Challenges and threats to economic stability Part 2

Thus far in this series of columns dealing with the 2012 National Budget I have catalogued two of four challenges and/or threats to near to medium-term macroeconomic stability in Guyana, under the caption of ‘global developments.’ The remaining two will be addressed today. These are 1) the deterioration of export marketing conditions for GuySuCo’s sugar consequent to the European Community’s (EC) denunciation of the EC-ACP Sugar Protocol (SP) in 2009; and 2) the uncertainty surrounding funding for forest services provided under the Guyana-Norway Memorandum of Understanding (MoU). Afterwards, I will continue to catalogue items under the second caption.

Sugar marketing disruptions
At the core of item 1 listed above are the lingering complications caused by the EC’s denunciation of the SP and the coming into force of the related Cariforum-EC, Economic Partnership Agreement (EPA). Writing on this topic in September 11, 2011 I had reminded readers that, during the 1990s and up to 2005, the SP had provided annual income transfers from Europe to Guyana, which averaged roughly 7.5 per cent of our GDP. These transfers are calculated as the gap between the prevailing world price for sugar and the SP price in force multiplied by the quantity of sugar Guyana supplied under the SP. The SP quota had provided for 160,000 tonnes of annual sugar sales to the EC.

Starting in 2006, the SP price paid by the EC was reduced in stages from 523.7 euros per tonne of raw sugar to 335 euros by October 2009. Between the latter date and the end of this year (2012) a price floor (or minimum reference price) of 301.5 euros per tonne remains in force; however, if the prevailing world price exceeds the floor price, the former would be paid by the EC. Additionally, the EPA now provides for ‘duty free quota free’ sugar sales from Guyana to the EC, subject to transitional provisions that come into force if the marketing of sugar is seriously disrupted during the first six years of the EPA.

Forest services sales
I have repeatedly observed in previous columns that Guyana’s sale of forest services is advanced by the authorities as both a low carbon development strategy (LCDS) designed to secure the country’s sustainable development and a vehicle to secure external funding in return for ensuring its rainforests are not destroyed. This latter is being pursued through the avoided deforestation provisions of the United Nations’ REDD + arrangements.

Over the past six years a great deal of the country’s governmental resources have been tied up in these pursuits; first, in securing the Guyana-Norway MoU, 2009 and second, through strong participation in international efforts aimed at securing public and private funding in return for the contribution of poor countries to the fight against global warming and climate change. So far, the financial returns for these efforts have been, to say the least, disappointing.

Thus for example, under the 2009 MoU Norway had pledged over the next five years a total of US$250 million as payment for validated forest services, which are to be provided by Guyana. For several reasons this pledge has not materialized. Indeed the 2012 National Budget reported that, at the end of 2011, two tranches of the pledge had been transferred by Norway to the Guyana REDD+ Investment Fund (GRIF) totalling US$70 million. GRIF is the agreed institution for disbursing these funds to approved projects. The 2012 Budget indicates approved projects representing only about 10 per cent of the total funds paid into GRIF.

The brief description above highlights the challenges and threats to economic stability due to uncertainty over the materialization of payments for providing forest services.

National economic management
I shall turn now to consider a second grouping of challenges and threats to economic stability, which I term national economic management. This captures three items, namely: the HIPC legacy, statistical delusion, and big government.

HIPC legacy
Previously in this series of columns on the 2012 National Budget I have observed that Guyana’s earlier designation as a highly indebted poor country (HIPC), marked one of the world’s most brutal peace time policy-driven assaults on the livelihoods of citizens of a country. As a consequence I believe our country requires economic managers who will keep this sombre experience always at the forefront of their deliberations and actions. Based on the HIPC legacy I urge that we do not embark on a path which requires in any way running the risk of slippage in the government debt to GDP ratio, whether through deliberate actions or inattention. In other words the HIPC legacy permits no retreat from strict containment of sovereign indebtedness.

This leads directly to the second item, which is economic managers should also be cognizant of the risk of statistical illusion inherent in the recent official adoption of the new rebased 2006 price series national accounts data. For years Guyana was a poster-child for unexplained real value added (GDP) stagnation. Many studies ‘explaining’ this phenomenon were conducted by the IMF and World Bank. With the adoption of the rebased GDP series, stagnating real value added instantly disappeared, as not only has the GDP growth rate increased but its total value and components have also increased in size by about two-thirds to three-quarters! The jury remains out on whether this has been a true occurrence or statistical illusion. In this sort of situation economic managers are invariably unsure of the reality on the ground and are prone to make policy miscalculations.

Next week I shall deal with the third item, big government, and then continue with cataloguing the other challenges and threats to economic stability.

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