Dear Editor,
I am writing in reference to Dr. Ramesh Gampat’s letter, published on January 30, 2025 with the caption: “There were no contradictions in my letter and, based on the data in Budget 2025 and various BoG reports, I can show that Rampersaud’s arguments are spurious”.
Editor, I wish to address three main themes that the learned economist Dr. Gampat proffered therein:
i) Gampat argued that “the growing gap between imports and non-oil export is a major reason for persistent [foreign exchange] FX shortages. Little, if any, of oil revenues flow into the FX market; Guyana’s share of less than 15 percent is deposited into the NRF. The vast growth disjunction (performance) between imports and exports can only be interpreted as relative stagnation of exports”.
ii) He assumed that “it does not seem likely that imports by the oil economy are captured by the data: such imports are done directly by oil companies and mostly likely do not pass through local commercial banks”, and
iii) that “the fiscal deficit should be gauged in relation to non-oil GDP and not total GDP. The literature is unanimous that a persistent fiscal deficit of over 6 percent or so can be a major cause of macroeconomic instability”.
What are the indicators that would signal a real FX shortage, or problems?
Gampat is correct in the sense that the causation of the FX constraints may be on account of the exponential rise in total imports and stagnated non-oil exports, albeit partially, not totally. Gampat’s proposition in this regard does not tell the full story. In order to determine whether there is a real FX problem or shortage, there are certain indicators that policymakers would have to pay attention to; and Gampat has completely omitted those in his analysis. They include mainly the import cover, which is an indicator that estimates how many months of imports can be covered with the help of Central Bank FX reserves. But to present a more prudent and pragmatic analysis, I have extended the FX reserves to include not only the Central Bank reserves, but the entire banking sector’s Net Foreign Sector Assets and Reserves (NFSA), together with the closing balance of the Natural Resource Fund (NRF). Effectively, these altogether constitute the Total Net Foreign Sector Assets & Reserves (TNFSA) for the country.
As shown in exhibit 1 below, the import cover was in a negative of 15.7 months in 1992, meaning that the country had virtually zero FX reserves. The Central Bank’s net international reserve balance was in the negative, indicating that the bank had to borrow FX from external sources. By 1999, the banking sector had begun to accumulate positive net balances in FX reserves and net foreign sector assets, derived from export earnings and other sources of FX inflows, such as foreign direct investments (FDIs). The chart shows that, in 1999, the FX reserves represented 1.4 months’ import cover, which rose to >3 months’ import cover in 2001 through 2018. The highest import cover recorded during that period was 7 months, in 2016.
In 2019, the import cover (a) fell to 3 months, which rose to ≥5 months during the period 2020-2024, to reach a record high of 9.2 in 2022 and 8.1 in 2024. Import cover (b), which excludes the NRF balance, during this period (2019-2024), averaged 3.6 months annually. As a general rule of thumb, Central Banks are required to maintain FX reserves equating to a minimum of 3 months’ import cover in order to be anchored within a macroeconomic stability framework. And as noted earlier, I have extended this analysis to include the TNFSA, to be practically correct, which shows that the total FX reserves in the financial system covered more than the minimum threshold of 3 months’ import cover. Worthy of note is that the total net foreign sector assets and reserves, which stood at US$916 million in 2019, rose to US$4.6 billion at the end of 2024.
Exhibit 1: Import Cover (a) is calculated based on the Total Net Foreign Sector Assets (TNFSA), which include the Banking Sector Net Foreign Sector Assets & Reserves + the NRF Closing balance, whereas (b) excludes the NRF balance.
Balance of Payments Account
Moreover, a thorough analysis of the Balance of Payment (BoP) account, which was another factor omitted from Dr. Gampat’s analysis, would also help to illustrate the full FX story. In this respect, it would appear that Dr. Gampat relied heavily on examining only the current account balances; that is, the international trade balances (the difference between exports and imports), in order to validate his argument. Consequently, his argument can be easily invalidated, because he ignored the BoP account. The BoP account records all FX transactions (inflows and outflows of FX) that a country engages with the rest of the world. These transactions are not limited to the current account that captures international trade, which is part of the BoP account as well. The BoP account constitutes both the current and capital accounts.
