Making the best of Guyana’s economic boom
Professor Emeritus in Economics, The University of the West Indies and former President, Caribbean Development Bank Guyana is on the cusp of an economic boom based on the commercial production and marketing of its petroleum energy resources. The challenge before the country now is to make the best use of the opportunities presented by the imminent boom. The quality of the outcome will turn upon the quality of management in government, in business enterprises and in households.
Let me begin with government. There is a conventional view that governments should follow a king of annuity rule which smooths expenditures over a defined long period of time. Most of current fiscal resources would thus be saved to finance deferred expenditures. This principle would only be valid if the economy is already well endowed with capital and wealth and is growing sustainably. This is not the case in Guyana, which starting from a low base of economic capital ( including infrastructure and business plant and equipment), wealth and national income, is better advised to utilise its fiscal windfalls to put the economy on a higher growth path than would be feasible in the absence of an enlarged public purse. Government spending directed towards improvements in community health, better social and productive infrastructure, more efficiency in the delivery of public services, and social stability can positively influence national productivity and investment, business opportunities and business income, household employment and household incomes and wealth. But for these benefits to accrue expenditures must be carefully planned and implementation must be tightly managed.
The management issues raised in relation to government apply to expenditures by private enterprises but there is at least one significant additional factor, namely the management of financial arrangements. During economic booms, financing costs are typically lower than returns or profits expected by investors. These gaps stimulate demand for credit and willingness to provide it. The outlook seems a “win-win” outcome. The danger is that when economic booms lose momentum, lenders and enterprises begin to temper their expectations. Lenders are less inclined to make new loans and debtors are stuck with repayment obligations contracted at now unrealistically high levels of expected revenues. The overall result could be that enterprises experience liquidity problems, difficulties in refinancing, and even insolvency. Financial management should therefore not be taken lightly during economic booms.
I turn now to the household sector. Households should be careful not to over-extend themselves during economic booms. They should ensure that their projected payments do not exceed their projected incomes. The danger lies in misjudging the degree to which the rise in personal incomes during a boom are either transitory and reversible or are permanent and sustainable. Transitory incomes do not provide a reliable basis for servicing debt. Euphoric conditions associated with economic booms and loans pushing by financial institutions tend to weaken household financial prudence, sowing the seeds for household financial distress and substantial loan losses among financial institutions.
Management issues arise at the macroeconomic level as well. Some characteristics of economic booms are rapid inflation, much higher international imports relative to national income, falling unemployment rates and rising wage rates in the energy sector, distorting spillovers from the energy sector to other sectors of the economy, and rapid sustained credit expansion. The overheating of the economy which is the collective term often used to describe these events interacts dynamically with the three economic sectors discussed earlier, compounding the problems of micro- management. The government sector’s institutions of macroeconomic management, i.e. the Ministry of Finance and the Central Bank, are therefore critical for making the best of Guyana’s economic boom.