Guyana’s ‘historic’ high inflation rate contributing to higher levels of poverty, inequality

Dec 21, 2022 News

Kaieteur News – A new Inter-American Development Bank (IDB) report has flagged Guyana’s ballooning inflation rate, which it said has been above historical levels since June last year, eroding consumer purchasing power and contributing to higher poverty levels and inequality.

Titled ‘Headwinds Facing Post-Pandemic Recovery in the Caribbean’, the IDB quarterly report said that Caribbean countries should prepare for prolonged effects of external economic shocks in 2023, including for high food and fuel prices and rising international interest rates. The bank said higher interest rates could lead to economic slowdowns, or even recessions, in important source markets for exported services and goods from the Caribbean.

Though the report spoke glowingly of Guyana’s economic prospects, it noted that there have been important local effects of these global headwinds that have not been as favourable as the improvements in the terms of trade, mainly through their impact on local price levels. “The inflation rate has been above historical levels since mid – June 2021. The annual inflation rate was 2.1 percent in December 2019, remained subdued through 202 0 and early 2021, and then reached 6.9 percent in June 2021,” the Bank stated. According to the IDB, the inflation rate averaged 6.6 percent in the second half of 2021 and 6.2 percent through September 2022. “More notably, food prices have seen even higher rates of inflation, averaging 11.2 percent this year through September. The implications of this challenging global context driven by high energy prices and disrupted supply chains is that consumer purchasing power has eroded in the face of increasing price levels, contributing to higher poverty levels and inequality.”

The report noted that a recent IDB study, estimates that a 20 percent increase in food prices in 23 countries in Latin America and the Caribbean would lead to an increase of 1.6 percent in moderate poverty and 1.8 percent in extreme poverty, increasing the total number of people living in moderate and extreme poverty by 9.8 million, and 10.8 million, respectively.

High commodity prices

According to the report, the current global context of high commodity prices affects countries differently, depending on whether they are mainly commodity importers or exporters, and directly affecting their terms of trade. Countries that mainly export products whose prices increase benefit from improved terms of trade, which means imports become relatively cheaper, supporting a country’s purchasing power. However, for Guyana, this development is two-fold, since the country is not only benefitting from higher energy prices but also from higher levels of oil production, the report stated. It added that specific commodities such as oil and aluminum are projected to have relatively high prices through 2024. The average price of the main oil benchmarks (Brent, WTI, and Dubai) reached a high of US$98 per barrel in 2022, up from US $61 before the COVID – 19 pandemic. The price is expected to remain over US$80 through 2024, before dropping to US$71 by 2027.

Similarly, aluminum prices were 50 percent higher in 2020 relative to pre – pandemic levels and are expected to remain around 40 per cent higher through 2027. While soybean prices are also expected to remain around 40 percent higher than the pre – pandemic level in the medium term, international rice prices have remained relatively stable.

Additionally, the report stated that gold prices are currently about 30 percent higher than in 2019. “These price trends, and, more importantly, Guyana’s higher levels of oil production, have significantly affected the profile of the country’s net trade in agricultural products and mineral fuels with the rest of the world,” the report said, adding: “Guyana rapidly moved from being a net importer of agricultural products and mineral fuels, representing eight percent of GDP in 2018 and 2019, to being a net exporter of the same commodities, with a trade surplus of 16 percent of GDP in 2020 and 31 percent in 20 21 with the rest of the world.“

According to the report prior to oil production, Guyana’s main suppliers driving the trade deficit in these products were the Caribbean Community (CARICOM) countries. “After the start of oil production, the main destinations of Guyana’s trade surplus were North America and other countries outside of North and South America. The share of net exports to these countries increased through 2021, reaching 17 percent of GDP for net exports to North America and 14 percent of GDP to other countries (Figure 3). As oil production continues ramping up, these trade surpluses are likely to continue growing.”