On the question of macroeconomic stability

It is true in a country like Guyana people are concerned with the daily struggles of life. Students are looking for meaningful employment; yet others are concerned with putting nutritious food on the table. Alcohol is not the only substance abused in the villages anymore; these days villagers have to contend with the cocktail of alcohol and cocaine. This often leads to the abuse of children and other family members. These day to day matters of life may tend to cause political leaders to ignore the overall macro economy. Some may say we all live individual lives; that the macro doesn’t really matter.

Macroeconomic stability means that the economy has minimized its exposure to various kinds of shocks. In a small economy like Guyana or those in the Caribbean it often means a predictable rate of inflation and a stable exchange rate. Obtaining this stability is often easier said than done. However, it is much easier to achieve a stable exchange rate and inflation if the country has a manageable fiscal deficit, low foreign debt-to-GDP ratio, low foreign debt service ratio and sufficient foreign exchange reserves. Stability can also be enhanced because of how history turned out. For example, many Guyanese have migrated and as a result Guyana receives a stable inflow of altruistic remittances of approximately US$400 million each year. Guyana also receives a fair amount of foreign direct investments these days in natural resource exploitation. These inflows are not subject to sudden reversal that will cause rapid loss of foreign exchange and devaluation overnight. A foreign investor after sinking millions of dollars in a project cannot pack up and leave the next day.

20140101watchStability could also be achieved by a central bank (Bank of Guyana) which is not susceptible to political pressure requiring it to finance the central government’s deficits. The central bank often has to balance the local foreign exchange market by offering Treasury bills to commercial banks and other institutional investors who would be tempted to use scarce foreign currencies to purchase financial assets from overseas. Such purchases would cause a loss of scarce US dollars, Canadian dollars, euros and pound sterling. These foreign or hard currencies can therefore be quarantined by the Bank of Guyana as foreign exchange reserves, which are now available for other crucial imports like oil, technologies and capital goods like machines. Therefore, the Guyana dollar Treasury bills that are sold in the name of “mopping up excess liquidity’ act as a compensating mechanism when foreign currencies are quarantined for other crucial imports to keep the economy running and stable.

As people go about their daily lives and struggles, they may not be contemplating these abstract ideas like compensating monetary policy, prudent fiscal policy, debt service ratio and so on. But responsible leaders who aspire to govern a nation must think about them because the macroeconomy also determines the individual’s well-being. For instance, if the Guyana dollar should depreciate by 50% the poor are made even worse off because importers of fuel and food will have to mark-up their prices. The middle class is also made worse off as prices rise. And the elites with the economic means and information will shift their capital from Guyana dollar investments to Miami and Toronto.

If investors curtail investments in Guyana how are the youths going to get jobs? Youth policy is inextricably linked to a stable macroeconomy. The same 50% depreciation will have an even more debilitating effect on pensioners. Their fixed pensions will buy even fewer things as the devaluation induces inflation. Any policy meant for helping elders and the poor will have to take into consideration a stable exchange rate and predictable inflation. Devaluation will also imply poor families are less likely to put nutritious foods on their tables; the depressed will be even more stressed.

These are not idle writings as scholarly economic research is more and more unravelling the importance of a stable exchange rate and predictable inflation for GDP growth and the creation of employment. In the Caribbean several scholars have always insisted on the need for macroeconomic stability given that their countries often are exposed to global shocks and natural disasters. Antagonistic domestic politics only adds another layer of unnecessary shocks.

Several scholars have also noted how politics drive the stability of the exchange rate and therefore the fortunes of their citizens. If workers are made to feel that only they are facing the strain whenever there is stress, they will eventually not cooperate. The Barbadians are way ahead in this realization. And even in Jamaica, with its historically divisive politics, public sector workers have agreed to several years of a salary freeze. Unfortunately the situation in Guyana is very different because labour unions are divided along ethnic lines and ethnic political parties. Unionized workers have always been used to make political statements in a mutual strategy of sabotage.

As workers observe the wealth accumulation of a few, it is a hard sell to tell them that they need to sacrifice more. One only has to look at Mr Jagdeo’s mansion by the seaside – inconsistent with his on-the-book pay – to get a feel for how abnormally skewed the responsibility for stability has been. Unfortunately, the workers are caught between a rock and a hard place. On the one hand, they have a right to be angry. On the other hand, if they continue to be used as pawns in the political process the entrepreneurs will not want to create the kind of quality jobs that are needed to grow the economy.

Comments: tkhemraj@ncf.edu

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