Dear Editor,
It is understandable that Guyanese people should feel euphoria over the discovery of oil in our waters and the prospects which this presents, but what this means for our future is an open question. What this leads to in terms of the prosperity and welfare of Guyanese people will depend to a significant extent on the choices we make. Guyana has scored phenomenal GDP growth rates since 2020 when the oil industry started operating – even against the background of the pandemic – but still, I find it disappointing when people tout these growth rates and Guyana’s elevated per capita income ranking as evidence of improved development. It must, surely, be clear to anyone – it does not call for university degrees – that understanding what is happening calls for a broader analysis, a look at the bigger picture. From the viewpoint of economics, for example, you have to wonder how it can be that a foreign exchange shortage is experienced at a time when exports in the billions and billions are being generated.
With international trade and payments playing such an important role in Guyana’s economy, we can learn a lot by looking at developments in our balance of payments. Starting with observations from the current account, the dominant factor is, of course, the phenomenal growth of exports due mainly to the oil industry. In just three years, between 2019 and 2022, Guyana’s goods exports jumped from 1.6 billion to 11.3 billion US Dollars (figures obtained from Bank of Guyana and IMF publications). That means that the value of our exports almost doubled every year over that period. But it is also significant to note that imports also grew rapidly. Whereas imports of goods averaged 1.7 billion USD from 2013 to 2016, in 2021 they had reached 4.4 billion in the middle of the pandemic. This signalled that the main part of the import increase was due to the oil industry.
Now while the balance of our goods trade has grown, the balance of our trade in services has moved dramatically in the opposite direction. The balance of service trade that averaged 126 billion USD annually in 2013-2016 was down to negative 3.9 billion in 2022. What accounts for this decline? The outflow of earnings by Exxon and other foreign firms operating in Guyana. It is also interesting to note that remittance flows into the country have continued to grow. Net transfers into the country more than doubled from 491 million USD in 2018 to over a billion USD in 2022. In other words, in this oil-rich society, families continue to depend substantially on the support of relatives and friends abroad.
The current account of the balance of payments taken as a whole is strongly positive, due mainly to the impact of the oil exports, but the picture is reversed for the capital (or financial) account. Whereas the capital account registered a net inflow of 314 million USD in 2013, averaging 146 million annually in 2013-16, by 2022 it was down to a net outflow of 3.7 billion USD. The main source of the outflow is the expenses claimed as costs by Exxon resulting in a net outflow of 3.1 billion USD in 2022. The IMF is projecting this net outflow to reach 11 billion USD by 2028. Deposits into the Natural Resource Fund count also as outflows, but government’s external borrowing is a significant positive inflow.
The overall state of the balance of payments is reflected in what is happening regarding the country’s stock of international reserves. The IMF record shows an addition to gross international reserves of 122 million USD in 2022. This brings reserves to a level providing 1.1 months of import coverage, well below the recommended level of three months coverage.
We may also consider the fiscal position, i.e., the balances based on the government’s management of its revenue receipts and spending. Government revenue and spending have both grown, but expenditure has outstripped revenue significantly. Even though the oil industry does not contribute much, revenue growth is to be expected as economic activity increases, while government spending has expanded rapidly as a result of the Government’s vaunted public capital works programme. The result is a widening fiscal deficit, estimated at 16 percent of the country’s non-oil GDP, overall, and with a primary deficit of 28 percent. The primary balance measures the difference between revenue and expenditure with interest payments on the government’s debt excluded. A primary deficit means that the Government is in the position of having to borrow to pay interest. Apart from concerns about the growing deficits and debt (which, admittedly, has not reached crisis proportions yet), Government borrowing to service debt is surely not the right direction to be going in.
The key question arising as we observe the fiscal deficits is: how are they being financed? The traditional sources available to the Guyana Government are borrowing from local institutions, borrowing abroad, withdrawals from the Natural Resource Fund and money creation (printing money). A couple of things must be borne in mind where these sources are concerned. As usual, borrowed money is not free, even when the Government does it. Ultimately, the service of Government borrowing will fall on taxpayers.
As it turns out, even though the Government has been borrowing both domestically and abroad, and withdrawing funds from the NRF, it is evident from the Bank of Guyana accumulation of Government securities and drawdowns on Government deposits at the Bank that it has also resorted to printing money. This is unfortunate because money creation is especially to be avoided because it supercharges, as it were, the worst effects of deficit financing such as inflationary pressure and pressure on international reserves. Looking back at the balance of payments, one can observe growing levels of net portfolio investments flowing abroad. Money creation by the Government may be a major factor in this as well as the experience of foreign exchange shortage alluded to earlier.
In conclusion, this sense of an enhanced development status with unlimited access to financial resources is premature at best. The Government needs to be prudent in its development choices, and not get carried away with the mentality that its pockets are so deep that it can spend at a whim. Its resources are limited relative to the development needs and imperatives of the country. So, whether it’s a matter of building bridges and roads or hospitals or paying teachers and nurses, choices must be made with prudence and attention to macroeconomic realities.
Sincerely,
Desmond Thomas
