Level of savings

When one looks at the current account balance in the country’s balance of payments, the concern might be about the deficit that emerges annually and the amount of foreign currency that seems to be leaving the country. Even though concerns about the outflow of hard currency are important, the current account balance plays another role as it relates to savings and investment. Advocates of free trade would agree that the latter two issues were more important than the direction of the trade balance. Savings and investments lead to employment, possibly a wider choice of consumer goods, increased productive capacity and greater amounts of revenue for government. Short of being able to gather data from various economic units such as individuals, businesses and the government, one can rely on the balance in the current account to give a sense of how much Guyana is saving each year. The level of savings gives a good indication of the potential for direct investment in a country. This article seeks to discuss some of the implications of savings and investment that emerge from the behaviour of the country’s current account balance. The article is being presented in two parts.

Current account balance

Even though Guyanese might be familiar with the current account balance, many might not be aware of its components and how they impact the level of savings and investment by the country. The current account reflects the active exchanges that take place between Guyana and other economic territories around the region and the rest of the world. It is the place where the country records, in summary form, its business dealings with economic units from all other countries. The most conspicuous of the activities that occur is the trade in goods and services. Most Guyanese understand that transaction very well.

They know that things come for them from abroad resulting from purchases that they might have made online or otherwise. On the flip side, they themselves might send things abroad as part of a business arrangement with the expectation that they will be paid. Even when they are not directly involved, Guyanese know that many of the goods that they buy in the supermarkets and shops carry foreign labels and are not produced in Guyana. However, when all the exchanges of goods and services are settled, they result in a balance. The balance arises because some of the goods in the economic exchange might have a higher value than others. The balance of trade could be favourable or unfavourable. When it is unfavourable, as is the case mostly with Guyana, people cast aspersions about the prospects of the economy. But an unfavourable trade balance could contain significant positives as will be indicated later in the article.

Movements and outcomes

Apart from a deficit or surplus arising from the trade in goods and services, the current account also has some activities that affect the level of savings by the country and, consequently, the level of investment. These movements and outcomes arise from foreign investments, migration and tax policies. A foreign company might transmit abroad part of the salary of an expatriate employee. The foreign company might also have to pay interest on a loan taken from abroad and, in favourable times, it would be interested in paying dividends and repatriating its profits. Such movement might be two-way depending on the economic activities that Guyanese businesses have abroad. In Guyana’s case, migrant workers play a big part in determining the current account balance as is shown in Table 1 below. However, the bottom line is the movement of money in and out of the country has an impact on how much we keep and how much of those savings is invested.

Table 1 below contains balances in the current account for a five-year period from 2011 to 2015. In none of the years, the current account balance was positive. The negative balances reveal that as a country, very little was being saved. That balance comes about after government, households and private businesses would have spent their money and then sought to acquire goods and services from abroad. As such, the excess comes from foreign transactions which makes what Guyana does with other countries very important. That Guyana can run a negative balance in the current account each year reflects the dynamics of international relations. Sometimes Guyana is unable to get its goods into foreign markets because of non-tariff barriers to trade. This is particularly the experience of agricultural and livestock products which must meet sanitary and phytosanitary regulations of importing countries. To the extent that such reasons are crucial to the export trade, some money and time should be invested in reducing the country’s export risk. In other instances, countries allow Guyana to buy goods and services on credit. The negative balance in the Table reflects what Guyana owes to other countries.

TABLE 1