7% increase in salary: the economic rationale

Dear Editor,
Since 1991, Guyana had made significant strides in building a robust and vibrant economy; until 2014, when the APNU/AFC Government took office. Our macroeconomic achievements have been numerous and quite impressive.
From 1991 to 2014, we increased the minimum wage from Gy$2,546 to Gy$42,702, or by 1,577%. In fact, in just under two years, from January 1993 to January 1995, the PPP/C Government increased the minimum wage by around 100% (1996 Budget Speech, page 37). Mind you, Guyana was in a precarious economic situation, and drastic measures were needed to boost aggregate demand.
I’m not going to go into too many details, but I think several achievements are worth mentioning. Within the same period, we have managed to improve our net international reserve at the Bank of Guyana from a deficit of US$27.9M to a surplus of US$652M; reduce inflation from 70.3% to 1.2%; reduce external public debt from US$2B to US$1.2B, and slash external debt-to-GDP ratio from 677% to 34%.
There are several reasons why there was an urgent need to stimulate spending during the early 1990s. One is that our economy was relatively dormant. Two, private consumption had tanked. And three, many of our people were on the breadline. Hence, the decision to increase minimum wages many times over was aptly justified.
Fast forward to post-2014 up until 2020, the period the then APNU/AFC Government took office. Our economic landscape changed drastically for the worse. Specifically, within a span of just two years in office, the then Government introduced more than 200+ new tax measures on private businesses and consumers. Tax revenues and duties increased from Gy$136B in 2014 to Gy$226B by the end of 2019, or 66%. Of this amount, VAT increased from Gy$37.3B to Gy$52.5B or 43%.
Putting this into perspective, if we take the size of our GDP in 2014 (which was $875B in 2012 prices) and 2019 (which is $1,023B in 2012 prices) respectively, and compare each to the amount of total tax revenue collected during the respective years, we see that the effective tax rate as of 2014 was 15% while that of 2019 is 22%; an increase of 7 percentage points. This means that the people in 2019 had to pay, on average, 0.22 cents in taxes on every dollar earned, while in 2014, they were paying a mere 0.15 cents.
At the level of private consumption, the increase in effective tax rate had greatly affected spending patterns. Critically, and not surprisingly, the level of private consumption in 2019 compared to 2014 fell by more than Gy$77B. In fact, as a share of GDP, private consumption decreased from 82.7% in 2014 to 53% by the end of 2019 (Appendix G, 2021 Budget Estimate, Vol. 1).
This means our people’s spending rate fell by almost 0.20 cents on every dollar earned within a mere four years, which undoubtedly resulted from the burdensome taxes.
In 2020, when we took up office, there was a need to unshackle the economy quickly. One of the first fiscal measures was the removal of the 200+ tax measures. This was critical in boosting disposable income at the household level. A quick extrapolation of past revenue patterns would elucidate this policy measure’s impact at the household level.
The average growth rate of tax revenue from 2016 (the year the 200+ tax measures were introduced) to 2019 is around 14%. If you apply this 14% to the 2019 figure and then compare that amount to what was collected, it is evident that there is a shortfall of around Gy$31.4B in taxes. Hence, this is what we have added to our people’s pockets at a very conservative level. At the household level, that is roughly $180,000 per family.
In addition to this, we also brought back the “Because We Care” cash grant, we removed VAT on electricity and water for the elderly, provided COVID-19 cash grants, distributed flood relief cash grants etc.

Why the 7% increase is economically sound
Going forward, much caution is needed as we confront the burgeoning increase in economic activities. For instance, oil production is expected to increase by almost 200% to 320,000 kbd in our oil and gas sector, while construction activities are expected to ramp up. We also expect to see significant increases in production among our traditional sectors, including gold, rice, sugar, livestock, etc. Further stimulating the wave of activities would be the new local content legislation which is expected to be enacted by the end of this year.
As an emerging and soon to be major oil-producing country, there are specific economic challenges that we need to be aware of that are pretty common among other oil-producing nations. Critically, these include high inflation and labour resource movement effects.
Currently, Guyana is experiencing an economic boom, thanks to our burgeoning oil and gas sector. According to the World Bank, Guyana is one of the fastest-growing economies in the world. While this is excellent news, it also means that we are at risk of said challenges.
However, a critical point to note is that we may be exposed to an added degree of these risks, especially high inflation. This may be the case since there is an increase in freight and shipping costs and a global supply chain disruption. In fact, in the US, as of November this year, we have seen that inflation has climbed 6.2% year-over-year, the largest increase since November 1990. Because a large share of our imports comes from the US, higher prices for imported goods could find their way into our economy.
Further, we have also seen a sharp increase in foreign direct investments, with an estimated US$2B projected for 2021, while the Government has also dished out billions in stimulus packages (COVID-19 cash grant, flood relief grant, etc). Hence if we continue on this path without exercising macroprudential measures, we could see a significant increase in inflation.
Another impediment that we may have to be mindful of is what we call the resource movement effect. This is where labour from our traditional sectors, especially those of the Private Sector, towards the Government. We foresee this as a likely outcome, since workers may become more inclined to take up jobs in the public and oil and gas sectors relative to private. In fact, this is something we are currently experiencing. What is worrisome about this structural change is that businesses in the Private Sector would now have to increase wages to retain or attract workers, an outcome that could suppress profit margins or further increase prices, hence inflation.
Overall, higher inflation could eat its way into what economists call Real Effective Exchange Rate. If this happens, our local currency would appreciate relative to the currencies of our trading partners, hence causing export prices to increase. For instance, logging, rice, bauxite, small manufacturing etc would all increase. In the long run, our entire export sector could collapse due to lower demand. Hence, this is the core of the Dutch disease theory.
Now, on the 7% increase in Public Salary. This amount is economically viable due to the fear of an increase in inflation. If this occurs, not only would we undermine the purchasing power of our people, but our export sector as a whole could become uncompetitive. At the macro level, we could see an increase in unemployment and social illness. Hence, I think that increases in Public Servants’ wages and salaries should be done in a phased and sustainable manner. In the end, we need to create an economy that works for everyone, for every sector, and for Guyana as a whole; one that is capable of withstanding economic shocks and other externalities.

Mark Sammy