Dear Editor,
I read with interest over the years the debates over the sustainability and viability of the Guyana sugar industry. Firstly, it is clear, on a stand-alone basis, sugar is not a straight-line profitable industry. How could it be with costs running at US0/tonne and being sold for US0/tonne? Clearly, each tonne of sugar contributes negative US0 to the industry.
Sugar, though loss-making, is a precious hard-currency earner for Guyana; as such, the importance of sugar should be taken in the context of its overall macroeconomic contribution.
Sugar, like any other basic farm commodity, barring a global unplanned shortfall, is destined to remain a loss-leader. However, in the case of Guyana (and other developing nations), such loss-leaders are key hard-currency earners making them critical components of the national development equation.
And this will remain so, until an alternate more profitable forex earner takes its place. Guyana has long been faced with this inversion where this critical forex earner costs more to produce than it sells for in the open market, the viability which was propped by the European pricing model. On the surface, and without much thought, one would cast aside and close the doors as who wants to be making a US0 loss (current state).
This is true from a micro-economic standpoint, from the perspective of an individual or individual firm. A commercial enterprise would have made a decision based on the optimal allocation of resources and its myopic choices. The question for Guyana, are there any alternatives for the deployment of the US0 input costs translating to a higher value than the US0 forex revenue? The answer is no. And bear in mind sometimes, even commercial enterprises entertain the concept of “loss-leaders” where specific products, portfolios or even units are “carried” as they augment the more profitable segments of a portfolio.
Sugar, in the true national sense, is a loss-leader, not by choice but by national necessity – the necessity to earn hard currency. There are no real alternatives to deploying the resources to a more profitable forex-generating venture. Had the sugar industry been in private hands and without price support, it would have likely been closed a long time ago. Given the industry is in Government hands and the Government enjoys national economic and taxing jurisdiction, this transforms a loss-making industry like sugar into a loss-leader in the general economy.
In looking further at sugar and the Guyana reality, one must consider the US0 input cost as the end of the cost chain, i.e. it is what it is, US0. Furthermore, one must consider, this US0 as primarily local input costs, such as labour, land, energy (from bio-mass), etc. There are some imported costs such as depreciation on imported capital equipment, replacement parts and service material, fertilisers and other supplies.
However, given the labour intensiveness and methods employed, the presumption is, most of the costs are locally derived in Guyana Dollars. The value chain for sugar itself is almost fully captured in Guyana. Packaging and branding could add value, but that presents its own set of challenges. Operational excellence through local input cost optimisation and field output productivity improvements are essential to improving the value proposition on the cost side.
In a nutshell, there are no easy answers, no cut-and-dry solutions to the economic reality of Guyana. Closing sugar is not an option. As long as Guyana remains a basic commodity agrarian economy, the loss-leader model is the only option. As long as it remains an economy dependent on loss-leader products, duties, VAT and other taxes will remain high.
The challenge of any such government is to remain alert, vigilant and discerning in how it generates and consumes its hard currency. Such economies need thoughtful minds and deliberate actions to ensure resources are consumed in ways that create value. There is little room for wastage and for trial and error. The Government needs to keep its “eyes on the ball” and understand the inter-connectivity of the various components of the economic fabric. The sugar industry is still a critical strand and, as such, flow-back subsidies are part and parcel of that economic model.
Barring a hot commodity like oil at higher world prices than today, the only other hope is to develop the local economy beyond mere basic commodities. Guyana needs to add verticals and depth to its traditional economy, built on its traditional products.
Guyana needs to leverage the forex earned from the loss-leaders and from windfalls like gold, etc, to invest and create further exportable value from domestic input sources. To do this, Guyana needs cheap and reliable power, good governance and a skilled workforce capable of creating value through differentiated products and services for which customers are willing to pay sustainable prices in the Region or wider markets.
Sincerely,
H S Gautam Naraine
NY, USA
