The economy continues to experience a “fallacious growth” that is not reflective of real broad-based economic development, and that is underpinned by misallocation of public finances into non-productive sectors from productive sectors.
The Ministry of Finance mid-year report for 2019 revealed that the domestic economy is estimated to have grown by 4 per cent in the first half of 2019. This outturn is 11 per cent lower than the growth rate achieved for the corresponding period in 2018. In reviewing the mid-year economic performance, it was found that this level of GDP growth was largely attributed to increased investments in the oil and gas-related sector and increased declaration of gold production.
Towards that end, private sector net (foreign) inflows increased by 67 per cent or US$322.5 million to reach US$803.5 million for the period ended in June 2019, of which approximately 44 per cent represented oil and gas-related capital inflows. Gold exports increased by 11 per cent or US$42 million, while losses in export earnings from the other major export commodities such as rice, bauxite, timber and other exports, amounted to US$42 million when compared to the half-year period in 2018. As such, a marginal increase in total exports of 4 per cent or US$30.5 million was achieved. Conversely, total imports increased by 32 per cent or US$329.3 million at the end of June 2019, when compared to the previous half-year period in June 2018. This outturn resulted in a sharp increase of 91 per cent in the trade deficit position by a whopping US$329.3 million. This worsening trade deficit position explains the 94 per cent decline in the Bank of Guyana net foreign assets position from US$110.6 million in June 2018 half-year period to US$6.3 million for the June 2019 half-year period.
Moreover, the above can be deduced to be the main cause of the Bank of Guyana selling off a huge chunk of its gold reserve by some $2.5 billion – from a position of $3.1 billion in June 2018 to a position of $589 million in June 2019 half-year. This outcome was largely on account of the massive increases in imported goods – more so for the oil and gas sector, and to stabilise the minimum reserve requirement. Clearly, as a result of these, the Central Bank is struggling to meet its minimum reserve target which can certainly magnify the risks of a weakened macro-economic stability framework of the Guyanese economy. There has been a continuous depletion of the Central Bank’s international reserves and more-so the gold reserve which is on a steep downward trajectory over the last four years. This could result in a real shortage of foreign exchange in the short to medium term which can inevitably induce a currency crisis and an economic crisis.
In the fiscal sector, government revenue increased by 6.4 per cent or $7 billion for the half-year period ended June 2019, relative to the corresponding period in 2018, while government expenditure increased by 9 per cent or $10 billion for the periods under review. Allocations for capital expenditure were greater than those of current expenditure, which were 32 per cent and 4.3 percent increases, respectively. However, on one hand, allocations towards government sectors in non-productive activities increased by a massive $22 billion or 16 per cent when compared to the half-year period in 2018, and on the other hand, allocations in the Agriculture sector and other economic sectors combined, fell by $13.2 billion or 49 per cent. This suggests that monetary allocations are misdirected from productive sectors into non-productive sectors to fund expenditure on increased goods and services in the public sector and more bureaucratic administrative expenditure.
Against these backgrounds, the performance for the half-year period ended June 2019 was driven largely by the oil and gas-related activities and increase levels of gold declaration. The most troubling outcome is such that the non-oil economy – that is, the traditional productive sectors— continues to dwindle, leading to huge losses in foreign exchange and thus, places pressure on the Central Bank’s International Reserves. The medium-to-long term implications of these weakened macro-economic soundness indicators could be far-reaching if not addressed forthwith. The analysis also revealed a worrying trend of misallocation of public finances in the fiscal sector which in effect has stymied the development of the productive activities in the economy. The effect of which could have resulted in real broad-based developmental growth – rather than depending on merely two sectors that are highly volatile to external shocks from depressed world market prices – a real external risk that is often times, unpredictable. As such, it can be concluded strongly to posit that the economy continues to experience a “fallacious growth” that is not reflective of real broad-based economic development, and that is underpinned by misallocation of public finances into non-productive sectors from productive sectors.