Continuing from where I left off last week, let’s assume that all of the money is deposited in one bank; let’s call it “Bank A”. “Bank A” would lend billion at an interest rate of, say, 12 per cent per annum. This results in 0M new money created. As this process continues, “Bank A” lends this money to “Company X”. “Company X” then deposits it into “Bank B.” “Bank B” then lends to another set of companies at 12 per cent interest; that’s another 0M. This cycle will go on for as many times as possible.
Assume it goes on to the other 4 banks through lending, and each bank, at an average rate of 12 percent, creates $3.6 billion in totality from a single deposit of $5 billion. The $5 billion would, in one year through the banking system, increase effectively to $8.6 billion.
Imagine then that, in actuality, this process could turn over 20 times; this would be equivalent to about $12 billion new money created in one year. Tying this demonstration — of how the multiplier effect works, and its role in the economy relative to economic growth — to real figures recorded for 2016, this is what I found, having extrapolated same from the 2016 Annual Report of the Bank of Guyana: total money supply in 2016 grew by $36.9 billion, while total credit grew by $198.8 billion as at the end of 2016.
It must be borne in mind that the $5 billion we assumed had been spent in the economy as consumer spending would also find its way into the banking system, and thereby contribute to the multiplier effect process as well.
The amount that is paid in the form of income tax, as mentioned earlier, goes back into the national treasury and contributes to Government spending. Payments to NIS (National Insurance Scheme) amounted to more than $1 billion dollars. It should be mentioned that NIS is a state-owned entity, and hence the profits that it declares belong to the state or the national treasury.
How does NIS make profits? NIS, the average person would know, collects pension funds which are paid by an individual who started working at the age of 16 and retires at 60 — Forty-four years later. NIS would then make monthly payments to that person as his or her pension. Effectively, the entity would have large surplus funds, which it would invest in various investment instruments (both locally and abroad) and developmental projects to make a profit. This is another method used by Government to generate revenue.
Sugar is one of this country’s largest export-earning commodities. 2016 export earnings from sugar amounted to US$73.4 million (BoG, Annual Report, 2016). So if we are to reduce the level of sugar production, thereby reducing export of sugar, the obvious consequence would be that the foreign currency inflow would be reduced drastically, and this will eventually deplete the country’s foreign reserves. The exchange rate would depreciate, as there would be a shortage of foreign currency (a subject I recently wrote extensively on). The value of the local currency would deteriorate. There would be hyperinflation (a similar situation exists in Venezuela). Further, with a depletion of foreign assets, or foreign currency, the country would not have the ability to import foreign goods. Think of all the commodities and consumable items which we currently enjoy; importation of such goods would be constrained.
Sadly, this is what the future of the country would be like, given the destructive policies being pursued in this respect and the direction policymakers are seemingly headed in regard to the touted actions they are seriously considering to pursue in respect to the future of GUYSUCO. They also seem unmoved, unbothered, uninterested, and unsympathetic towards the sugar industry and the country at large.
It is grossly misleading and incorrect to say that the Government injected $23 billion in GuySuCo in eighteen months and completely ignore the above-stated economic and financial reality in regard to the economy and how the economy works. The implication is that, by injecting this sum into the operation of GuySuCo, Government is ‘bleeding the country’. An injection of $23 billion in 18 months is almost equivalent to $15.3 billion, on average, in one year. Clearly, we have seen on a broader spectrum what it would cost the economy should we downscale the industry via closure of the estates
(Next week I will expound on this some more). From next week, I will be focusing on the ‘State White Paper on the Future of the Sugar Industry’. I was perplexed when examining the paper. For a moment I thought I was a reading a high school student’s essay. It is far from what a real white paper should be in that, from the perspective of a critical analysis, there are many omissions and weaknesses contained therein.
The paper lacks rigour, robustness, and sound economic and financial credibility. It is, in my view, an unscholarly piece of work coming from the highest offices in the country’s bureaucratic and hierarchical political structure.
