CDB economist warns of danger of inflation from oil and gas

– notes that exchange rate fluctuation can damage economic sectors
– says Bank of Guyana has crucial role to play in managing rates

While Guyana is in the midst of a currency crisis before first oil has even arrived, Caribbean Development Bank (CDB) Director of Economics, Dr Justin Ram has urged Guyana to guard against the impact that inflation driven by oil can have on the overall economy and exchange rate.

Dr Ram was at the time speaking at a public policy talk facilitated by the Guyana Budget Policy Institute on Saturday night at the Regency Suites hotel. The very theme of the talk was “mistakes Governments make and how to avoid them” and the veteran economist highlighted one that can have devastating consequences.
“How do we continue to keep Guyana phenomenal beyond the economic growth we will see in 2020, and some of the other years in that decade. When we speak of the oil and gas sector, we typically hear the words resource curse,” Ram said.
“I don’t see it that way. I see this resource as being a blessing. But how do we ensure that it is a blessing for Guyana? Once oil revenues start going into the Government’s coffers, the oil and gas sectors tend to drive inflation in the economy. And that inflation tends to lead to other workers in the economy seeking wage increases.”

According to Ram, while wage increases are desirable, they must be given by the Government in a structured way. According to Ram, however, these wage increases tend not to be matched by actual productivity in oil and gas economies.
“What tends to happen is there is an erosion of the real exchange rate, meaning that the exchange rate appreciates and all other sectors of the economy become uncompetitive. I think this is what we need to avoid. So Guyana needs to think about how to avoid this.”
Ram noted that the exchange rate needs to be managed, something the Central Bank will have to play a role in. Ram also noted that long-term planning and vision would be necessary in order to avert the oil and gas pitfalls.
While the inflation rate in Guyana has largely been kept under control in recent years, the Ministry of Finance’s own mid-year report for this year had warned that food prices are actually on the rise.
According to the report, the inflation rate from December 2018 to June 2019 reached 1.6 per cent, which the report says was “moderate”. But behind this marginal increase is an increase in food prices.
“The 12-month inflation rate at the end of June 2019, which grew to 2.4 per cent, was driven mainly by higher food prices. Over the 12 months, these prices rose by 6.3 per cent, and affected 2.5 percentage points of the increase in the Georgetown-based Consumer Price Index (CPI),” the report states.
Meanwhile, the CPI itself showed that the average cost of living rose to $118,000 per month at the half-year mark, compared to the $116,000 it was at last year. This includes cost for food, clothing, footwear and repairs, housing, furniture, transportation and medical care and miscellaneous goods and services.

Currency rate
In addition, it was reported on Sunday that Guyana’s currency is now selling at $233 for US$1. This would be quite a jump from the characteristic $218 it was previously trading at and the highest it has been in years.
Persons have opined that this is due to a shortage of foreign currency, a development that comes on the heels of unimpressive economic performances for the first quarter of the year in the traditional sectors.
The Bank of Guyana’s first-quarter statistical bulletin had shown a general economic downturn among the major sectors, such as in sugar which experienced a major decline of 34.3 per cent, owing to the restructuring process the Guyana Sugar Corporation (GuySuCo) is undergoing.
On the other hand, the decline of rice output by 9.3 per cent was attributed to rice bug infestation and the increased costs of production. The mining and quarrying sectors exhibited lower production. According to the bulletin, there was a 4.9 per cent decline in gold declarations.
Only recently, the Inter-American Development Bank (IDB), having concluded its Article IV consultations in Guyana, had come up with projections that oil will dominate Guyana’s Gross Domestic Product (GDP) by as much as 40 per cent, rapidly overtaking other sectors by 2024.
As of the middle of this year, no single sector had more than a 15 per cent share of the GDP. According to the Ministry of Finance’s 2019 mid-year report, the highest individual bite of the GDP came from the wholesale and retail trade, which had a 13.4 per cent share of the GDP.
Combined, agriculture, fishing and forestry have just a 15.6 per cent share of the GDP, with major sectors like sugar, rice and forestry having just 0.9 per cent, 3.5 per cent and 1.7 per cent respectively.