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

Dec 21, 2022 News

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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.”

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