Key concern for long term is that non-oil exports must not lose international competitiveness

The Vice President, Mr. Bharrat Jagdeo, has provided us with very useful entry points for an informed discussion of the budget. I refer in particular to his comments, as quoted directly and indirectly elsewhere in the media:

1. “this intense period of build out of a lot of our infrastructure [is] urgently needed to support continued growth in the economy but once they are completed, you will see a steep fallout in the budget. The budget would be reduced significantly in the [other] years because once you finish building the 12 hospitals and the bridges and the power plant, then you don’t need to expand anymore.”

2. “The Dutch disease refers to a situation where a country’s currency appreciates due to large revenues from natural resource exports, leading to a decline in other sectors like manufacturing and agriculture. Jagdeo noted that this currency appreciation is a hallmark of the Dutch disease.”

The first statement includes the words “budget” and “growth.” Economic growth is usually computed as the change in (preferable “real”) Gross Domestic Product (GDP) from one period to the next. In turn, GDP is the value of final goods and services produced in an economy in a year, and it is computed as Consumption + Investment + Government Expenditure + Exports Imports or (C + I + G + Net Exports). The relationships among these components of GDP are quite complex, and the complexity increases when consideration is given to the method of financing the budget (deficit), but we can say this much without any equivocation: An increase in government spending, as reflected in government’s annual budgets, increases GDP in the year of the fiscal expansion by exactly the increase in fiscal spending. Conversely, if the budget is “reduced significantly in other years” then GDP in the years of the fiscal contraction will also decrease by the amount of the reduction in fiscal spending. The GDP and GDP growth we end up with in those future years depends entirely on the economic growth that occurs over time. If the 12 hospitals, bridges and power plant - and whatever - do not lead to economic growth, then a continuation of fiscal stimuli, or annual injections of increased fiscal spending, will be required to sustain GDP and GDP growth.

Note that we can say the same things about the other components of GDP increases, and conversely about imports, all in a strictly accounting sense. Going beyond the accounting framework is where the analysis of the

budget ought to begin.

The second comment attributed to Mr. Jagdeo is in the nature of “going beyond the accounting framework,” but here one needs to be careful. The Dutch Disease has come into our national discourse in a timely manner, but the Dutch Disease cannot be discussed in “nominal” terms that have to do with currency appreciation. By definition, talk about currency appreciation implies something about (a decrease in) the exchange rate, but here again, a meaningful discussion of the Dutch Disease goes beyond the “nominal” exchange rate.

It is indeed a remarkable thing that the Guyana dollar (i.e., our local currency) has not appreciated, and in fact seems to be depreciating. In his only reference to exchange rate policy in his 2024 Budget Speech, the Minister of Finance gave us a clue as to this mystery: “monetary policy in 2024 will remain focused on containing prices and keeping exchange rates steady (p. 95).” One can only hope that the budget debate will allow the Minister of Finance to elucidate on this statement, and especially to tell us if it implies the sterilisation of capital inflows, but for now we ought simply to note that it is directly related to the misunderstanding that forestalling the Dutch Disease would entail targeting the nominal exchange rate.

Jargon aside, our key concern for the long term is that Guyana’s non-oil exports must not lose international competitiveness. The international competitiveness of our exports, traditional and new, is eroded when our currency appreciates, but also by rising domestic prices. In more technical terms, what we must concern ourselves with is the “real exchange rate” and not just the “nominal” exchange rate. The former is the latter, adjusted for inflation.

Budget 2024 which is actually three times as large as the revenues earned by ExxonMobil Guyana in 2022, is not just another, bigger, budget. It is a test of our willingness to make the best of the massive oil discovery that made it (Budget 2024) possible.