Maintaining sufficient foreign exchange reserves pivotal to stable value of dollar
The ideas we have proposed in the paper justifying Unity and Human Development (“UHD”), can be downloaded at http://bit.ly/18odYmG. We welcome criticisms and comments. Here is another of the principles in which we argue that the Bank of Guyana must be independent of political interference.
In the case of rapid inflation, the financial assets and savings of our people will be threatened. Savers would prefer to demand unproductive assets such as gold, or non-durable ones like livestock. Fixed income earners like pensioners will see their standards of living plummet. In general, the poor will be made poorer. The same will occur if the exchange rate depreciates rapidly. Therefore, the preservation of a stable value of the Guyana dollar must be central in the policy matrix of the government. If the value of the currency is unstable, then those most capable, and those who possess relevant information, will send their money overseas. This will make foreign exchange even scarcer, thus deepening the perpetual foreign exchange gap Guyana faces. That makes it even more difficult for businesses to engage in imports such as technology.
Maintaining sufficient levels of foreign exchange reserves must take a central position in the stabilization agenda. Moreover, the Bank of Guyana must be independent of political interference so as to curtail the excessive printing of money or issuance of unwanted domestic debt. The government must maintain reasonable fiscal deficits (with a balanced long-term intertemporal budget), and must not indulge in excessive debt financing because that takes away funds from building production capacity. Worker salaries cannot be financed by printing money or running up debt; salary growth is better financed by productivity gains and strong tax capacity. Collecting tax revenues ought to be a central part of the stabilization agenda since it means the government can finance salaries better. For this reason, better understanding of the VAT and its crucial role in mobilizing tax revenues, versus income taxes, are required. With the underground economy running on average over 60 per cent of Guyanese GDP since 2002, the VAT – a tax on consumption – is the only way for the government to tax underground economic activities.