Concluding challenges and threats to economic stability

Part 7

Introduction

Under the miscellaneous category of economic-structural challenges and threats to macroeconomic stability over the near to medium-term, last week I considered those posed by three “crime-driven sectors,” for want of a better of label. These were the underground economy, remittance flows, and markets indicating characteristics of economic bubbles. I argued that, because crime is the main, if not the only driver of outcomes in these sectors, incentives, as well as motivations and behaviours of participants differ from those in the official/formal economy. And, because these sectors continually interact with the official/formal economy in real time, they pose serious risks to economic stability.

This week I consider three more items in this miscellaneous grouping, and begin next week to wrap-up this ongoing assessment of risks confronting the Guyana economy. The three items dealt with today are: the tax system, the National Insurance Scheme (NIS), and financial contagion.

Tax system

In previous Sunday Stabroek columns (January 15-March 25, 2012), I had considered tax reform and made the observation: “the tax system is fractured and far too costly, burdensome, and inefficient. It is dysfunctional in relation to promoting economic efficiency, growth, development and welfare because the deep-seated problems are as much political in nature as they are technical (economic).”

Large discretionary tax giveaways and pervasive discriminatory provisions in the tax code reveal its political dimension. Additionally, the predisposition of tax management to outside-led political direction and manipulation, as well as the intrusion of “executive lawlessness” into tax administration have allowed the tax system to become, not only an economic albatross on the back of the economy, but a major conduit for corruption, waste, and resource distortion. The continuous risks these circumstances pose for macroeconomic stability cannot be over-emphasized.

NIS

The present NIS is another economic albatross on the back of the economy. I had discussed this also in earlier SN columns. The basic facts, however, remain the same, namely: 1) a growing imbalance between NIS benefits paid out and contributions received;  2) the lack of adequate reserves and resources in the NIS to guarantee its financial sustainability; and 3) the pressure the previous two circumstances are creating to provide significant state funding to protect the NIS.

Established five decades ago to cover public and private sector workers, several weaknesses have emerged over the years, including: 1) low contribution rates (ostensibly designed to avoid being burdensome or punitive) as well as to encourage participation in the Scheme; 2) despite this, however, less than one-third of the employed population has joined the Scheme; 3) an aging workforce requiring benefits rather than making contributions;  4) a highly debatable early retirement age (given Guyana’s demographics); and 5) obvious bureaucratic/management weaknesses, which have led to widespread evasion and continuous public (media-driven) complaints and scandals.

As is well known, the Report of the Reform Committee the NIS had established has not been embraced by its management. NIS reform, however, was a feature of the APNU’s Manifesto at the last election, but proposals based on these have not yet been put before the new National Assembly.

The basic statistics are gloomy. These show the Scheme has an overall income of about $11.5 billion, with the value of contributions being about one billion dollars less, and investment income making up the difference. Two years ago, the IMF Article IV Consultation Mission had forecast that 2012 would be the last year for the Scheme to retain a current balance between its contributions and paid out benefits. Hereafter, current deficits are projected to emerge. However, in 2010 there was already an overall imbalance, if capital expenditure (at about $1.1 billion) is taken into account.

The sad state of the NIS finances reveals the pressure for an urgent infusion of state funding, thereby threatening macroeconomic stability.

Financial contagion

Similar to the two topics considered previously, I have already treated with the risks financial contagion pose to the Guyana economy. I shall not repeat the discussion here, except to make two observations.

One is that, although it has disappeared from the front-burner of attention in the local media, financial contagion, triggered by the collapse of the CLICO Group in Trinidad and Tobago and the bursting of the financial bubble (Ponzi scheme) promoted by the Stanford Group out of Antigua and Barbuda has continued to have lingering effects on Guyana and the wider Caricom. This is not surprising, since as much as 19 per cent of NIS assets were held in CLICO securities, and this has not yet been fully restored!

Further, elusive and messy insurance businesses and credit unions are still to be brought fully under the control of the Bank of Guyana. Less obvious, but just as important, reforms like improved liquidity and loan provision ratios, risk-management, and capital adequacy ratios are still being consolidated.

Second, under the guidance of the IMF (arising out of its Article IV surveillance responsibilities for Guyana) there have been ongoing reforms to the financial system, as well as strengthening of the financial regulatory framework (specifically consolidating the supervisory roles of the Bank of Guyana over both the commercial banks and all other ‘non-bank‘ financial institutions). In 2010 the IMF had reported “commendable efforts” in this regard, although it conceded that, out of 26 agreed-to-reforms, only 12 had been “fully implemented”; five of the 13 were short-term reforms and seven of the 13 long-term reforms.

In view of the above, it remains clear that if the Guyana economy continues to be relatively undiversified and the underground economy as robust as it is, the financial system will continue to remain vulnerable to abuse and shocks.

Next week I shall wrap-up the discussion of the challenges and threats to economic stability.

Latest in Features, Sunday

default placeholder

Can Guyana afford parking meters?

‘Cities love meters – they are a “captive” income source. … unless you know someone or are a “public figure”, the city will tow your car if you have too many tickets.

20160629Development Watch29

Government spending and the economy

Last week the Private Sector Commission (PSC) urged the government to increase its spending to stimulate the needed aggregate demand to sustain business activity.

default placeholder

Peru’s president-elect demands freedoms in Venezuela

Peru’s pro-business President-elect Pedro Pablo Kuczynski won his country’s elections by a hair with the last-minute help of a leftist party, but — judging from what he told me in an interview — he won’t budge on his criticism of Venezuela and other repressive regimes.

default placeholder

Public financial management: 1966 – present (Final)

This is the fifth and final in a series of articles on the above aimed at highlighting the extent of our achievements in the post-Independence period.

LUCAS STOCK INDEXThe Lucas Stock Index (LSI) rose 0.54 per cent during the third period of trading in June 2016. The stocks of six companies were traded with 79,573 shares changing hands. There were three Climbers and one Tumbler. The stocks of Banks DIH (DIH) rose 1.98 per cent on the sale of 18,757 while the stocks of Demerara Distillers Limited (DDL) rose 5.26 per cent on the sale of 41,667 shares. In addition, the stocks of Demerara Tobacco Company (DTC) rose 1.51 per cent on the sale of 13,603 shares. In contrast, the stocks of Demerara Bank Limited (DBL) fell 5.26 per cent on the sale of 4,324 shares.  In the meanwhile, the stocks of Guyana Bank for Trade and Industry (BTI) and Republic Bank Limited (RBL) remained unchanged on the sale of 222 and 1,000 shares respectively.

Massy and Guyana (Part 1)

Steadfast Last year, this writer looked at the Massy Group of Companies formerly Neal and Massy to gain an understanding of the operations of this company which has been doing business in Guyana for the past 48 years. 

20160626table2jun

Value-added performance of the forest sub-sector: Erratic, weak, declining

Erratic Last week’s column highlighted what I consider to be a most distinctive feature of the extractive forest sub-sector’s performance in Guyana’s economy, during the past decade.

default placeholder

The UK bids Europe farewell

On June 23 by a small majority, the British people voted to remove themselves from the European Union (EU). The decision has consequences for the Caribbean.

default placeholder

What would life be without sport?

I wonder what it would be like to exclude sport completely from one’s life for, say, one year? No playing sport, no watching it, no reading it no discussing it no thinking about it even.

Comments

About these comments

The comments section is intended to provide a forum for reasoned and reasonable debate on the newspaper's content and is an extension of the newspaper and what it has become well known for over its history: accuracy, balance and fairness. We reserve the right to edit or delete comments which contain attacks on other users, slander, coarse language and profanity, and gratuitous and incendiary references to race and ethnicity.

Stay updated! Follow Stabroek News on Facebook or Twitter.

Get the day's headlines from SN in your inbox every morning: