply chain disruptions globally, prices will increase and this is beyond our local policymakers’ ability to control.

For these reasons, the best option available to policymakers is to look at policies to cushion the effects. For example, the reduction on the tariff of fuel imports among other measures in the budget to cushion the impact of (imported) inflation.
We are also experiencing in Guyana, wage inflation where companies, particularly international companies are competing for talented and skillful professionals and workers in general and salaries are increasing to triple and quadruple levels. This in turn will lead to a shortage of skills in the labour force given that while we have a large labour force, only 5% of the labour force is qualified at a tertiary level education. This is a signal that we all need to ready ourselves, up-skill and learn new skills, to take advantage of the sea of opportunities.

With the largest budget in history, there will be lots of cash in circulation and therefore instead of having 100 / 1000 notes in your pocket to represent $100K you can reduce that to either 20 with the $5K note or 50 with the $2k note (this is on an individual level). Think of the many businesses that will be doing millions of dollars in transactions at the bank, both deposits and withdrawals and the bulk of cash their staff have to carry. The note effectively reduces the bulk of cash and adds somewhat a layer of security the fact that you can reduce the physical bulk of cash transactionally.

Against these backgrounds, the introduction of a new note has nothing to do with driving inflation. What it does, it serves a particular purpose given that our economy is largely a cash-based economy, to reduce the volume of cash in circulation. Moreover, inflation is not managed in any way or form by the introduction of any currency note denomination, per se, whether high or small. It is more used to manage the volume of cash in circulation within a cash-based economy context.

Inflation on the other hand has to be managed by a combination of monetary and fiscal policies. To manage inflation in Guyana’s case, since most of the goods we consume are imported, we have to manage the exchange rate and not the denomination of currency note. Exchange rate is the signal of inflation. The average market rate for the US/GY exchange rate if one consults with the Bank of Guyana report, would find that it is about $214. For clarity, this is the average market rate by the commercial banks who are the dominate players in the foreign exchange (FX) market and not the unlicensed money changers on the streets.

Generally, the goal is to keep inflation in the single digit range, the desired rate is 2%. When inflation spirals out of control to double digit, then that is hyperinflation. So far, our inflation rate is in the single digit range. I do not expect this to reach double-digit levels, given the policies being implemented coupled with the development agenda of the country. Other ways to manage inflation in the medium term, are the projects such as the gas to shore that will enable cheaper energy that will make our manufacturing sector more competitive. In so doing, we can produce more value-added goods at a lower cost of production for consumption locally instead of importing. Increased investments in agriculture as well will help us to have more control and manage inflation better domestically because we will be producing most of the goods we consume instead of importing them and in so doing, import inflation from other parts of the world that is beyond our control. In other words, because as a country we depend heavily on imports for about 90% of the goods we consume locally, we are bound to be affected by other factors leading to price increases in other parts of the world. Even the goods that are produced locally are also affected to some extent, inter alia, imported inflation because most of the raw materials to produce the local goods, are imported from other parts of the world. Cognizant of the foregoing factors, the government of the day is pursuing a set of policies in the medium term to manage inflation coupled with the mega development projects for cheaper energy that will ultimately give us more control to manage inflation better in the foreseeable future.

Conclusion
It is true that we are in inflationary times, but the introduction of the $2k note is not the signal of that, the pandemic is among other factors such as wage inflation that is a natural outcome in an oil economy, etc. Finally, there is no credible empirical evidence that suggests there is a relationship between the introduction of a currency note, whether higher or lower denomination, leading to inflationary pressures.

Yours faithfully,
Joel Bhagwandin
Financial Analyst

---

---