Sunday, June 7, 2009

The IMF Consultation on the Guyana economy in 2008

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Posted By Christopher Ram On June 7, 2009 @ 5:14 am In Features, Sunday | No Comments
The IMF Consultation on the Guyana economy in 2008

Using its stock-in-trade jargon the Executive Board of the International Monetary Fund in a Public Information Notice issued on May 19, 2009 gave a very favourable report on the performance of the Guyana economy for 2008. The IMF attributed the maintenance of macroeconomic stability in 2008, despite what it referred to as external shocks and undefined “social pressures,” to the implementation of prudent fiscal and monetary policies by the Guyanese authorities. This assessment came in what is referred to as an Article IV Consultation in which the IMF holds bilateral discussions with member countries, usually every year. For the consultation an IMF staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies.

The website archives/000309.html considers such consultations to be as “fine a piece of research as you’re likely to find produced by the public sector.” It claims that “the IMF staff economists harangue each country about its weak points on a periodic basis; these reports record this tongue-lashing.” Roles have reversed and it is the tongue-lasher who is in the effusive role immediately juxtaposing a criticism with an overwhelming corresponding achievement. The website also opined that with the recent fashion for good governance the consultation covers not just economic policy but also political institutions. That certainly did not happen with the Guyana 2008 Consultation. To complete the songs of praise of such reports, notes that they contain an excellent data section at the end including detailed budget numbers and IMF forecasts. Not even the IMF Public Relations Department could have done a better job.

Insensitive IMF
Today’s column looks at the May 19 statement which has generated practically no comment in the media. The consultation took place just days after the presentation of the 2009 Budget by the Minister of Finance and it is in many ways a restatement of the points made in the speech by the minister, except perhaps for its level of generalisation. If the matters contained in the report are almost identical, so too are the omissions. Nothing, for example, about job creation and unemployment levels, which must be the major poverty issues facing the country, the pervasive underground/parallel/narco-economy which has such a distorting effect on the official economy, and widespread tax evasion which is as much an equity issue as it is a contributor to poverty with the poor paying the taxes for the rich. In fact the reference to taxation said nothing of the punitive tax burden borne by those who have the misfortune to be honest or employed while the report lauds the introduction of VAT as “significant progress in the area of fiscal reform.” That is as insulting as it is insensitive.

In fact if the unnamed official who visited Guyana had taken the time to read the IMF’s own recommendations on tax reform s/he would have noted that many of the recommendations are yet to be implemented. Some of these are: the recommendation for the reduction of the corporation income tax rate for commercial companies from 45% to 40% in 2003 and to 35% in 2004; disallowing the carry forward of minimum tax in excess of corporation income tax; extending the minimum tax to noncommercial companies and the abolition of the threshold; limiting the deduction of interest paid for corporation tax purposes and imposing a withholding tax on payments to local government contractors.

And those locals more familiar with the tax laws and their operations could add several more, including constraints in the tax laws (income, corporation, property and VAT) which inhibit businesses; clarifying ambiguities in the tax laws; modernising the provisions relating to capital allowances in respect of the service and IT industries; thin capitalisation rules; trans-border and operational issues such as set-offs, interest, refunds, etc.

Resuscitating the PRSP
The report describes the attention to poverty alleviation as a medium term issue and notes that the directors “welcomed the upcoming finalisation of the Poverty Reduction Strategy Paper,” which, however, did not get a mention in the 2009 Budget speech. Other than references to earlier documents, the past three budget speeches paid no attention to the PRSP, leading many to wonder whether the PRSP had been subsumed or abandoned. And the Minister of Finance in his 2009 Budget speech linked poverty reduction and economic development to the mobilisation of external and domestic debt. Not only can debt cause impoverishment, but what about the seventy billion dollars or so paid in VAT and other indirect taxes and PAYE which make many into working poor? It seems that the PRSP is no more than another marketing document to take to donors and the lending community.

Macroeconomic stability holds a special place on the IMF altar of economic performance and rectitude. If that is preserved then for the IMF all is well. But then we seem to have shifting sands when it comes to what the IMF in fact means by macroeconomic stability. Has the meaning changed from the early days when the IMF itself defined its objectives to include a) achievement of an average rate of GDP growth of 4%; b) a viable balance of payments situation in the medium term; and c) the re-incorporation of the parallel economy into the official economy? The economy is of course a long way from these, so the meaning not only changes but when growth decelerates the IMF considers it sufficient compensation that there is a decline in inflation. And after a sharp shortfall in 2008, sugar is expected to contribute to higher growth for 2009 to offset a slowdown in the other sectors of the economy.

The IMF seems to accept all statistics at face value. It repeats the official growth in the 2008 economy of “about 3%,” described as a deceleration attributed to the performance of sugar. Even if it is assumed that at the time of its official’s visit in February, the statistics were unavailable, more complete data were available by the time of the report’s publication. The data disclosed by the Minister of Finance show that in 2008 sugar as well as forestry declined over 2007 by 15%, diamond by 37%, bauxite by 7% and manufacturing by 2%. Despite all of this the economy grew by 3.1% – a questionable proposition indeed.

There was not a single comment on the unrestrained excessive domestic spending, but in relation to external transactions the IMF noted that the country’s external current account had widened to close to 21%. The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). Almost as if to soften the impact of the deterioration the report not only seeks to attribute that deterioration to sugar but immediately adds “but was fully financed by concesssional loans, grants, and FDI.” As if one justifies the other.

No mention either of the alarming growth of the domestic debt which has quadrupled since 1992. As debt – domestic or foreign – rises so too does debt-servicing. The interest cost of servicing the domestic debt in 2008 was $2.98Bn while the interest of the external debt was $1.7Bn. Total debt service inclusive of interest cost is 14.4% of the total non-interest expenditure compared with 11.7% in 2007. Instead of seeking to address poverty reduction through incurring further debts policy-makers should be concentrating on job-creation to save our citizens from the indignities, cruel treatment and even death as they seek jobs in neighbouring countries.

Job creation
Even with all the limitations of our national statistics the evidence is overwhelming – we are not creating an adequate number of jobs to serve the population. That is the essence of the problems our citizens face. To blame Barbados for enforcing their immigration laws is counter-productive. Every government is sworn to uphold its laws even where there is a common economic space, and one only has to think of the illegal Mexicans who are routinely held by the US and returned to their country. To use Obama’s word it is “ignorant” to threaten to pull out of Caricom when we are certainly a major beneficiary. Or to hark back to the days when Bajans were welcome into our country, as if the traffic was all one-way.

For all the constant criticism about the economy inherited from the PNC and the boast about growth in the economy, since then the active number of employed persons in 2008 is less than it was in 1990, 1991 and 1992. NIS is a poverty issue and the failure by the scheme to insure persons is a failure of poverty management. It means that those persons would have no NIS pension when they turn 60.

Guyana is by far the largest country in Caricom and has one of the lowest population densities. We need our citizens – artisans and professionals – to stay and help build the country by exploiting the country’s vast potential, also the greatest in the region. We need imaginative economic and social policies; we need local and foreign investors who create jobs and make a net contribution to the country, and who do not just reap benefits and leave; we need a society that is as favourable to the poor as it is about the rich. We need a tax system that is fair and equitable.

At best the IMF sees poverty as a subscript to their macro-economic fundamentals. They seem neutral whether it is the parallel or the formal economy that makes the economy stable or how many persons are put on the breadline to achieve that stability. We need to make the elimination of poverty as much part of the equation as macro-economic stability. It is time to reject trickle-down economics.

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