In this week’s column I shall begin a review of Guyana’s economic performance during 2008, principally through evaluating the impact of three major shocks and economic challenges which rocked the economy during the first half of that year. As presented in last week’s column the shocks and economic challenges during 2008 differed greatly between the first and second half of the year. Indeed, in that column, I displayed a schedule listing the 14 most important economic challenges of 2008. Three of these occurred in the first half of the year.
2008 Budget theme
The 2008 Budget was laid before the National Assembly on February 22 and had as its theme: “Staying the Course: Advancing the Transformation Agenda.” That theme was no doubt largely guided by the uncertainty that faced the global economy in the early months of 2008.
Indeed, the Budget had recognized global economic growth of 4.9 per cent for 2007. This was, however, expected to falter in 2008 reaching only 4.1 percent. According to the Budget strong global growth in 2007 was fuelled by rapid growth of the emerging market economies (7.8 per cent for 2007), and in particular China, which grew at 11.4 per cent in that year.
During 2007, the phenomena of rising food and oil prices at the global level constituted the major external economic challenges. The general inflation rate for that year was 14 per cent. The increase in food prices, however, exceeded 20 per cent. Like others at that time, I am skeptical about the accuracy of these inflation estimates. However, I have to use them as they are in fact the only ‘official’ estimates for that year.
The ‘official’ overall inflation rate for 2007 did not accord with the anecdotal experiences of purchasers in local retail markets, particularly those spending on food items. Rising food import prices, plus the 16 per cent value added tax (VAT) on most retail items, did not square with a price inflation rate as low as 14 per cent and 20 per cent for the “overall” and food items, respectively. Nevertheless, these rates were in fact more than double those of the preceding five years!
During the first half of 2008, rising prices of food and fuel, which started in 2007, persisted. This occurrence dominated government’s policy responses in early 2008. Further, as the year went on, the price of oil reached unprecedented levels and, despite the official statistics for January to June 2008, the prices of imported food items continued their relentless rise.
Shortly after June 2008 the Bureau of Statistics had produced an estimated inflation rate that was less than half the rate for previous year (6.8 per cent for January-June 2008). I have already commented on these statistics in previous public statements and in the process I have highlighted the course of certain prices (for example, milk and milk products), which no consumer I questioned considered plausible.
Effects of rising oil prices
The effect of rising oil prices was as devastating, as the increase in food prices. Oil is the main source of energy in Guyana. Price increases have pass-on effects, since every item reaching the final consumer requires energy to produce, store, and/or distribute. In addition, rising oil prices raise export production costs (particularly in non-sugar areas such as mining), as well as personal transportation costs.
The persistence of rising oil and food prices during 2008 clearly impeded Guyana’s economic growth, development and job creation. Moreover, these two shocks were both exogenous, in that they arose from considerations beyond the control of the Guyanese authorities. Regrettably, these same authorities have sought to minimize or ignore the negative impact of external shocks and economic reverses on economic performance during 2008.
As if the situation created by rising oil and fuel prices was not bad enough, the fusing of the two created a global ‘bio-fuels bubble,’ which affected Guyana. The basis of this bubble lay in the mistaken belief that rising food and oil prices in 2008 represented fundamental shifts in the global demand and supply schedules for these items! It was argued that the main causes for these shifts were 1) the spectacular growth of demand for food and fuel in the emerging market economies 2) the negative effects of global climate change on food supplies and 3) the disruptions and geo-political uncertainty in the Middle East.
I will not revisit these issues here, as I have already discussed them in previous Sunday Stabroek columns during 2007-2008. The main point I wish to reiterate now is that speculation has clearly dominated price behaviour for oil and food in the recent past. In addition, rising food prices globally are not a sustainable long-run phenomenon. The economic evidence shows clearly that as persons and nations’ income levels improve, a diminishing proportion of that income will be spent on food. In this circumstance there can be no long run sustainable improvement in the price of food relative to the price of manufactures and services. Of course, this stipulation does not rule out supply shocks in the short run, particularly those caused by bad harvests. In the case of rising food prices during 2007-2008, the evidence now reveals that there were supply shocks in the food chain, but that the main cause of price increases resided in speculation in food and commodity markets. This was also true for oil prices in that period.
As I stated above, rising food and oil prices fuelled what I would term in retrospect as a bio-fuels bubble. Typical of such bubbles, speculation dominated the market place and players in both food and oil markets deceived themselves that bio-fuels, led by what seemed a continuous increase in oil prices, were also entering an era of continuously rising prices, growing demand and therefore increased profitability. Guyana got sucked into the bubble, with the authorities making extravagant claims about the potential of ethanol and sugar cane production as a solution to Guyana’s energy needs, export earnings, and saving on import expenditure.
The later decline in oil prices, (by about 75 per cent of its peak level of US$150 per barrel in 2008) has brought the cold harsh light of realism onto the domestic energy market and has hopefully burst the bio-fuels bubble in the making.
As readers would realise these shocks of rising food prices, rising oil prices and the bio-fuels bubble posed serious economic challenges for the economy. As we shall see, however, the effects of the later shocks, which emerged in the second half of the year turned out to be far more devastating.
I shall continue from this point next week.