September 30, 2016

IMF Surveillance

The International Monetary Fund (IMF) now has a benign image in Guyana after the depressing days when visits by its officials always meant “belt tightening” for a hapless populace. As part of Art IV of its mandate, the IMF conducts annual “surveillance” of the economies of its members, which are then free to use or ignore its subsequent report and recommendations, unless the country is part of a programme under which it borrowed money from the Fund. In that case, as with Barbados for instance, the country must comply with the IMF’s directives which invoke the belt-tightening “austerities” referred to above.
Guyana’s recent stress-free IMF experience was due to a very responsible handling of the economy by the previous PPP/C administration, which produced 5 per cent growth rates that were consistently higher than those of neighbouring economies.
Guyana’s economy, however, is almost totally dependent on the export of commodities – sugar, rice, bauxite, timber, seafood – and gold. As the US Ambassador recently stated, Guyana handled the collapse of the economies of the US and Europe in 2008 very well, as China (and the rest of BRICS to a lesser extent) became the locomotives of global growth.
However the IDB’s 2012 Latin American and Caribbean Macroeconomic Report (LACMR) had predicted Chinese growth rates would fall and as they did, commodity prices would follow, presenting a significant risk for Latin American and other exporters. By 2014 this prediction began to manifest itself, but once again, prudent PPP/C management of the macro-economic fundamentals kept the economy on an even growth rate.
The change of government in May 2015 coincided with the issuance of the IDB’s 2015 LACMR and unfortunately this predicted: “failing unanticipated developments, lower commodity prices are here to stay for a while with no sharp rebound expected”. With China’s growth rate stubbornly remaining depressed – as compared to its two-decade 10 per cent rate – it is almost certain that lower commodity prices may persist.
In such circumstances prudent governments would factor in the anticipated lower revenues flowing into the economy and scale down their spending – especially in areas that would not directly improve economic production or productivity. If this is not done there are several repercussions. For instance debt levels which were prudent under high export prices can suddenly become unsustainable at lower ones and precipitate insolvency, as in Barbados. That country did not acknowledge its plummeting tourist arrivals after the economic collapse up north, and was soon forced into an IMF austerity programme that, among other measures, demanded 3000 workers from the Public Service be terminated.
While acknowledging the danger, the APNU/AFC government was forced by its populist promises made during the campaign – when the symptoms of the lower commodity prices were already kicking in – to increases salaries and PR spending without tying them to increased productivity.
The IMF team warned that the latter practice is unsustainable and strategically dangerous since the increased money’s flowing into salaries could have been used to invest in areas that would generate economic returns.
The other negative impact of the increased current spending, the team pointed out, was to “crowd out” private investments since the government would be financing its spending via funds sucked out of the private banks.
The government was also criticised for increasing its excise taxes on petroleum imports as the latter priced plunged by more than two-thirds. While this policy garnered revenues for the government, if it had been passed on to consumers, it would have stimulated the economy.
Much of what the IMF team noted had been pointed out in this space over the last nine months. Unfortunately, several members of the government view critiques as “attacks” and have even refused to communicate with this newspaper. It is hoped that they will heed the message of the IMF and not continue to attack the messengers.
We are all involved but we do not have to be consumed in a meltdown.

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