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.
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.
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.
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.