– presents golden opportunity for economic restructuring and cleaning of fiscal mess
According to the United Nations Special Report on Latin America and the Caribbean, focusing on the economic impacts of COVID-19, the region is facing the pandemic from a weaker position, compared to the rest of the world. Prior to the pandemic, it was projected that the region would grow by a maximum of 1.3% in 2020. This forecast has now been revised in view of the effects of the crisis, and GDP is now expected to fall by 1.8%.
That notwithstanding, the report acknowledged that the final economic impact would depend on the actions taken at the national, regional and global levels. The report highlighted that the region has been affected through five external transmission channels:
(i) The decline in economic activity of the region’s main trading partners, and the effects of that decline: The region is heavily dependent on exports, the volume and value of which would be reduced by the global recession. The full extent of this reduction depends on the sectoral structure of each country.
(ii) The drop in commodity prices: The sharp decline in those prices, and deterioration in the terms of trade, will have a strong negative impact on the income levels of Latin American economies that depend on those exports, although with significant differences among them. Contraction in global demand would play a major role in decrease in commodity prices. Further, the geopolitical crisis in the oil market led to a 24% reduction in prices in less than a week, in early March.
(iii) The interruption of global value chains: The disruption of supply chains, starting with Chinese suppliers and followed by producers in Europe and the United States, would mainly affect Mexico and Brazil, whose manufacturing sectors are the largest in the region.
(iv) Lower demand for tourism services: Caribbean small island developing states (SIDS) in particular may be severely affected.
(v) Greater risk aversion and worsening global financial conditions: This situation leads to higher demand for safe assets (for example, rates of return on United States Securities have reached historically low levels); lower demand for the region’s financial assets; and significant depreciation of countries’ currencies, as is currently the case.
Is COVID-19 a blessing in disguise for Guyana’s fiscal stability?
Over the last two years, and of recent, this column has dealt extensively with the state of the country’s finances; that is: Government expenditure and revenue, the national stock of debt, and the Government’s deposit accounts at the Central Bank. In particular, it was contended that Guyana could be on the verge of bankruptcy should certain trends of Government borrowing (from the Central Bank) and spending on consumption goods continue at the rate they were going before the onset of COVID-19; especially since those trends were coupled with a significant widening of the balance-of-payment deficit driven largely by imports of capital goods for the oil and gas-related activities, and dwindling international reserves from the equivalent of 4 or 5 months’ worth of import cover to less than two months’ worth of import cover.
These trends would certainly have induced a sharp depreciation in the exchange rate; depletion of the reserves; a mountain of domestic debt, that ought to be repaid from tax revenues; and inability to service the external debt if the international reserves are depleted to record low levels.
Fortunately, the COVID-19 pandemic necessitated closure of the borders and a halt, more or less, to global trade, except for essential items such as medical and food supplies. This, together with low oil prices, would effectively have allowed for savings in fuel imports, which are usually in excess of US$500 million. Further, a decline in the importation of other consumer goods and an upsurge in the price of gold are helping to stabilise the economy, inter alia, maintaining a stable exchange rate.
The National Recount exercise will come to an end soon, and it is expected that a legitimate Government would be installed. The road to recovery would therefore be one of the greatest priorities of any responsible Government, given the absence of resources in the current state of the political economy, and the lack of appropriate support packages thereof. The policymakers henceforth ought to recognise the opportunities present to rebuild the economy, starting with food security. It is uncertain when the pandemic would be over, but in such times of difficulty, the growing demand for food in the region presents opportunities to scale up the country’s productive capacity, and channel the appropriate investments in this sector.
On the fiscal side, the opportunity for a legitimate Government to negotiate debt forgiveness and restructuring in order to create the much-needed fiscal space to facilitate the rebuilding of the economy ought to be recognised as of paramount importance.