Home Letters Food for thought to revamp our economy under a Dr Irfaan Ali...
As I pen my letter, Guyana is on record as having lifted its second million barrel of crude oil. While this is surely good news for us all, the true benefits are yet to materialise. Viz, new roads and bridges are yet to be built, schools and hospitals to be constructed, and wealth is yet to be created for the ordinary man and woman.
Of course, with our growing need as a nation, and more so due to the ravaging effects of the COVID-19 virus on our economy and society as a whole, the most pragmatic fiscal response would be to increase government spending. This approach may further find favour among policy makers, given that our economy is highly indebted, key production sectors have shrunk, unemployment is high, and businesses are reeling.
In fact, across the spectrum, household income has, on average, surely tanked; and let’s face it: there is little hope of an imminent rebound if the current situation perpetuates.
As a nation, our only hope at this time is our hard cash windfall accrued through crude oil sales and royalty, which is sitting in the Federal Reserve Bank. However, like any responsible government, the thought of intergeneration wealth, absorptive capacity, exchange rate appreciation, crowding out of private sector, and so on, may question our rationality to engage in 0-100 under 5 seconds spending spree. More so, we have been awash with tales of the Dutch disease involving countries such as Nigeria and Venezuela, coming to mind, where more than 50% of the population are still fettered to absolute poverty.
Like the motivational adage of “seek the light in every darkness”, our current economic quagmire could serve as the light in ensuring maximum economic returns, stability, and robustness. As earlier stated, absorptive constraint is one of the likely impediments that may hinder our developmental endeavour; engendering a burgeoning non-traded sector, the very element that sits at the core of the Dutch disease theory. Countries where absorptive capacity is a problem may see a rapid escalation in prices, especially of labour in the non-traded sector (services). At the sectorial level, labour would become more inclined to relocate from traded (manufacturing and agriculture) to non-traded. For private businesses, it means that the cost of operation would certainly increase, placing a downward pressure on profit and the likelihood of any expansion. Higher prices would mean lower disposable income (undermining purchasing power), appreciation of real exchange rate, and reduced demand for all exportable goods (gold, rice, bauxite, timber etc). Of course import would become cheaper, but, at the same time, locally produced goods would become obsolete. In the long run, our reliance or dependence on oil revenue would escalate; exposing us to the very volatility in oil prices and other negative external shocks we so dearly endeavour to mitigate. In short, we would be no better than Nigeria or Venezuela in combating the Dutch disease.
The million-dollar question is: Are we in position to ‘spend our way’ out of the crisis without jeopardising our economic wellbeing in the long run? I think the situation could not have been more ideal. High unemployment, large debt, low revenue, ailing business sector, low household income creates, create the prefect environment for us to floor the gas pedal and circumvent the predicament of not having the requisite absorptive capacity. What follows supports my stance.
As far as the literature goes, the benchmark prescription of managing natural resource windfall is the permanent-income rule. The idea under this approach is that revenues should be invested abroad, ideally in an intergenerational SWF (Sovereign Wealth Fund), and that judicious borrowing and saving policies must guide both private and public consumption, while keeping real exchange rate in check so as to avoid large swings in the relocation of factors of production from tradable to non-tradable sectors. Of course real exchange rate may appreciate quite modestly, which may lead to a symmetrical contraction of the traded sector and expand the non-traded sector. However, a key point to note is that while this policy direction may appear appealing for developed countries, such an approach for developing countries like Guyana is not advisable. There are several reasons why this may be the case.
First, we have relatively less access to future markets and financial derivatives. To counter stochastic volatility of oil prices, we must instead institute a stabilisation fund. The brute approach is that government should focus heavily on the establishment of a stabilisation fund so as to smooth out consumption, and less so on an intergenerational fund (SWF). At this point in time, consistency of revenue stream is crucial to avoid excess borrowing, and hence overheating of the economy.
Second, relatively speaking, we are faced with high cost of borrowing and low level of investment. And these levels are likely to be exacerbated in the coming months. This is the ideal time to use our windfall to not only cut the cost of borrowing, but alleviate capital scarcity and boost domestic investment. Investing in foreign assets at this time would be less rewarding.
So, Dr. Ali, my advice to you is ‘floor it’!