Assessing Guyana’s economic performance in 2017 and the 2018 budget measures

(Part I)

We must all express our gratitude and appreciation to Mr. Christopher Ram for disclosing that the Government was in receipt of a signing bonus of US$20 million from ExxonMobil. When the matter was brought to the fore in the media, Government officials vehemently denied the existence of such a transaction, one of whom contended that “it was a figment of imagination”. It has since been confirmed that the Government did receive a signing bonus. However, the only compensation it is entitled to, for the grant of a petroleum licence, is in relation to the licence and other fees, royalty on production, and a share of the profits based on any Production/Profit Sharing Agreement. Any payment to the Government outside of these cannot be considered legitimate and should be rejected.

Since the agreement is between the Government and ExxonMobil, the signing bonus once received is considered public money or public revenue. As such, it should have been paid over to the Consolidated Fund in accordance with Article 216 of the Constitution and Section 38 of the Fiscal Management and Accountability Act. The only exception relates to funds to the credit of an ExtraBudgetary Fund created by an Act of Parliament. However, no such fund has been created. This Column is therefore of the view that the money should be returned to ExxonMobil, and the bank account at the Bank of Guyana closed. In the defence of our territorial integrity, we must be prepared to use our own resources, and not depend on handouts from entities that do business with us. When the latter happens, a dangerous precedent is set, and we risk compromising ourselves.

An interesting article appeared recently in MoneyWatch on why the Gross Domestic Product (GDP) fails as a measure of well-being. It refers to the recently concluded World Economic Summit where the head of the International Monetary Fund, Christine Lagarde, Nobel Prize-winning economist, Joseph Stiglitz, and MIT professor, Erik Brynjolfsson, considered the GDP as a poor way of assessing the health of economies. The problem is compounded by the fact that that we now live in a digital age, and the standard GDP statistics overlook many of the technology’s benefits. The article went on to identify the well-known shortcomings in the use of the GDP as a measure of well-being, but it is worth repeating as we reflect on the Guyana situation:

(a) GDP counts “bads” as well as “goods.” When an earthquake hits and requires rebuilding, GDP increases. Similarly, when someone gets sick and money is spent on his/her care, it is counted as part of GDP. But nobody would argue that the country is better off because of a destructive earthquake or people getting sick;

(b) GDP makes no adjustment for leisure time. Imagine two economies with identical standards of living, but in one economy the workday averages 12 hours, while in the other it is only eight;

(c) GDP only counts goods that pass through official, organized markets, so it misses home production and

black-market activity. This is a big omission, particularly in developing countries where much of what is consumed is produced at home (or obtained through barter). It also means that if people begin hiring others to clean their homes instead of doing it themselves, or if they go out to dinner instead of cooking at home, GDP will appear to grow even though the total amount produced has not changed;

(d) GDP does not adjust for the distribution of goods. Again, imagine two economies, but one has a ruler who gets 90% of what is produced, while everyone else barely - subsists on what is left over. In the second economy, the distribution of the GDP is considerably more equitable. In both cases, GDP per capita will be the same; and

(e) GDP is not adjusted for pollution costs. If two economies have the same GDP per capita, but one has polluted air and water while the other does not, wellbeing will be different but GDP per capita would not capture it.

The article referred to a summary of alternative measures, as proposed by Catherine Rampell, an opinion writer for the Washington Post, as a way to fix the problem. These include: (i) China’s “green GDP” which attempts to adjust for environmental factors; (ii) the OECD’s “GDP alternatives” which adjust for leisure; (iii) the “Index of Sustainable Economic Welfare” which accounts for both pollution costs and the distribution of income; and (iv) the “Genuine Progress Indicator” which adjusts for factors such as income distribution, the value of household and volunteer work, and the costs of crime and pollution. These are in addition to more direct measures of well-being, such as the “Happy Planet Index”, “Gross National Happiness” and “National Well-Being Accounts”. The full article can be accessed at (https://www.cbsnews.com/news/why-gdp-fails-as-ameasure-of-well-being/.

In his recent column in the Stabroek News entitled “GDP’s faulty measurement of the good life”, Ian McDonald referred to the work being undertaken to develop a “Canadian Index of Wellbeing” (CIW). The CIW describes wellbeing as, “The presence of the highest possible quality of life in its full breadth of expression, focused on but not necessarily exclusive to: good living standards, robust health, a sustainable environment, vital communities, an educated populace, balanced time use, high levels of democratic participation, and access to and participation in leisure and culture”. CIW is a composite index involving an assessment of these areas of activity. It acts as a companion measure of societal progress to the GDP that is based solely upon economic productivity. Further details can be obtained at https://uwaterloo.ca/canadian-index-wellbeing/what-wedo/domains-and-indicator.

Now for today’s article. Last week, we provided a summary of the macroeconomic variables for the years 2015 to 2017 and the projections for 2018 as well as the budget measures for 2018 as contained in the Minister of Finance’s budget speech. Several prominent individuals and organisations have aired their views on the performance of the economy and of measures proposed. An analysis of these views indicates that most of the commentaries were critical of the budget. The National Assembly has since concluded the general debate, and has resolved itself into the Committee of Supply to consider individual components of the budget, beginning today.

Strategic framework in support of the budget

Annual budgets are prepared, not in isolation, but in the context of a strategic framework that outlines priorities of an organisation over the medium-term, usually three to five years. In government, a commonly used tool is the Medium-Term Expenditure Framework (MTEF) which is an annual, rolling three year-expenditure planning that sets out the medium-term expenditure priorities and hard budget constraints against which sector plans can be developed and refined. MTEF also contains outcome criteria against which performance can be monitored(http://www.grips.ac.jp/forum/module/prsp/MTEF1 .html).

The 1998 World Bank Public Expenditure Handbook describes the MTEF as the ‘linking framework’ that “allows expenditures to be driven by policy priorities and disciplined by budget realities”. Prior to MTEF’s implementation, many developing countries experienced a disconnect between policy making, planning, and budgeting. The MTEF has therefore become a central element of Public Financial Management (PFM) programmes for developing countries. It consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy, and matches these costs with available resources.

By the end of 2008, two-thirds of all the countries have adopted a medium-term expenditure framework, according to a 2013 World Bank publication, “Beyond the Annual Budget: Global experience with Medium Term Expenditure Frameworks”. Guyana’s adoption of the MTEF can be traced back to 2010. Tables 1-8 of Volume II of the 2018 Estimates contain indicative figures for both revenue and expenditure for the years 2019, 2020 and 2021. However, there is no explanation in the entire package of budget documents, including the Minister’s budget speech, to indicate how these figures have been arrived at. This observation is not meant to be a criticism, as several developing countries are faced with similar problems. One hopes that for future budgets, there will be an outline of the Government’s medium-term policies and how they are linked to its MTEF. In this way, the Estimates, including the indicative figures for the next three years, can be viewed in context. While Volume II of the Estimates also contains Programme Performance Statements for the year in question, the indicators of achievement in terms of outputs, outcomes and impacts need to be quantified to facilitate independent ex post evaluation and to ensure good value for money is achieved.

Actual and projected GDP growth rate

The Minister indicated that the Government was able to maintain stable macroeconomic fundamentals, despite constraints due to the lack of economic diversification that left key sectors and industries vulnerable to external shocks and internal meltdowns as in the case of the Guyana Sugar Corporation (GuySuCo). He stated that the economy is expected to grow by 2.9% by the end of 2017, compared with a projected growth of 3.8%, due mainly to weak performance in the mining and quarrying sectors, and the sugar and forestry industries. The Minister has projected a growth of 3.8% in 2018.

One would have thought that the budget for 2018 would have attempted to address how the economy could be diversified and how to insulate it against the shocks and meltdowns referred to by the Minister. Regrettably, except for forestry and gold mining (where the proposed measures are modest), concrete measures are to a large extent absent in relation to the other areas of the economy. Nor is there reference to possible new areas in an effort aimed at diversification. There is also hardly any mention of GuySuCo which is a major contributor to foreign exchange and the GDP, notwithstanding its lossmaking status and consequent drain on the Treasury. Another concern relates to the absence of measures to address the unreliable supply of electricity and the high cost of this utility service that not only hampers the operations of existing businesses but also creates an entry barrier for the development of new businesses, including attracting foreign investment in industries. In the circumstances, the projected growth rate of 3.8% appears somewhat over-estimated.

Removal of VAT on education services

In our Column of 5 December 2016, we had examined the 2017 budget measures and concluded that the budget was more of a taxation one rather than a developmental budget that could assist in kick-starting an ailing economy. There was little evidence to suggest that a genuine effort was made to provide the desired level of fiscal and other incentives for the manufacturing and service sectors and for new businesses to be established. Nor was there evidence of any proposal to address the state of unemployment among youths, which accounts for as much as 40% of the youth population. This is according to a 2015 Caribbean Development Bank study entitled “Youth are our Future: The Imperative of Youth Employment for Sustainable Development” and reported by the Stabroek News on 22 May 2015.

A key issue was the imposition of a 14% value-added tax (VAT) on electricity and water above certain thresholds, as well as on education services. We are glad that VAT has been removed on the latter but remain concerned about its effects on electricity and water, especially from the perspective of businesses.

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To be continued -