Guyana economy urgently needs stimulus plan which will have similar effect to quantitative easing

Dear Editor,

The perceived lag in Guyana’s economy is an ongoing discussion in the media and among business associations and trade groups. Every Guyanese wants a vibrant economy so that “the good life” can become a reality. How to achieve this status is the question which requires an answer. This letter attempts to develop one possible answer.

The so called underground economy seems to have been effectively stopped. This, in effect removed money out of circulation in the economy, resulting in a scarcity of money for commercial activities. The only way to restore balance to the economy is by creating more jobs

i.e. placing more money into circulation by periodic injection i.e. quantitative easing of the tightness of currency circulating in the economy. However, one must also consider the possibility of inflation. A valid question is “won’t creating money like that spark inflation? In normal times, it would. But with lots of spare capacity in the economy, price increases typically encourage firms to bring new production online and hire new workers. Not until the economy bumps up against its structural limitations will price increases accelerate”. The dilemma which now must be considered is whether there are structural limitations within the Guyana economy. The answer to this question is, yes, given the inability to spend the nation’s budget.

During the last two years an early budget seems to be the financial approach with a view to getting capital projects going so that the central government can inject money into the financial system. The goal is to increase the money circulating in the economy, create jobs, stimulate economic growth and build the national infrastructure. This approach is theoretically sound but it does not seem to be gaining traction in Guyana when one considers that the projected spending of the budget is also lagging and is far below the intended expenditure plan. Lack of human capacity seems to have been characterized as the problem in this case.

The second phenomenon that seems to be active in Guyana’s economy is low economic growth. Dutch Disease, which is a characterization of economies of countries with an abundance of natural resources i.e. resource endowed nations which only achieve very low economic growth. A common thread for countries with this form of low economic growth is the specialization in the production of raw materials. “While investment by the government, businesses and individuals should increase economic growth, Dutch Disease causes these investments to be poorly allocated (Barro and Sala-i-0Martin 1995). Dutch Disease undermines consumption of and investment in education because resource intensive businesses do not reward workers with advanced degrees” hence the brain drain in Guyana which has led to lack of human capacity. Consequently, a diasporic re-migration response maybe a solution for Guyana.

Another solution maybe “Quantitative Easing”. Quantitative easing (QE), with a mix of other measures, is a solution which can be applied to change the status quo. QE, also known as Large 

Scale Assets Purchases, is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging commercial banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment. The purpose of this type of expansionary monetary policy is to lower interest rates and spur economic growth. Lower interest rates allow banks to make more loans. Bank loans stimulate demand by giving businesses money to expand, create jobs, shoppers get credit to purchase more goods and services. This is a deliberate increase in money circulating with the domestic economy.

In Guyana context, the economy urgently needs a stimulus plan which will have a similar effect to QE and can be implemented by investing US$2.0 billion over the next ten years i.e. annually US$200m or 10% GDP in Public Private Partnership (PPP) projects using the diaspora to inject additional capital, technology, Intellectual Property and entrepreneurship. Projects such as Infrastructure development, Telecommunications, ICT, health care, food supermarkets, agro- processing, renewable energy, housing, commercial real estate, mining and land reclamation, forestry and wood processing, clean-green transport systems, oil upstream and downstream and tourism are viable areas for investment. Spreading development funding across all these economic and industrial sectors will provide a fillip across the economy. Financial support for the PPP projects will come in the form of 20% equity from the Government of Guyana (GoG), the other partner providing the other 80% investment for design and build projects of national interest. Money from the GoG can originate from the budget i.e. use the current annual budget which is returned to the Consolidated Fund or use new money from the Consolidated Fund or take an annual drawn down from potential oil revenue. This 20% or US$200m annually will garner another US$800m in debt funding from international funding agencies.

Additional support from the GoG can be in the form of loan guarantees; land as a factor of production (natural resource) granted to Guyanese citizens for PPP activities and joint ventures; grants for feasibility and environmental impact studies; and GoG’s recommendation and support of projects to local and international financial institutions. In addition, the GoG can secure equity shares in these projects which could be traded on the local stock exchange as options to raise local investment capital from citizens and the Private Sector. This would have the result of creating the liquidity and increase the volume of money available for projects and of money circulating in the economy. The use of stock options as a method of stock purchasing creates a level playing for all segments of the Guyanese public to invest in stocks i.e. stock options given to an employee to buy stock in a company at a discount or at a stated fixed price with a maturity date when the stock can be sold with a profit if the business become profitable and the stock value appreciates.

Yours faithfully,

Colin Westmoreland

Around the Web

Comments