The graph below extracted from Table 2.16 (a) of the Bank of Guyana January 2018 Statistical Abstract revealed a hazardous reality. The Central Bank has actively bought more foreign currency from the banking system that it sold to the system in 2017 for the first time in 12 years.
The graph illustrates a situation where the Bank of Guyana bought some US$37.6 million more than they sold on the local open foreign currency market in 2017, unlike the other years under review. This is nothing but a simple drain of hard currency from the market, which will lead to shortages in the supply of US dollars.
The last time this happened was when Guyana had a genuine national disaster; the GREAT FLOODS of 2005. In that year, such an outcome was expected since the system had to support emergency purchases of fuel, equipment and all sorts of other emergency items, all of which were unforeseen, unexpected and unavoidable. But what is the explanation of the national currency crisis of 2017 in Guyana? Is there a HURRICANE called INCOMPETENT DAVID GRANGER in progress?
The reality of 2017 exposed the economic folly of this Granger administration. They took a policy action to dismantle one of the largest contributors of foreign currency into the market; Guysuco. Any first-year economics students would know that there is a material difference between actual foreign currency flowing into an economy and what is booked. So although the gold sector booked some US$800 million of foreign currency flows in 2017, less than half of that amount actually flows into the Guyanese foreign currency market and by extension the Guyanese economy. When these gold bars leave Guyana, less than half of their real value returns to the Guyanese banking system. Clearly, the owners of capital chose to invest their capital elsewhere and that is their right. But the economic consequences for Guyana are dreadful. Guysuco, on the other hand, being a state-owned company, does empower the Government to channel most of its earned foreign currency into the local system in a controlled manner. With higher inflow from Guysuco in the previous years, the pressure on the foreign exchange market was usually relieved and mitigated. With Guysuco now contributing to the local foreign currency market less than one-third of what it did just 4 years ago, the choices available to the Central Bank are fewer. Thanks to the troika of human destruction (Clive Thomas / Noel Holder / Errol Hanoman) that wrecked havoc in the sugar belt, this situation will not improve in the near future. We cannot blame the Central Bank, as they have a duty to maintain their foreign reserve targets and thus they had no choice but to drain the local foreign currency market to meet these targets. But such action will have economic consequences. It is only a matter of time before there is a run on the exchange rate. From the Bank of Guyana Daily Report on the Foreign Exchange Market for March 29, 2018, one of the local banks was already selling foreign currency drafts to the public at G$216.50 for US$1. I am being advised that at the local non-bank cambios, “off-the-books” trading in March 2018 averaged around G$222 to US$1. I would not be surprised if the official exchange rate reached G$240 to US$1 by September 2018 when the procurement for the Christmas season commences. As the supply shrinks in 2018, the only option left is devaluation.
There are public policy lessons to learn from this wild adventure being engaged in Team Granger. When you close down and privatize large segment of state own industries that have significant export capabilities, you take away control of many vital factors that facilitate stability in the economy. Guysuco is not Guyana Stores Ltd, it is a foreign currency earner. Because of what Team Granger did to Guysuco, the nation has now lost its ability to effectively control the foreign exchange rates, the inflation rates, the unemployment rates, the growth rates and so on. In short order they have lost control of the economy.
It is clear as the Bank of Guyana scrambled to meet its international reserves targets, it had to take draconian actions like the disposal of some 85% of its gold reserves within 24 months. Now that the gold stocks are gone, they will have no choice but to print Guyana dollars in order to buy foreign currency on the local open market to meet its international reserves targets. I am truly hoping that Team Granger is willing to make some common sense decision and incentivize the local private sector to invest; not hound them into the underground using agencies like SARA because they have a big property.
