In last week’s column, it was highlighted that the exchange rate against the United States dollar has depreciated by almost 5 percent from G$204 – US$1 in 2012 to G$214– US$1 at the end of the first quarter of 2018 by using the average market rates for the said period. Put differently, the cost of US$1dollar has increased by $10 Guyanese dollars in just over seven years. This means that in 2012, total imported goods for that year of US$1,996 million would have cost local importers G$407.18 billion, and that same amount of imported goods at today’s exchange rate would cost G$427.14 billion – effectively $20 billion more costly or expensive. In other words, it cost $20 billion more to import the same amount of goods that would have been imported just over seven years ago.
On the export side of the equation, in 2012, exports were recorded at US$1,394 million or G$284.38 billion in foreign exchange earnings. Re-worked at today’s exchange rate for the same amount of export earnings give rise to G$298.3 billion, representing a variance of $14 billion. Normally, when the domestic currency depreciates, imports become more expensive, thus causing imported goods to decline, and exports become cheaper in the foreign markets – which naturally necessitates an increase in exports as demand increases. Applying this basic economic theory to the real numbers over this period, one can observe that this is exactly what happened: wherein, in 2012, imports stood at US$1,996 million, and fell to US$1,632.1 million, or by US$363.9 million, at the end of 2017; while exports, which stood at US$1,394 million in 2012, increased to US$1,424.7 million, or by US$30.7 million, at the end of 2017.
It is therefore unfortunate, considering the acknowledged fact that with the massive restructuring of the sugar industry, inter alia, the closing down of a number of sugar estates, Guyana is thus poised to lose significant amounts of foreign exchange from the exportation of sugar, which was once one of the higher earners of foreign exchange in the export commodities basket – of more than US$70 million annually. This is in addition to other traditional sectors and export commodities underperforming; and also, in a previous column which dealt with the recent fish ban imposed by the United States on certain species of fish to that market, all of these developments combined have compounded the issue of declining international reserves held by the Central Bank — by 38.5 percent, or in monetary terms, US$318.4 million, over the last seven years.
On the external debt front, at the end of the first quarter of 2018, the total stock of foreign currency-(US$)-denominated debt stood at US$1.265 billion. It would be prudent, for the sake of this article, to include the US$35 million World Bank loan and the US$900 million line of credit that was approved by the Islamic Development Bank (I stand corrected if I missed any).
Though the Government is yet to access funds through this line of credit, it was nonetheless approved for specific projects to be accessed between now and 2020. It is therefore possible that total external debt could reach or surpass US$2 billion, which would significantly push up the debt-GDP ratio to more than 60%. It could also be deduced that this timing is strategic on the part of the Government, given that oil revenues are expected to start flowing in 2020.
Notwithstanding, one has to consider what can go wrong from now until 2020, amidst all of these developments highlighted herein. Will the potential oil revenue come in time to correct a currency crisis, should such an event occur in two years’ time? What will it cost the economy, and how will it impact the livelihoods of its people? These developments are certainly cause for concern for policymakers as a matter of high importance and urgency, to guard against a potential currency crisis should this current economic scenario continue to worsen – that is, along this same trajectory.
Taken together, these symptoms of a deteriorating foreign reserve, loss of foreign exchange vis-à-vis earnings from export commodities such as fish and shrimp, sugar among other traditional export commodities, a fall in remittances, lack of foreign direct investment, there has notably been no new foreign direct investment in the country over the last three years or so; and a rising stock of external debt necessitate an increase in demand for foreign exchange for debt servicing; companies with parent companies abroad will also buy up the already depleting stock of foreign exchange in the domestic market to repatriate profits to their home country or parent companies, then importers need foreign exchange to pay for imported goods. All of these together can ultimately lead to a shortage of foreign currency, which then translates into a depreciation of the domestic currency, which then eats away the value of savings of householders, investments for businesses and firms, and the list goes on. In fact, to conclude this article, these are definitely symptoms of a currency crisis; and a currency crisis can trigger a banking crisis, which can also trigger an economic crisis. On this concluding note, next week the author shall delve into these other dimensions in an in-depth manner in perhaps another series of forthcoming articles.
