Loose fiscal policies by APNU+AFC administration could have serious implications for monetary and exchange rate policy

Dear Editor,

The foremost objective of macro-economic policy is to obtain sustainable economic growth in the context of price stability and a viable external account. In order to achieve this, it is essential to have closely coordinated fiscal and monetary policy. Without efficient policy coordination, financial instability ensues leading to high interest rates, exchange rate depreciation, rapid inflation and negative economic growth as happened in the 80’s when Guyana turned to the International Monetary Fund (IMF) for survival.

Guyana has been operating without a budget for nearly two years that has resulted in lax fiscal policies. This untenable situation is further compounded by the absence of parliamentary oversight, the Covid-19 impact and an inconclusive election after three months for reasons that are well documented. Government has continued its spendthrift ways by utilizing all avenues especially monetary financing by increasing its overdraft at the Bank of Guyana and the issuing of treasury bills for budgetary spending.

Non-prudent fiscal spending can have serious consequences for the economy. Moreover, the financing of the fiscal deficit in Guyana has relied mainly on expansionary monetary policy. The overdraft at the Bank of Guyana has increased by $37 Billion to $92 billion as of April 2020.The IMF estimated the overdraft at the Central Bank to be equivalent to 9% of GDP in 2018 and advised that it be converted to domestic bonds. This is tantamount to “money for nothing and checks for free” since government does not pay interest on its overdraft at the Central Bank. Since May 2018, the Bank of Guyana has issued fiscal treasury bills that accumulated to $71.7 billion at the end 2019 for budgetary purposes. It should be noted also that the Bank did not issue ninety-one days treasury bills in the last two years which is the prime determinant of the bank rate.

Central Government deficit was $30 billion despite a rapid growth in tax revenue by $27.4 billion or a 19.6% growth in income tax revenue to $93.5 billion in 2019. A major source of financing of the public sector deficit is banking system credit that increased by 25.8% and 38.4% respectively in 2018 and 2019. It should be noted that private sector credit hovered around a meagre 4% in those years.  The monetary financing of the massive central government deficits has led to the rapid increases in excess liquidity in the domestic economy with growth in narrow money i.e. currency in circulation and demand deposits increasing to $258.1 billion as of April 2020. Narrow money grew by 43.5% in 2019 alone and continued along the trend of further creating a bulging liquidity in the economy.

Fiscal profligacy has been a major source of economic crises in both developed and developing countries. A number of European countries that are members of the European Union (EU) breached the fiscal threshold of 3.5% deficit to GDP with large spending and an insoluble deficit that put the single currency at the brink. It took major interventions by the IMF and the EU central bank to prevent a catastrophic crisis in a number of countries in the EU. Argentina the poster child of the Washington Consensus after an initial success with the currency board arrangement faced its worst crises ever in the dawn of the new millennium due to lax fiscal policies that led to the sacking of four Presidents in less than a year. Domestic debt was a major problem for the Jamaican economy that was complicated with the transfer of financial sector adjustment company (FINSAC) debt equivalent to 34% of the GDP to the public coffers.

The loose fiscal policies by the APNU+AFC administration could have serious implications for monetary and exchange rate policy in Guyana as past experience had shown. The most justifiable support for fiscal intervention at the present juncture is Covid-19 and it is receiving scant attention. The flagship Covid-19 project in converting the Ocean View hotel into a hospital that will cost over a billion dollar may well end up being another white elephant. Hopefully, the election crisis is quickly resolved and Guyana can return to a level of public accountability. A good start for a new administration will be to reduce the ballooning deficit by cutting the top-heavy bureaucracy in eliminating the number of vice presidents and some ministries that have overlapping functions. Finally, for a natural resource-based economy like Guyana a counter-cyclical fiscal policy is the best option for long-term sustainability.

Yours faithfully,

Rajendra Rampersaud