Standing firm on macroeconomic fundamentals
August 26, 2009 | By knews | Filed Under Letters
Last year, during the month of September, the world’s economy began a downsizing trend. The fall of Lehman Brothers opened the eyes of millions globally to the reality of the severity of the damages caused by the US sub-prime mortgage crisis.
Banks became fussy to lend, which eventually led to a global recession causing an outpour of analysis and debate about the austerity of the crisis.
Leaders worldwide were and are still now busy arranging meetings to discuss how the global economic crisis has affected their countries’ economies, and what type of government policy responses are necessary to help cushion the effects of the crisis.
Despite this crisis, developing countries were not severely affected as the United States (US) and European Union (EU) economies, since the banking systems of developing countries are small and had no involvement with the sophisticated financial systems abroad. However, the economic crisis still had some spillover effects on all developing countries, inclusive of Guyana.
Developing countries felt the effects of the financial crisis particularly in areas such as: trade, credit, remittances, private capital flows, and aid.
As a result of the financial crisis, the International Monetary Fund (IMF) predicted that world trade is expected to contract by 11%. Also the interconnectedness of the banking systems has posed a problem for developing countries to access credit from banks because of capital shortages in foreign banks. Remittances are one important asset and developmental tool to the economies of developing countries and the financial crisis has led to a decline in growth of remittances in the second half of 2008. Private capital flows and financial aid are expected to decline, which are crucial for the promotion of growth and development in poor countries.
The Global Financial Crisis has proved itself that no country is immune to its unexpected economic shocks which are responsible for the fluctuations in national income, output and employment. However, Guyana managed to maintain good macroeconomic fundamentals, with quite a stable inflation rate.
And, the IMF acknowledges this. The IMF report from the concluded Article IV consultation with Guyana lauds Government for the effective implementation of some policy initiatives and their ability to maintain macroeconomic stability, achieve real growth rate of 3.1 percent in 2008, following rates of 5.1 and 5.4 percent in 2006 and 2007, respectively, and stabilizing inflation rate; the inflation rate for 2008 was 6.40% which was lower than the 14.05% rate in 2007amid the global financial crisis.
The IMF Public Information Notice (PIN) No. 09/61 states that, “the fiscal deficit widened to 7.9 percent of GDP (6 percent target) due to measures adopted in early 2008 to reduce the impact of high fuel prices, most of which have since been eliminated. So far, the financial system has been relatively unaffected by the global turmoil.”
Guyana experienced the impact of the rise in world fuel and food prices at the beginning of 2008. Food prices in Guyana increased by 27.2%; and Government increased the tax threshold by 25% from $28,000 to $35,000 per month and removed the Value Added Tax (VAT) from a number of items. The IMF report commends Government for the successful implementation of VAT and progress in the area of fiscal reforms. The IMF report states that, “the Guyana Revenue Authority introduced a Total Revenue Integrated Processing System allowing for better monitoring of taxes and risk profiling.”
The IMF report commends financial sector reforms, which include measures to improve compliance with Basle Core Principles and the preparation of legislation facilitating the creation of a credit bureau, on money transfer agencies, and on anti-money laundering and combating the financing of terrorism. The recently completed Berbice Bridge — a major public-private project — bodes well for increased private sector participation in the economy.
According to the IMF report, the Executive Directors noted that, by implementing prudent fiscal and monetary policies, the Guyanese authorities had maintained macroeconomic stability in 2008, despite external shocks and social pressures. Sustaining these policies will be critical to reduce vulnerabilities associated with commodity price volatility and possible spillovers from the global crisis. Directors commended the authorities’ commitment to further entrench macroeconomic stability, strengthen the financial system, and implement structural reforms.
The IMF recognises the economic achievements of Guyana, and so Government remains committed to stabilize price levels and exchange rates, make certain that fiscal deficit is controlled, reduce unemployment, and keep an eye on the cost of borrowing money.
And in order to maintain this, Government intends to restructure the economy by reforming policies and investment strategies.