In continuation of the topical discussion for today, it must be stated that it would have been much more meaningful if this particular topic could have been examined by considering more recent data for example, export and import figures for at least the end of the first quarter in 2018, total stock of external debt among other key macroeconomic indicators. By doing so, this columnist would have been able to demonstrate a much more clearer and accurate picture in this analysis but unfortunately, for some reason or the other, the Finance Ministry seemingly stopped making its usual monthly economic bulletin report available on its website. The last such report is available for April 2017, whether this is intentional or not, that’s a whole different matter altogether.
Notwithstanding, empirical evidences support the view that, in general, a deterioration in economic fundamentals and pursuit of lax monetary policy can contribute to currency crisis. Emerging market economies or developing economies suffer more than developed economies if they pursue lax fiscal and monetary policies, though both economies appear to be equally affected by political considerations (IMF Working Paper, 2005). During 1968-2001, the growth rate of domestic credit, the rate of inflation, and the growth rate of money all contributed in a more significant way in developing economies in determining currency crisis. Further, it should be noted that an effective warning system for currency crisis should take into consideration a broad variety of indicators, and, as such crises are usually preceded by symptoms that arise in a number of areas.
To that end, proven indicators that are particularly useful in anticipating crisis include the behaviour of international reserves, the real exchange rate, domestic credit, credit to the Public Sector, and domestic inflation. While other indicators include the trade balance/balance of payment, export performance, money growth, real GDP growth and fiscal deficit.
It was previously noted that foreign reserves held with the Bank of Guyana declined from US$825.2 million in 2012 to US$506.8 million as at the end of the first quarter in 2018, representing a depletion in the reserve of US$318.4 million over this period or 38.5 per cent. In a previous column it was established that the minimum target for the international reserves held with the Central Bank is usually bench-marked to three months of import cover – that is, the equivalent of the country’s total import bill of goods and services from the rest of the world, for three months. In this regard, Guyana’s total import figure over the last decade reached a high of US$1.97 billion in 2012 and a low of US$1.14 billion in 2009, giving rise to an average annual import figure of US$1.5 billion. Therefore, using the highest import figure of US$1.97 billion; three months import cover is equivalent to: US$1.97 billion/12 (months) x three (months) = US$492.5 million. Thus, rounded to the nearest hundred, the minimum reserve target for the central bank should be US$500 million.
It is also worthwhile to examine the trend in the balance of payment account – another important indicator – given that it serves as an indicator of the changing international economic or financial position of a country. It also helps in formulation of a country’s monetary, fiscal and trade policies. As can be observed from the data above, over the last six years, Guyana’s trade balance recorded deficit balances in each year with a high of US$119.5 million in 2013 and then fell to US$69 million in 2017; while the exchange rate, using the average market rates for over the last seven years, depreciated by almost five per cent against the US dollar from G$204–US$1 in 2012 to G$208–US$1 in 2017. (To be continued next week).
