In the previous week’s article, it was contended that the Bank of Guyana (BoG) net foreign assets will continue to deplete to stabilise the international foreign reserve which in turn is the most important determinant of the macroeconomic stability framework. Today’s article extends on the last week’s analysis in which the author sought to highlight the assumptions which underpin the analyses and projections made herein.
See table below with projected forecast of anticipated losses in FX based on historic trends and analysis:
Readers might recall that in a previous article, it was shown that Guyana has lost about US$3 billion in foreign exchange (FX) in four years from the traditional export commodities except for gold and other exports. This means that Guyana has lost an average US$750 million per annum over the last four years or approximately G$160 billion, which works out to about 17 per cent per annum. At the same time, the BoG net foreign assets or international reserve has been depleted over the years by an average of 6 per cent per annum in order to fund the continuously deteriorating balance of payment deficit to pay for the huge increases in the import bill.
In the above table, using the rate at which total imports increased for the first half of 2019 relative to the previous half- year period in 2018, that increase was about 32%. These are the basic assumptions in the projections in the above table which gave rise to a negative net effect of US$324 million, in
2020 and -US$393 million by 2023. Bear in mind that total imports may well increase by more than 100% when Guyana starts to produce oil, thus, the assumptions used for these computations are nothing but conservative.
One can only hope, therefore, with cautious optimism, that with the foreign exchange earned from gold exports, which is not included in the projections for obvious reasons, may or may not be sufficient to offset the negative outturn that even oil revenues may not be able to achieve in terms of ensuring a sound level of net foreign assets by the Bank of Guyana to ensure a sound and stable macroeconomic environment.
Extending on the above analysis on an even broader spectrum, the second table shows that RBL, GBTI, & DBL increased their investment portfolio (Guyana Govt securities and investment in securities out of Guyana), by 112%, 47%, and 16% respectively, while their loan portfolios changed by 14.6%, -3% and 5% respectively.
Interestingly, of the total investment portfolio of these three institutions, more than 80% represents investments outside of the Guyana economy. These statistics therefore tell a damning story of the domestic economy to the extent that they validate the notion that there is limited lending opportunities in the Guyana economy, thus, triggering the banks to ramp up their foreign and domestic investments in government debt instruments, in order maintain the high level of profitability achieved by these institutions. Important to note, is that the level of profitability of the banks is not necessarily attributed from increased lending activities in the domestic economy, but largely through investments out of the economy.
This discussion and analysis shall be continued next week wherein the interpretation of these numbers will be further simplified.
(For comments, questions and responses on articles featured in this column, readers can reach the author at jbinsights@outlook.com).
