– Contextualising the 4.5 percent estimated mid-year growth for 2018
This article (which will be continued next week) seeks to contextualise the limitations of GDP as a measure of economic growth within a broader framework of economic growth versus economic development and the relationships on the outcomes of human development. The Mid-Year Economic Report was released and presented to the Parliament by the Finance Minister earlier last month. The report thus noted that Guyana recorded an estimated GDP growth rate of 4.5 percent for the period January to June 2018, which compared rather favourably with the 2.5 percent growth rate recorded for the first half of 2017.
The report noted that the mid-year growth rate for this year was driven by more broad-based growth, compared to that of the previous year; with improved performances in agriculture, fishing and forestry of 3.4 percent; services of 8.2 percent, and construction of 13.4 percent.
With regard to the external sector, the overall balance of payments recorded a deficit of US$139.8 million, compared with a deficit of US$46 million for the corresponding period in 2017. This represents a 204 percent widened deficit on the balance of payments accounts relative to that which was recorded one year ago; that is, June 2017.
In the monetary sector, the money supply expanded by 7.6 percent to $372.6 billion, which was highlighted as the highest rate of expansion of the money supply in the last five years. Net domestic credit of the banking system grew by 24.5 percent to $236.8 billion, of which loans and advances to the private sector expanded by 4.1percent. Notably, the public sector (net) credit position with the banking system increased from $4.2 billion in June 2017 to $44.8 billion at the end of June 2018. In the fiscal sector, Central Government’s overall balance was a reduced surplus of $3.1 billion, compared to $8.3 billion for the corresponding period in 2017, owing to a dramatic increase in total expenditure by $14.6 billion, as well as reduction in grants of $2.6 billion.
Having extrapolated the foregoing from the mid-year report for June 2018, and more so what actually inspired this article in particular is that when the GDP growth rate of 4.5 percent was reported, this analyst was of the view that this outturn of the GDP growth rate was driven largely by a dramatic increase in Government expenditure to achieve such attractive growth rate in an arguably dwindling economy, wherein most of the traditional sectors have been underperforming. It turned out that this analyst’s pre-conceived hypothesis was nothing far from being accurate, as will be proven shortly in the following sections.
GDP, or Gross Domestic Product, is the market value of all final goods and services produced in a country in a given time period. GDP measures the value of production, which also equals total expenditure, or final goods and total income. The equality of income and output shows the link between productivity and living standards.
GDP can be measured in essentially two ways: (1) aggregate expenditure, and (2) aggregate income. Aggregate expenditure measures total expenditure on final goods and services, and equals the value of output of final goods and services, which is represented by the equation below:
Total expenditure = C + I + G + (X-M), where C is Consumption (total expenditure by households), I is Investments, G is government spending/expenditure, and (X-M) is exports minus imports, which is net exports.
In the second method, aggregate income measures the aggregate income earned from production of final goods, Y, which equals the total paid out for the use of resources, wages, interest, rent and profit. Firms pay out all their receipts from the sale of final goods, so income (Y) equals expenditure:
Y = C + I + G + (X-M).
Therefore, by studying the abovementioned equation which is used to compute GDP, one would observe that the Government cannot directly influence and/or control the outcomes of three components from the equation to achieve a higher or improved level of GDP growth rate. Those are: Consumption (household expenditure); Investments (I) in the economy by firms and FDI (foreign direct investment) and, net exports (X-M). But Governments can very well influence their own components from the equation, which is Government expenditure (G).
So, from looking at total Government expenditure for the last three and one-half years’ period, for the period January to June 2016, total Government expenditure was recorded at $89.6 billion; from January to June 2017, it was recorded at $97.2 billion; and from January to June 2018, it was recorded at $111.8 billion. This therefore gives rise to increases in the levels of Government expenditure for the half year (HY) period 2016 – 2017 of $7.6 billion, and from 2017 (HY) to 2018 (HY), a difference or increase of $14.6 billion, thus doubling the level of increase of Government spending for the period January – June 2017 and 2018 when compared to the January – June 2016 and 2017 half-year periods. And hence this was how the GDP growth rate of 4.5 percent for 2018 half-year was skilfully achieved.
