Recent events in the foreign exchange market: the APNU + AFC factor Part 6

The previous five columns explored several recent developments in the foreign exchange market. They explained that the present depreciation of the exchange rate cannot be separated from common economic events – that show up in the aggregate economic statistics – affecting peoples’ lives on a daily basis. The columns underscore that the macroeconomic picture is wobbly, and as a result the adverse sentiments are being priced into the FX market. This is reflected in weak demand for machines and other intermediate goods needed to keep people producing and employed. The essays also observed the precipitous decline in foreign investment and overall private investment.

We concluded that there is little evidence to indicate that there is a slowdown in the underground economy as evidenced by the persistent increase in the use of cash for payments compared with bank deposits.  However, we saw that Guyanese are reducing their demand for bank deposits or money, thus signaling a general slowdown in official economic activities since 2011. The general pattern of a slowdown starting in 2011-2012 can be witnessed in the other major statistics.

I have argued that the primary reason for the slowdown in economic activity is the very contentious politics that resulted from the 2011 General Election, when the PPP became a minority government. The PPP refused to budge on any opposition request and the opposition opposed every policy decision of the Ramotar administration. As an aside, Mr Ramotar could possibly have been President today had he acquiesced to about two reasonable requests of the then opposition.

However, we saw that private investment and FDIs fell steeply in 2016 under the APNU + AFC government. No doubt the two-year old government accounts for part of the steep economic slowdown even though forces from 2011 were already causing investments to decline.  In other words, the government’s ambivalence with respect to the business community is the straw that broke the camel’s back. In a letter “The government appears deeply suspicious of the entire private sector,” I argued that the policy uncertainty of the government is causing those who earn foreign currencies to hoard instead of pursue physical investments (SN February 19, 2017). The hoarding creates a prima facie shortage.

If we go back to the third essay in this series, we would observe that private investment as a percent of GDP collapsed from around 22% in 2015 to 9% in 2016. Moreover, in the fifth column, we saw private foreign investments declined steeply by over US$125 million from 2015 to 2016.

Soon after the May 2015 General Election, the Private Sector Commission (PSC) signaled its willingness to work with the new administration. A Stabroek News report of June 5, 2015 summarized a series of measures discussed between the PSC and President Granger and his team. They discussed the need reorganize National Insurance Scheme and Go-Invest as well as telecoms liberalization and tax reform. They     stressed the importance of legislation to address money laundering and their support of the Procurement Commission and Integrity Commission and other measures.

The government, however, responded with several disparaging comments about the private sector. These public outbursts likely stem from the fact that the government does not see entrepreneurs as part of its base. I think this perspective is wrong on many levels. The public feud between government and private sector culminated in a Stabroek News headline “Gov’t accuses private sector of helping opposition undermine the economy” (SN February 18, 2017).  It is normal for new governments to seek to reassure private investors after a change in government, let alone when such change occurs after 23 years. Instead, Guyanese producers of stones, fruit juices and pharmaceuticals were replaced by import sourcing in the public procurement. Last week, however, a Guyanese contractor once again obtained the contract to supply stones, possibly signaling a softening of the quarrel between the two sides.

The government came to power with little policy clarity with respect to the big economic challenges facing the country. This is confirmed by the abrupt closure of sugar estates, except three. At best, the sugar sector white paper strings together sentences. Fiscal policy – government spending and taxation – over the past two years has been pro-cyclical in the sense that the government is seeking to expand the tax burden during an economic downturn. We also saw in Column 4 that capital spending collapsed in 2015, thus worsening the procyclicality.  While the latter cannot be blamed completely on the government owing to fiscal uncertainty in an election year, it became counterintuitive why the tax burden had to be increased in the 2016 budget. In general, it is better for fiscal policy to be counter-cyclical.

A series of steep increases of fees and of course the VAT on private education have also contributed to the general pessimism. The VAT on private education makes no economic sense. Education at the primary and secondary levels should be subsidized instead of taxed given the higher public good component of education. This is regardless of whether the school is public or private. The extent of the subsidy for university education is debatable, however. Many countries are requiring students to put more skin in the university education game, by requiring them to bear part of the cost.

The sudden and steep increase of fees for farmers in the MMA area would further decrease the return on farming. It is time the government takes stock of how wealthy Guyanese small and medium-scale farmers really are. I am putting my bet on the event that large-scale farming and the millers are doing better. Small-scale and medium-scale farmers are at subsistence or just above. Small farmers usually do multiple jobs, including working for little cash using their visas. Guyana’s economic history – not the kind of history focusing on who suffered more than whom – from around the time of the African peasantry should inform current policy makers as to the viability of small-scale farming in the coastal geography.

Another problem is associated with the conflation of the underground economy with corruption of government officials of the previous administration. Often perceived corruption of the previous government gets projected onto the private sector, and vice versa. This has resulted in gross exaggeration of the extent of theft on the books that took place under the PPP. Unfortunately, many private investors, who are not saints, are seen as PPP supporters. This is far from the reality. Ultimately, any government would have to work with what it has. The art is to nudge the selfish interests of the entrepreneur in the direction of national ones.

In conclusion, I argue that the five percentage point decline in private investment (as a percent of GDP) in the year 2016 is primarily the result of the ambivalence of the APNU+AFC government with respect to domestic investors. It appears like the foreign investors are also taking note given the collapse of FDIs in 2016.


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