Strapped for foreign cash, it is time to think out of the box?

By Sase Singh; MSc – Finance, ACCA

Continuing its decline, the country’s foreign exchange reserves slumped by US$126 million to GY$452.6 million as at the end of September 2018 due to a fall in foreign currency assets, especially the holding of short-and long-term debt instruments of foreign governments, such as US Treasury Bills. This information was sourced from the Bank of Guyana September 2018 Statistical Bulletin. This is the worst foreign reserves position since 2008 when the size of the economy was 40 per cent smaller. This has now pushed our import cover to 2.2 months, meaning we only have enough cash to back some two months of imports. The world standard is three months. Guyana is out of order, plain and simple.
Expressed in US dollars, foreign currency assets include the value of the national gold holdings, balance with foreign banks owned by Guyana, and other easily convertible securities. For the record, foreign currency reserves had touched a record high of US$825 million in 2012. However, since then, it has been on the decline, but from the graph below, it is clear there is a rapid deterioration of the situation since December 2017 with a serious dive happening in the first six months of 2018 as a result of some US$32 million being drained from the local system.
This cannot be good news for the Guyanese business community. The decrease was larger than the same period last year. The main cause principally was weak growth in exports, a higher outflow of investment income (capital flight mainly) and stagnation in remittance. The supply of foreign currency is at an all-time low because a former big foreign currency contributor (the sugar sector) has now imploded with sugar exports expected to be less than 50 per cent of where it was in 2016. To add salt to the wound created by the policy incompetence in the sugar industry, the foreign currency contribution from the gold sector has declined over 2018 with a complimentary decline in gold exports. The export of gold has declined by some eight per cent over the first nine months of 2018 with the market price almost US$100 lower than it was a year ago. These are all bad omen for the economy in 2019.
If the entire banking sector is considered, according to the Bank of Guyana September 2018 Statistical Abstract, the stock of foreign currency declined by US$125.4 million. (see graph above).
Any rational thinker would be very concerned about the evolving patterns of the foreign reserves since 2016. It is the responsibility of the policymakers in the Finance Ministry to construct and launch a policy response but since May 2015, that has been very absent. The time for making excuses is over and the usual spates of political sound byte and propagandist deflection have lost their potency. It is time for action. REAL ACTION! The reserves act as an instrument of confidence that gives the assurance to the international community that the nation can pay its bills. When international players start to question your ability to pay your bills, it will have many adverse consequence including whether Guyana is fit and proper as an investment destination. This will impact the future long-term growth potential of the Guyanese economy and does spell doom for the people today, in 2019 and even beyond with the initial oil revenues in 2020. Refined petroleum products being our largest foreign currency consumer does have a direct impact on the foreign reserves. This is the real issue thanks to the A Partnership for National Unity/Alliance For Change (APNU/AFC) Government’s inability to rapidly expand the green energy portfolio. They destroyed a great investment opportunity in the Amaila Falls Hydro Project but offered nothing worthy of serious response in response. Same nonsense from the APNU+PNC+AFC; different day. So let us focus on what can be done immediately. – SELL THE MARRIOTT! This is a transaction that should have been sold in US dollars months ago. Such a transaction will easily reap upwards of US$40 million on the open market. Such a move will boost the international reserves over the short-term and would immediately change the trajectory of the stock of foreign currency until first oil. Too many policy mistakes were made under this Granger regime. Reading the Minister’s Half Year Report and the Bank of Guyana Half Year Report was not comforting at all. If one is to quote the Central Bank, one will find a pertinent statement which is quoted as “gross international reserves are projected to further decline at the end of 2018”. Is this the good life?