In last week’s column, the author would have examined the 4.1 per cent GDP growth rate achieved for 2018, and established that this was not reflective of any real substantive growth of the economy. Rather, it was more or less reflective of growth in terms of massive increases in Government expenditure, and not real expansive growth of the economy.
In continuing along this same line today, another summary of previous articles is presented. This one is focused on bringing together a comprehensive review of the performance of the economy for the previous year.
One would have noted that several public comments from key Government officials have been pointing in a direction to suggest that the December 21, 2018 NCM did not stimulate any major cause for concern in terms of a slowdown in business activities, or a diminishing economy. This is in fact a true and accurate notion, because the economy, as will be proven hereunder, has been underperforming or dwindling since before the NCM. Perhaps this was even the underlying genesis of the NCM.
In a previous article, an analysis of macroeconomic data was conducted for a ten-year period, wherein it was found that the fiscal deficit position over that period stood at $15 billion in 2008, and a record high of $35 billion in 2014. In 2015, however, this position dropped to a record low of $9.3 billion, after which it went back up to the $30 billion region in 2016-2017.
On the international reserve front held with the Bank of Guyana, total international reserves stood at US$298.8 million in 2008, and there was a balance of payment position of a surplus of US$5.6 million for the same year. Notably, international reserves reached a record high of US$825 million in 2012, and a balance of payment of US$33 million surplus. Thereafter, the international reserves’ balance started to dwindle in 2013 to US$751 million, balance of payment recording a deficit of US$119.5 million. In 2014, it went down by another US$100 million to US$652 million, while the balance of payment position recorded a deficit position of US$116 million.
Between 2015 and 2017, the international reserves’ position continued to deteriorate to a record low of US$584 million from its high of US$825 million in 2012. It was also shown that the Central Government’s balances held with the Central Bank for the period 2008 to 2014 were always recorded at a surplus, from $40.9 billion surplus balances in 2008 to $21.4 billion in 2014. This means that the current Government would have inherited an economy that was in a sound macroeconomic position, after which, from 2015 to 2017, it racked up a deficit balance in those fiscal accounts to a position of $60 billion to date.
Over the years, the Central Bank has always maintained a net sales position of foreign currency with the commercial banks. Notably, however, in 2017, this trend had been reversed; that is, from a net sales position to commercial banks to a net purchase position from the commercial banks. In 2017, the Bank of Guyana bought US$37.6 million, and in 2018 it bought a whopping US$178.2 million from the commercial banks, thus giving rise to a total purchase of US$215.8 million from the private FX market in just two years – something that had never happened over the last ten years or so. Now, when the central bank of a country has to buy FX from the commercial banks to this extent, this in itself is very worrying, and it means that there is a real shortage owing to several factors, which will be discussed.
As was highlighted last week, since the closure of a number of sugar estates, Guyana has lost approximately 70 per cent of incoming foreign exchange from sugar alone; while, in 2018, gold, which is currently the biggest foreign exchange earner, had underperformed by US$20 million compared to the corresponding periods of 2017 and 2016.
Turning now to the net foreign assets’ position of the banking system for the year 2018, international foreign reserves reached a record low of US$452.6 million in September 2018, which is US$47.4 million below its target of US$500 million. Figures for the commercial banks also showed that, at in January 2018, commercial banks’ net foreign assets stood at US$307.5 million, which was depleted to US$281.3 million by the end of 2018, or by US$26.2 million.
With the aforementioned factors leading to this outcome, it is no longer just a matter of an artificial foreign currency shortage being created, as was contended in previous articles. There is now a real situation of rapidly depleting foreign reserves, coupled with an increasing number of foreign companies in Guyana in the oil & gas- related sectors. It in effect means that, with this growing number of foreign companies operating here, this would inevitably add pressure, or compound the issue wherein there is and will be a growing demand for foreign exchange to repatriate profits out of Guyana to entities that are parent companies of those operating in Guyana.
Taken together: export earnings continue to decline; international reserves are depleting; the traditional economic sectors are undeforming; there is widening fiscal deficit owing to massive increases in Government spending; sovereign debt is climbing, and the rate of unemployment is rising. These are indicative of reckless spending and egregiously poor and imprudent economic governance of the economy; and should these trends continue, these are indicators for an economic crisis, despite the prospects of oil revenues in the medium-term.