News Room Guyana
Latest News from Guyana Live on E-Networks E1 7PM

THE ECONOMY: Budget 2018 – the economic impacts of GuySuCo’s divestment programme; the future of the industry

0

During the course of this week, the National Budget for the fiscal year 2018, was presented by the Minister of Finance on Monday, November 27, 2017, to the National Assembly. As is customary, this document has stimulated nationwide discourse, critiques, and commentaries from analysts and commentators alike, and of course, members of the political opposition. To this end, the opposition leader has promised a ferocious debate on budget 2018, in the sitting of the National Assembly next week.

This column chooses to focus on just one aspect for now, as space precludes a more comprehensive review and economic impact analysis in a single article.  Albeit, there are some positive elements contained in the document, for example – the Youth Innovation Project of Guyana – which provided grant resources of up to $2M to finance innovative solutions. In this regard, $150M was allocated for the continuation of this initiative. Despite this, other important economic issues in the area of fiscal policy in particular, as presented in the national budget for 2018, will be dealt with in forthcoming articles. The government must also be commended for the reversal of value added tax (V.A.T) imposed on private education; a policy which was implemented in the 2017 budget by the said Minister of Finance, and was received with the greatest degree of criticism as an unwelcomed policy.

In the introductory speech by the Finance Minister, in his budget presentation on Monday, told the house and the nation that they were met with many setbacks that impeded greater progress – on the part of government – making specific reference to their inheritance of a bankrupt Guyana Sugar Corporation (GuySuCo). In this respect, government continues to pursue its divestment programme of GuySuCo wherein $6.3 billion is budgeted for this purpose in 2018.

Earlier this year, the Minister of Agriculture presented to the National Assembly, a State White Paper on the Future of the Sugar Industry. This document, was previously critiqued heavily in some workings done otherwise by the author of this column – a comprehensive review was conducted of the said ‘White Paper’. It was described – by yours truly as – akin to a high school student’s essay – characterized in the highest degree possible, as an unscholarly piece of work coming from the highest offices in the country’s bureaucratic and hierarchical political structure.

Substantiating this position, the Finance Minister in his Budget 2018 speech, acknowledged that going forward they need to strengthen their analytical skills-set to assess the impact of economic policies pursued by the administration of the day. Indeed, so far, having reviewed policies pursued by this administration, they are a reflection of analyses that lack depth and obviously weak intellectual resources.

The socio – economic impact of GuySuCo’s divestment

GuySuCo is the single largest employer in Guyana’s economy – employing some 10,000 plus persons. It is noteworthy to mention that the closure of the estates will affect the lower working class people. Already, one major sugar estate was closed in December last year; and as of November 28, 2017 some 409 sugar workers were issued with termination letters.Additionally, this column, was reliably informed that in 2018, some 7,000 more employees will become unemployed due to GuySuCo’s divestment programme.

While I note with interest that the Government had the cause to inject about $23 billion in eighteen months and they (government) continue to contend that GuySuCo is a burden on the government by virtue of them having to render financial resources to save the industry; many other crucial factors were omitted from their analyses. Moreover, the direct adverse impacts will be felt in a magnifying manner in the sugar producing communities. It should be noted too, that more than 48,000 or about 80,000 dependents will be adversely affected immediately.

Having said that, GuySuCo’s annual average payment for salaries and wages to workers amounts to approximately $11 billion dollars, of which a safe assumption can be made that about $3 billion find its way back into the national treasury in the form of income tax (P.A.Y.E). In fact, up to April 2015, according to the report stemming from the Commission of Inquiry (COI), GuySuCo had $4.3 billion for ‘P.A.Y.E’ and $1.5 billion for NIS payments, recorded as amounts owing.

So effectively, $11 billion on average, find its way back into the economy annually, both directly and indirectly. A portion of this sum would be utilized for consumer spending; consumer spending fuels economic growth, it sustains the livelihoods of businesses such as retailers, the fisher man, the taxi driver, hire car drivers, minibus operators, the vendors on the streets, the village shops, and the wider retail and distribution sector in addition to spending in their own village economies and the list goes on. Assuming that $5 billion is spent, the other $5 or $6 billion is likely find its way into the banking system as savings.

The $5 billion or so, in the banking system; in turn, forms part of the liquidity profile of the banks, which is then channeled through lending to firms in the form of commercial loans: firms or businesses borrow to invest and expand their operations, and in doing so, employment is created. Commercial banks also engage in retail and consumer lending – all of these activities together, contribute towards the growth of an economy. The banking system facilitates the multiplier effect – this is the process by which the money supply of a country increases via the extension of credit facilities – which also means, the aggregate wealth of a country increases.

How the multiplier effect works?

Hypothetically, approximately $5 billion find its way into the banking system. Assuming that all of the monies are deposited in one bank, let’s call it bank A. Bank A would lend $5 billion at an interest rate of say 12 percent per annum. This results in $600M new money created. As this process continues, Bank A lends this money to Company X, Company X then takes it and deposits into Bank B – Bank B then lends to another set of companies at 12 percent interest, that’s another $600M. This cycle will go on for as many times possible, assume it goes onto the other 4 banks through lending. Each bank, at an average rate of 12 percent, created $3.6 billion in totality from a single deposit of $5 billion. Consequently, the $5 billion in one year through the banking system, increased effectively to $8.6 billion. Tying this demonstration of how the multiplier effect works – to real figures recorded for 2016, citing the Bank of Guyana annual report for 2016: total money supply in 2016 grew by $36.9 billion while total credit grew by $198.8 billion as at the end of 2016.

Then there isincome tax, as mentioned earlier,find its way back into the national treasury and contributes to government spending. Payments to NIS (National Insurance Scheme) amounted to over $1 billion dollars. It should be mentioned that NIS is a state owned entity and hence, the profits that it declares belong to the state or the national treasury.

Additionally, sugar is one of the largest export earning commodity for the country. Export earnings from sugar for 2016 amounted to US$73.4 million (BOG, Annual Report, 2016). Further, the agriculture sector contributes, on average 18 – 19 percent to GDP with sugar alone accounting for 3.5 percent, on average. In 2016, real GDP growth was recorded at 3.5 percent while nominal GDP was close to 10 percent.

When the government took office in 2015, they had instructed a Commission of Inquiry (COI) on GuySuCo which cost the nation over $50M in just three months – so why was none of the COI’s recommendation taken seriously? Was this all a political fallacy? And wastage of taxpayers money? The COI did not recommend the closure of any estate. It was recommended that GuySuCo be privatized but within a specified time line to which the report suggested 2018 – 2020.

A number of subsidiaries or diversification options were identified namely; co-generation of electricity; supply of drainage and irrigation to communities; supply of business services (IT, Tourism, recreation etc.); Prime Real Estate and Property Holdings; Agricultural Equipment Pools, including aircraft for rental to farmers; Sugar Refinery (Planation Whites or Refined Sugar); Molasses; alcohol; ethanol; packaging of special sugars; other by-products etc. These recommendations are of course intended to diversify and increase the revenue base of Guysuco and within the report, it was outlined in detail how each component of the recommendations should be executed, implemented and the respective timelines.

And finally, as an example of a truly caring government, in 1985, the Trinidad & Tobago Government reluctantly bought a money-losing Texico Inc. refinery mainly to save 3,000 jobs and avoid expensive imports of oil products at that time – such an act is a classic example of a caring government. The functionalities and role of a government are not to manage corporations on the basis of profitability alone.

A government’s fundamental responsibility is to prudently manage the economy and safeguard and protect the interests of its citizens – their livelihoods – even if it means keeping a bankrupt entity alive. It is therefore unethical for the Guyanese government to call itself a caring government while plunging thousands of persons into poverty – uncaringly – without conducting a proper economic and social impact study.

Leave A Reply

Your email address will not be published.