Policy Issues and Financial Plan 1999

The Minister announced that the Budget is geared to meet many challenges facing the economy. He identified as key issues the return of confidence to the economy, the maintenance of sound macroeconomic policies, the acceleration of structural reforms, continued support to the private sector, improvement in the social conditions and the continuation of the public sector modernisation programme under the HIPC Initiative.

Despite the legal challenge to the Revenue Authority the Government is commendably committed to its implementation since it sees the Authority as an integral policy to widen the tax base.

The Minister also announced that during 1999 the feasibility study for the introduction of value-added tax (VAT) will be concluded.

The principal trade policy is the acceleration of trade reform by reducing the maximum import tariff rate. debt relief including US $253M under the HIPC Initiative.

Structural reforms will continue this year with the privatisation of all public enterprises with the exception of GUYOIL, GNSC, GNCB and GUYSUCO. These enterprises will be restructured with a view to improving efficiency and productivity.

The enterprises considered as being at the point of sale include two bauxite companies, the national airline and the Electricity Corporation, with the latter two privatisations being in advanced stages.

The government’s strategy for private sector growth will be to continue the establishment of a simple, clear and well-enforced legal framework: improvement in the incentives' regime; reinforcing and broadening of the financial sector and providing the supporting economic and human infrastructure.

The government plans several projects as it continues the infrastructure rehabilitation programme:

1. An investment of G$ 1.9Bn in the agricultural sector, most for capital projects. The projects include the rehabilitation and improvement of drains, canals, sluices and the completion of certain roadways in the rural areas.
2. A new US $41M bridges’ programme, to rehabilitate and reconstruct all the bridges and structures between Timehri and Rosignol will commence this year. Also included in this programme is US$ 11M for part financing of the Berbice River Bridge.
3. A US$ 25M Urban Development Programme earmarked for commencement this year.

The Administration intends to stimulate the job market through a greater concentration on the development of micro enterprises, the promotion of more labour intensive public sector investment projects and skills training.

To reduce the duplication of activities and inefficient use of resources by NGOs the government proposes to establish an NGO Co-ordination Unit at the Ministry of Finance. This is absurd.

The main thrusts of the social sector programme are to poverty reduction programmes, rehabilitation of the education infrastructure and delivering an improved quality of education, the allocation of 10,000 house lots and expansion of the water distribution network.

In an effort to achieve its objectives the government plans to strengthen the institutional capacity of the Health Ministry

The continuation of the Government’s G$ 20Bn programme to supply safe, pure and reliable was to all our communities.

In Georgetown, the GSWC first phase remedial programme will be completed. Negotiations for Phase II will also begin in this year.

More than 10,000 house lots will be distributed.

Government is seeking a US$ 30M loan for the housing sector to be partially used for institutional strengthening of the Central Planning and Housing Authority.

The Government has established a national Y2K Committee with a grant from the World Bank. The Committee plans to amend the National Data Management Authority Act to allow the Authority to deal with Y2K related activities including those of the private sector companies whose operations are deemed critical to national security and economic interest.

 Ram & McRae’s Comments

The Government continues to emphasise expenditure on physical capital rather than people, at a great cost to productivity and society.

There is no reference to the Youth Employment Programme announced in the 1998 Budget Speech. To adopt policies to promote more labour-intensive public sector investment projects appears retrogressive and hardly a good use of public funds. Anyone familiar with the diversity of NGOs will find the decision to establish an NGO Coordinating Unit in the Ministry of Finance most absurd. The Minister should immediately rethink this matter.

If the Government wishes to assist and promote small businesses it will have to modify the provision of the Companies Act 1991 in relation to such businesses, cut bureaucracy and establish a ‘small companies’ tax regime.

The tax holidays that were recently re-introduced are available only to pioneering activities i.e. new locations and new products. We believe that the objectives of granting tax holidays can be enhanced by expanding its scope to include other industries, particularly the tourism sector. This can be done at no cost to the Treasury if the duration of the Tax holiday period is limited to three years.

Every year we comment that tax reform is most successful if the populace is involved and consulted. Episodic and reactive changes often result in a patchwork of prescriptive additions at the expense of a coherent framework.

We support the introduction of VAT but only as part of wider, comprehensive reform in which the public is genuinely consulted.

Desirable though it is the benefits of the Revenue Authority appear to be somewhat exaggerated since the basic laws to be administered by the Revenue Authority are not essentially altered by the Revenue Authority Act which was passed in 1996.

We believe it would be in the country’s interest for the Government and the public workers’ union to reconcile their differences on the Act outside of the courts.

On the question of tax evasion we would be surprised if the revenue collecting agencies did not know the sectors, companies and individuals who engage in systematic tax evasion. Our laws provide for draconian penalties and in our view it is more a matter of will rather than laws which inhibit action against tax evasion

The following economic targets have been earmarked for 1999:

1. A real GDP growth of 1.8%
2. An average inflation rate to 5.5%
3. Overall public sector budget deficit (after grants) of 3% of GDP

Whilst the growth in real GDP is projected at a modest 1.8%, the performance of the economy so far in 1999 has not been good and is being worsened by continuing unrest in the sugar industry. Accordingly, although it is achievable it assumes that major shocks will not take place in 1999.

We do not believe that an inflation target of 5.5% is realistic given the deterioration of the exchange rate since January 1. Inflation imposes a great cost on the economy and should the rate move into double digits, most other targets would suffer.

Similarly, we believe the overall public sector deficit as optimistic.

The table on the next page presents a summary of the Government's projected fiscal operations for 1999. The Plan projects a current balance of G$2.434Bn compared with the latest estimate of G$3.054Bn in 1998. The overall balance is projected at a deficit of G$11.305Bn compared with a deficit of G$15.255Bn in 1998.

Current revenues are projected to increase from G$33.121Bn to G$34.939Bn in 1999 with the Inland Revenue Department (IRD) and Customs and Excise projecting increases of 5.72% and 7.3% respectively in 1999.

Total interest is projected to decrease by approximately 0.4% from G$10.370Bn in 1998 to G$10.331Bn in 1999 or approximately 29.6% of current revenue compared with 31.3% in 1998. Interest on domestic debt is projected to increase by 27.4% whilst that on external debt is projected to decrease by 11.5%.

Current expenditure is projected to increase by 5.5% from G$33.121Bn to G$34.939Bn in 1999. Interest represents 31.78% of total current expenditure whilst employment cost represents 31.77% and other charges account for 36.44% of the total current expenditure. Budgeted current balance of G$2.434Bn (1998 - G$3.054Bn) represents 6.97% of current revenue in 1999 compared with 9.22% in 1998.

Capital revenue is projected at G$3.016Bn (1998 - G$424.5Bn) and capital expenditure at G$12.787Bn (1998 - G$13.034Bn).

The capital expenditure budget for 1999 represents a 1.9% decrease over 1998. This follows a decrease of 20.4% in 1998 after an increase of 4.3% in 1997.

Debt repayment is G$3.97Bn (1998 - G$5.69Bn) leaving an overall deficit of G$11.305Bn compared with G$15.255Bn in 1998. It is projected that the deficit will be financed from external sources of G$15.402Bn of which G$4.096Bn will be repayments to the local banks.

Domestic and External Debt Service as a percentage of current revenue is projected at 40.9% compared with a revised percentage of 48.5% in 1998 and a budget of 34.1% for last year.

Notwithstanding the fact that projected current revenues of $34.9Bn is less than the actual for 1996, it seems highly unlikely that the revenue target for 1998 will be realised. The revenues fell short of target by 11.1% in 1997 and 12.9% in 1998.

Th Minister is now projecting a 5.5% increase in current revenues which appears extremely optimistic. The projected increase in employment cost of 5.5% does not include any provision for public sector wage increases which in 1998 was 9.6% over 1997.

The 11.5% decrease interest on external debt is premised on further debt relief under the Highly Indebted Poor Countries (HIPC) Initiative. Since the Minister did not indicate the exchange rate assumed in the Budget, it is difficult to predict the impact on the Budget of further depreciation in the exchange rate of the Guyana Dollar. The successful achievement of the capital target depends heavily on the completion of privatisation of a large number of so far difficult to sell corporations. However, The Privatisation Unit has been doing a good job and the Government has also appeared committed although there are pockets of vested interest still determined to stymie the process.

For yet another year there was a shortfall in current revenue of 12.86%. The first quarter of 1999 showing a rapid slump in the economy promises to bear similar results in the new millennium. The non-resolution of the Revenue Authority status can also contribute to the non-achievements of targets.

The projected 610.6% increase in capital revenue also assumes that the privatisation programme will not be significantly affected by the current political instability. A positive note, however is the rate of privatisation of the Guyana Airways Corporation.

Source: Ministry of Finance

1/ Excludes Project Grants, which are included in the External Financing item.

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Last modified: March 31, 1999