Review 1998 & Legislation and Sector Measures

After seven years of continuous growth averaging around seven percent (7%) per annum, the economy recorded a decline of 1.3% against a target growth rate of 3.2%.

The Minister attributed the decline principally to the following factors:

1. The effects of the global economic crisis on our local economy
2. The drop in commodity prices, especially forest products
3. Drop in agricultural production of 5.3% partly due to the lingering effects of drought
4. The slow down in the manufacturing sector due partly to financial difficulties

The Minister appears to have over-emphasised the situation in East Asia. In many countries, which had experienced a loss of investor confidence, severe currency depreciation and a deep recession, signs of stabilisation and economic recovery have appeared. With the return of investor confidence, exchange rates have risen whilst interest rates have fallen.

The PNC led street protests, particularly in the first half of 1998, would have severely eroded investor confidence, as does the continuing stand off between the two major political parties. However, the fall off in foreign investment in Guyana has been evident from 1996 so at worst the street activities would only have exacerbated an already weakening situation.

Key sectors of the economy, including rice and sugar, were unaffected by political unrest but appeared to have suffered from bad weather conditions, reduced prices and industrial disputes. Increase costs of production have also affected the commodities’ ability to compete.

After several years of relative stability, the exchange rate depreciated significantly particularly during the latter half of the year. With no indication by the Minister of the inflation rate in the economy in 1998 we are left to speculate on a phenomenon which mirrors the exchange rate given the high import content of our expenditure on both goods and services.

The agriculture sector declined by 5.3% compared with growths of 7.7% and 3.1% in 1996 and 1997 respectively. Cane sugar output declined by 7.1% over 1997 against a target decline of 3%. Performance in the rice sub-sector was "better than expected". Rice was budgeted to experience a 7% decline in 1998. In the absence of specifics one is left to wonder whether the "better than expected" performance meant a growth or a lower decline than the target of 7%.

There was a 24% decline in output in the forestry sub-sector which was partly attributed to the fall in commodity prices. However, strong growth was recorded in fisheries 11%. Mining recorded mix performance with gold production increasing by 4.2% to 454,485 ounces and bauxite production dropping by 8.2% over 1997. A 5.4% increase in Omai’s output together with a 14.9% increase in independent declaration accounted for the increase in gold output.

The growth in the manufacturing sector slowed significantly during the year. The growth in the production of processed rice, refrigerator and stoves recorded in the previous year was reversed in 1998. However increased production of alcoholic and non-alcoholic beverages helped to stabilised the sector’s production.

The construction sector grew by 4.7% mainly on account of an expansion in housing and residential areas. This had been projected to increase by 11%. Despite continuing poor performance in tourism the services sector grew by 2.9% compared to a target of 3.6%.

The legislation on the Bank of Guyana is critical to the maintenance of a non-inflationary macroeconomic environment and a stable financial system. Since this legislation would also lessen the influence of the Minister of Finance over the operations of the Bank, it is a positive sign to see this Act passed.

Private sector credit increased by 15.4% in 1998 compared with a 23.6% growth rate in 1997. Major increases were recorded in credit to distribution and household sectors with modest increases in the agriculture as well as mining sectors.

The Minister again lamented the ever widening spread of the commercial banks despite a significant decline in the 91-day Treasury bill rate from 8.14% at the end of 1997 to 8.84% at the end of 1998.

Actual performance deteriorated significantly when compared to the budgeted but marginally when compared with 1997. This decline was due to a combination of contraction in revenue collection (G$4.8Bn lower than budget), decreased current expenditures (G$ 799M), and increased debt servicing (G$ 764.1M). Capital proceeds were less than budgeted largely as a result of the privatisation programme being behind schedule. It is doubtful whether some of the entities previously brought to the point of sale can be sold given the present economic and political climate.

Current revenue was some $4.8Bn below budget, made up mainly of shortfalls in collections at the Inland Revenue Department ($2.2Bn) and Customs Department ($2.1Bn). The lower economic activities (lower imports etc) and difficulties with collecting tax arrears were cited as the main reasons for the shortfall in current revenues.

Capital revenue fell short of budget by $2.2Bn or 610%.

On the expenditure side, there were modest savings on budget on total expenditure of G$ 1.8Bn or 4% below the target of G$44.9Bn.

Interest expenditure was 3.8% over budget and actual debt repayment was 69% over budget. This would have been the consequence of meeting current obligations as part of the rescheduling arrangement.

The Government failed to achieve the targeted level of external financing which was $4.2Bn below budget. This shortfall forced additional local borrowing of $7.01Bn during the year when a decrease of $6.65Bn was budgeted.

Overall the budget deficit, when compared to the target for 1998, almost doubled.

By the most amazing oversight, the inflation rate for 1998 was not announced. This was projected at 5.5%.

The decline in overall GDP from 6.1% positive to 1.3% appears inconsistent with the decline in the major sectors and other indicators. In any case, as we have previously contended, the emphasis on GDP in the National Accounts can give a false sense of well being since in our case much of it accrues to non-residents often on a tax-exempt basis.

The Minister expressed concern that in relation to the forestry sub-sector Guyana was not capitalising on the enormous opportunities for value-added and added that "it is important that we explore avenues for achieving higher value added." Yet in his speech he made no mention of incentives or measures that would attract businesses to invest in the sector.

Similarly, in the area of commercial lending he continues to lament the interest rate policies of the commercial banks. With the introduction of the Bank of Guyana Act 1998, the Bank of Guyana will now have the autonomy and we hope, the courage to address the problem to the satisfaction of all concerned.

Most commentators had predicted a substantial shortfall in revenue particularly given the experience of 1997. What was perhaps most surprising is that as late as the third quarter of last year the Minister was still projecting positive growth.

We are particularly concerned that any serious budget process could result in a bidet deficit of almost twice the amount projected. We believe that the Government too must be concerned.

Whilst it is perhaps possible to extrapolate from the estimates some of the major economic indicators the failure of the document to disclose these seriously inhibits a thorough analysis.

1998 LEGISLATION AND SECTOR MEASURES

Highlighted hereunder is legislation passed in 1998 of interest to the business community.

This Act repeals and re-enacts the Bank of Guyana Act 1995.

Its principal objective is to enhance the role of the Bank of Guyana, assigning it responsibility for the creation of a non-inflationary macroeconomic environment and a stable financial system.

The Act defines the relationship between the Bank and the Government and makes provision for a separation of monetary and fiscal operations.

The Act amends the Income Tax (In Aid of Industry) Act, Cap. 81:02 by the re-insertion of Part 1 giving the Minister power to grant tax holidays for a period of up to ten years to companies engaged in a trade or business of a wholly developmental and risk bearing nature.

The Act which will come into operation on such day as the Minster by Order appoints will repeal and replace the 1970 Insurance Act, Cap. 91:02, and provides for the regulation of insurance, the promotion of competition in the insurance industry and the protection of consumers.

It allows, inter alia, for the appointment of a Commissioner of Insurance with responsibility for the general administration of the Act and the appointment of staff, engagement of actuaries, consultants, advisors, managers and the preparation of a budget for the office in conformity with directions given to him by the Minister.

The Act will create an Insurance Arbitration Board for dispute resolution between policy holders and the insurer or broker and an Insurance Board of Review to deal with appeals.

The Act which will come into operation on such day as the Minster by Order appoints, inter alia, seeks to establish a Guyana Securities Council which will be charged with the administration of the Act and the provision of advice to the Minister of Finance on all matters relating to securities.

It provides for the registration of securities exchanges, clearing agencies and associations of securities companies and intermediaries and sets basic qualifications for such registration. It also makes provision for matters relating to ‘insider trading’ (which is addressed in the Companies Act 1991), liability of persons associated with prospectuses and the enforcement of Regulations made under the Act.

When the Act comes into force it will repeal Part III Division D of the Companies Act 1991, dealing with prospectuses, and the Capital Issues (Control) Act, 1995.

Having announced in the 1998 Budget on March 30, 1998, the intention to introduce the above-mentioned among a list of other legislative measures it took the Government the rest of the year to introduce them.

The amendment to the Income Tax (In Aid of Industry) Act is merely a restoration of Section 2 of the same Act and as the Minister himself said recently, would require the publication of guidelines before having any real effect.

Despite the passage of the Bank of Guyana Act the Minister still appears to exercise excessive influence over the Bank which seems unwilling to assert publicly its independence and autonomy so critical to establishing the public’s confidence in the Bank.

Of equal significance is the Minister’s recent call for a debate on Currency Boards which may suggest some dissatisfaction with the concept of a Central Bank.

A general feature of all these legislation is the overwhelming authority they confer on the Minister of Finance. The authority includes the right to appoint the Commissioner of Insurance, the Deputy Governor and Directors of the Bank of Guyana; the approval of the use of a currency other than Guyana Dollars in the fulfillment of any monetary obligation or transaction; the authority to specify policies, principles and criteria governing the exchange rate system in Guyana; and the need for Ministerial approval in the exercise of the financial powers conferred on the Securities Council by the Securities Act.

Given the need for transparency and accountability the conferment of these powers may prove dangerous in the hands of a single individual.

The Ministry of Finance has not displayed the technical expertise or institutional capacity to deal with its mandate under existing legislation. To impose further responsibility on the Ministry without the benefit of a Junior Minister, which the President has refused, and substantial institutional strengthening, including a team of competent professionals, it is unlikely that the Ministry of Finance will be able to execute its obligations under legislation for which it has statutory responsibility.