Independence of central bank essential – economist

In comparing Guyana with Ghana in the context of their oil and gas sectors, Guyana-born economist Collin Constantine has declared that if this country did not protect the independence of the central bank, it could lead to several complications that may have long-lasting effects on the country’s financial standing.

Constantine, who was one of the presenters at a forum organised by Moray House Trust on Wednesday evening, made a panel presentation and discussion entitled “What will oil do for Guyana?” The young economist told the small gathering that the legislation in Ghana supported the central bank’s independence (this obtains in Guyana as well).
But according to him, this did not stop the Ghanaian Government of the day from abusing its power, which led to the country suffering from the oil curse. In fact, during his 20-minute Powerpoint presentation, Constantine noted that post 2007 the bank’s financing of the Government of Ghana increased by 640 per cent. This, he said, was political control of the central bank.
He explained that the international standard and recommendation for balance of payments and sustainability is three months of import cover. It means that each central Bank should keep three months’ international reserves in the vaults that could cover three months of imports. “This is the minimum. Anything below of imports you have a crisis. This is the moment you invite the [International Monetary Fund] IMF,” he added.
The economist noted that Ghana discovered oil in 2007 and started production in 2010. At the point of production, immediately after 2010, balance of payment import cover went below three months. This, he explained, was related to the irresponsible funding of Government by the central bank. “When you provide loans to the Government, that increases aggregate demand. Industrial capacity is limited in Ghana just like Guyana. It means much of that demand will spill over to imports. This will put pressure on reserves, lead to depreciation of the currency and inflation in the economy, which indeed is the Ghanaian experience. This is why we have an independent central bank,” he asserted. Constantine, therefore, argued that given the similar nature of the discovery and production in Guyana and Ghana and the fact that the political structure of executive power is the same, there is an urgent need for constitutional reform. This, according to him, will help to limit political influence and ensure that the central bank operates independently as it should, without any hindrances. Another similarity between the two countries is that they have two dominant political parties with fairly similar political support, and they have a Petroleum Management Act to ensure fiscal accountability. They also have a Sovereign Wealth Fund and a Stabilisation Fund. But in getting into the details of the issues Ghana faced, Constantine showed statistics which showed that post production, the fiscal deficit as a percentage of Gross Domestic Product (GDP) increased substantially. Political consensus was another point raised by Constantine, who explained that based on his research, most oil-producing countries which have a similar political structure such as Guyana, where there is executive power and politicians are selected through proportional representation, have had many issues. “The resource curse exists in natural resources-rich countries that have little limits on executive power. So, it’s not a case that all resource-rich countries suffer from the resource curse…Constitutions matter, political systems matter for how oil will affect Guyana,” he opined. As Guyana’s debt continues to rise, there have been some concerns in several quarters of society that the coalition Government’s spending is spiralling out of control and should be better managed, or the country could be faced with insurmountable challenges in years to come.Economists, financial analysts, and politicians alike have argued that the current Administration was engaged in too much borrowing in light of the pending oil sector. But these critics have also warned that this could have severe economic and financial implications for the country.
Nevertheless, Finance Minister Winston Jordan has repeatedly defended Government’s position when it comes to borrowing against future oil revenues. Jordan stated that the Government was actually uneasy about borrowing in that regard. The Minister said that while tempting, as it would provide important resources to finance many critical pipeline projects, it was not something that Government would do.
However, Opposition Leader Bharrat Jagdeo, who has opposed extensive borrowing by Government, recently said that the debt accumulated from 2015 to 2018, plus the $30 billion loan from Republic Bank, coupled with the US$900 million, which the People’s Progressive Party (PPP) predicted that Government would borrow from the Islamic Development Bank, doubles the total debt which the PPP had left after 24 years in Government. Political consensus was another point raised by Constantine, who explained that based on his research, most oil producing countries which has a similar political structure such as Guyana, where there is executive power and politicians are selected through proportional representation, have had many issues.
“The resource curse exists in natural resources rich countries that have little limits on executive power. So, it’s not a case that all resource rich countries suffer from the resource curse…Constitutions matter, political systems matte for how oil will affect Guyana,” he opined.
As Guyana’s debt continues to rise, there have been some concerns in several quarters of society that the coalition Government’s spending is spiraling out of control and should be better managed, or the country could be faced with insurmountable challenges in years to come.
Economists, financial analysts and politicians alike have argued that the current administration is engaged in too much borrowing and is using that opportunity in light of the impending oil sector. But these same critics have also warned that this could have severe economic and financial implications for the country.
Nevertheless, Finance Minister Winston Jordan has repeatedly defended Government’s position when it comes to borrowing against future oil revenues. Jordan stated that the Government is actually uneasy about borrowing in that regard. The minister said that while tempting, as it would provide important resources to finance many critical pipeline projects, it is not something that Government will do.
However, Opposition Leader, Bharrat Jagdeo who has opposed extensive borrowing by Government, recently said that the debt accumulated from 2015 to 2018, plus the 30 billion from Republic Bank, coupled with the US$900 million, which PPP predicts that Government will borrow from the Islamic Development Bank, doubles the total debt which the PPP had left after 24 years in Government.