This is no time for naysayers to gloat about the declining fortunes of the gold industry and the conundrum of the rice industry. These two industries along with remittances have emerged, in recent times, as the heart and soul of the Guyana economy. Within the last three years, they were responsible for 46 per cent of the income that people were able to spend and for over 70 per cent of the foreign exchange that the country earned. Trouble in the gold and rice industries would spell trouble for the Guyana economy. Gold alone was responsible for 25 per cent of the income earned in the economy and 37 per cent of the export revenues and transfers received. Rice brought in eight per cent of the income and 12 per cent of the revenues and transfers while remittances made 17 per cent of the income and 25 per cent of the foreign exchange available. The importance of the three sources of foreign exchange is underscored also by their impact on the hard currencies available in the foreign exchange market. Together, they are responsible for about 75 per cent of the money coming into the foreign exchange market. All three important sources of revenue are now exhibiting signs of trouble and their demise would bring harder times to Guyanese than exist now. Of particular interest are the problems of gold and rice which originate from two different sources, but are likely to produce the same effect on the Guyana economy, a drastic slowdown in the rate of output.
Turn of events
The turn of events for the worse for both gold and rice exposes a sad truth about the leadership of this country and the consequence of not having a national vision of inclusion for its development. An attitude of complacency has infected the management of Guyana and the belief persists that with autopilot technology the economy can reach its destination by cruising along an unchartered flight path. It is not hard to see how that could happen when one considers the series of events that converged in 2008 and shortly thereafter to help the government develop a posture of lethargy and condescension towards the people it asked to serve. Among them were the near collapse of the global financial system, the special trade agreement with Venezuela signed in 2007 and the introduction of the value-added tax (VAT) in the same year. Their influence on the sustained growth of the Guyana economy over the past five years may have been downplayed by the government and contributed to the improper management of the gold and rice industries that now reveals itself in the consternation about output and markets.
In 2008, the global financial system experienced a devastating blow of seismic proportions. Discoveries of fraud and corruption in the real estate and financial markets made it difficult for investors to trust the value of assets in which they had their money parked. Several major industrialized economies remained weak and could not offer investors the comfort and returns which they sought. This reality forced many investors around the world to retreat from assets that they held and to seek refuge in gold. This is a typical reaction to financial uncertainty and it caused the price of gold to rise. The long period of economic uncertainty about the value of alternative assets and the value of the US dollar, as well as fears of inflation from the expansion of money supply in the USA, kept the price of gold abnormally high. Sovereign governments like China and India began to adjust their holdings of reserves, replacing large quantities of an unstable US dollar with gold, thereby helping to keep gold prices buoyant.
From 2008 to 2013, the output of gold in Guyana rose continuously and by the end of last year output had expanded over 85 per cent during the period in reference. That trend was not surprising since the export price of gold remained relatively high for an extended period of time, and the high income attracted larger amounts of investment.
False sense of reality
Unless one understood that this phenomenon of exceptionally high gold prices would come to an end and one had to prepare for that eventuality, he or she lived in a false sense of reality. It would appear that is what happened to the Government of Guyana. Three years after creating a new ministry to manage the affairs of its natural resources, Guyana is confronted with uncertainty as to what has caused the 20 per cent fall in gold declarations. Most Guyanese would shake their heads in disbelief that the collapse in gold production could come as a shock to the government which is supposed to be on top of things. The finger-pointing between industry operators and industry regulators would do no good and is no substitute or excuse for what obviously is poor planning by the government.
Guyanese would be equally alarmed to hear that the government would expand the acreage of rice production and encourage the overproduction of the product with no idea as to where to sell the additional output. This economic fallacy was likely induced by the guaranteed sales created under the PetroCaribe arrangement where Guyana exports rice and paddy in exchange for asphalt, oil and similar products. Last year, Venezuela agreed to buy 200,000 tonnes of rice which represents more than one-third of current domestic production. But Guyana has nearly doubled its production since signing the agreement. While the PetroCaribe deal provides a guaranteed market for a limited period of time, the bulk of Guyana’s rice has to go to the regional and world markets. Between 2007 and now, the global rice market has been far more volatile than that of gold. Prices have been fluctuating significantly, thus producing less export revenues than anticipated. Yet, the government has encouraged rice producers to expand the output of a known perishable commodity without making adequate provision to get rid of it. Guyanese must wonder what the government was thinking since it has a direct hand in the management of the rice industry.
Gold and rice earnings contributed to the revenue bonanza of the government which it was able to collect with the use of a modified tax structure. To most Guyanese, the value-added tax (VAT) is an added annoyance that they could do without. They feel the pinch on the pocket every time that they buy a commodity that carries the tax. But to the government, VAT was a game-changer. Prior to the modifications of the tax structure which allowed production and consumption taxes to emerge as dominant income earners, these taxes accounted for an average of 33 per cent of tax revenues. Prior to 2007, income tax was carrying the burden with an average of 45 per cent of the current revenues. By 2008, the government came to realize that VAT could and would be an exceptional income earner. In 2003, production and consumption taxes were contributing 37 per cent of revenues as against 46 per cent for income taxes. By the end of last year, production and consumption taxes were responsible for 58 per cent of revenues while income taxes were responsible for 36 per cent.
The growth in revenues was phenomenal. From 2003 to 2013, VAT revenues grew 393 as against that of income tax which grew 142 per cent over the same period. The introduction of VAT in 2007 enabled the government to move from the position of servant to that of master. Unlike income tax where the receipts depend on the level of income (profits and wages), and could vary wildly, VAT depends on people’s need to feed, clothe and house themselves. It also depends on their desire to look and feel good about themselves, and to have fun at the same time. VAT does not discriminate as to the source of the money that is spent. The money could be gotten legally through working for others (wages), working for oneself (profits), investing in securities (investments), saving the money in the bank (interest), renting premises or equipment (rental), or receiving the money as a gift (remittances). It could be gotten illegally through gambling, smuggling or engaging in other types of illicit activity. It does not matter and there is no need for the government to be bothered even about the more notorious of those activities.
Once the money comes out to be spent, the government gets access to it. Since consumption is based on a wider range of income, the government gets access to a greater amount of money. Businesses really don’t bear the burden of the tax and so they collect it and pass it on to the government. Even though VAT replaced taxes that were there, the manner of its administration made collecting the tax more certain. When the government realized how much more money it had immediate access to after the first year of the VAT, it set about using it to manage relationships.
VAT and labour
VAT also has implications for labour and the attitude of government towards employment. Foreign and local workers who earn income in Guyana and spend it here contribute to tax revenues through VAT. It does not matter to the government who is employed by businesses in Guyana. The VAT would be paid by either the local or foreign worker. In addition, workers who lose income for being delinquent or on work stoppage pay a smaller amount of taxes. A government that needs money would be more responsive to workers’ needs if income tax was its principal source of revenue. VAT has the effect of draining the resources of striking workers fast and forcing them to choose between unrealized labour gains and reducing their savings if they had any in the first instance. VAT has in effect immunized the government from the power of labour unions, unless those unions are ones that could threaten its political power.
Sense of surety
With cash flowing in faster and in great amounts, the government appears not ot have thought sufficiently hard about the threats that faced the gold and rice industries. It proposed expenditure levels in the 2014 budget as if money was not problem. It is through this sense of surety that the government has conducted the economic management of the Guyana economy. Gold production has fallen in response to a decline in the price of the precious metal. Rice production was likely to fall as a result of the need to reduce inventory of the product. Either way, the Guyana economy would suffer and the blame would lie squarely at the feet of the managers of the economy.