Stats Bureau should be doing far more to explain questionable GDP numbers

It was refreshing to see the letter by Chief Statistician Mr. Lennox Benjamin `Challenge of country’s growth estimate was undertaken without single reference to the economy’s sectoral sources of expansion’ (Stabroek News, May 4, 2014). Mr. Benjamin was responding to a letter in the Stabroek News of April 26, 2014 “challeng[ing] the Minister to illustrate to the nation how he arrived at the 5 per cent GDP growth rate reported in his 2014 Budget Speech”. In support of their conclusion “that the 5 per cent growth rate was an act of economic illusion”, the writers of the first letter drew attention to an overall balance of payments deficit of US$119.5 million compared to a surplus of US$32.9 million in 2012.

In his response Mr. Benjamin states that if the writers have doubts on the figures, they must say what the numbers should be. Mr. Benjamin is confusing the duty of the Stats Bureau to produce accurate and timely information with the right of the public to question the information and to ask for explanations. For example, the Stats Bureau reported an inflation rate of 0.9% in 2013, which as Mr. Benjamin knows is not a national inflation rate but an Urban Consumer Price Index for Georgetown only. The so-called inflation rate of 0.9% for 2013 not only defies all logic but is inconsistent with and unsupported by the several different specific and complementary measures and indicators to which Mr. Benjamin himself refers.
Continue reading Stats Bureau should be doing far more to explain questionable GDP numbers

Threshold Country Plan/ Implementation Project was a major failure

Introduction
It was interesting to see almost the entire Cabinet turn out on February 17 at a ceremony at the Georgetown Club to mark the end of the Guyana Threshold Country Plan/ Implementation Project (GTCP/IP). The two-year project, financed by a US$6.7 million grant from the (US) Millennium Challenge Corporation (MCC), was launched on January 14, 2008, reportedly with the specific aim of supporting government’s efforts to overcome the country’s serious fiscal challenges while also streamlining the business registration process.

With the project closure coming soon after the 2010 Budget projecting a record deficit for 2010, it had to be diplomacy rather than reality for Director of Threshold Programmes, Mr Malik Chaka, to report to the assembled dignitaries on the successful implementation of the project, an assessment echoed by President Jagdeo and Dr Ashni Singh, Minister of Finance. Even if the 2010 Budget was overlooked, the assessment was not borne out by the results of other elements of the project. Indeed, the ultimate test is that Guyana did not qualify for further assistance under the programme, a sign of failure, not success.

From conception to conclusion, Guyana’s performance on the project was sub-par. Identified by the MCC on November 8, 2005 as eligible to receive Threshold Programme funding, Guyana had to secure assistance from the MCC to enable it to make its proposal. That was accepted by the MCC on June 27, 2007.

E-mail and telephone consultancy
During the course of the project, US consultants MetaMetrics Inc provided “performance-based management systems technical assistance… through email and telephone communications.” According to this firm’s website, the Government of Guyana requested the support of the MCC to provide technical, institutional and operational support in:

(i) the preparation and implementation of a value-added tax (VAT) while at the same time strengthening the institutions involved in tax administration and tax policies;

(ii) the transformation of Customs administration;

(iii) transformation of the institutions that provide fiduciary oversight on the utilization of public resources; and

(iv) completion of government procurement reforms.

According to the Final Draft Report (FDR) dated June 26, 2006, the project was a continuation of the government’s “comprehensive fiscal reforms” in the area of reducing the fiscal deficit and improving transparency, accountability and fiduciary oversight. According to the FDR, these reforms, which have received financial support from the World Bank, IMF, IDB and the CARTAC, are expected not only to alter the fundamental structure of revenues and expenditures but more importantly, to strengthen the institutions involved in tax administration and oversight, leading eventually to a progressive reduction in the fiscal deficit.

The plan
Nathan Associates Inc, another US consulting firm was appointed Implementing Partner for the project. The ‘local’ face of the project was Dr Coby Frimpong, supported by a small number of Guyanese employees. The government would, of course, be aware of how the US$6.7 million was spent, and in the spirit of transparency and accountability, should disclose how much was paid to MetaMetrics, Nathan, and Dr Frimpong who for many years was the country’s highest paid consultant, until that prize went to another foreign, non-resident consultant. It would be interesting to know too, whether the value of the grant has been incorporated in the national accounts, as required by the Fiscal Management and Accountability Act.

MetaMetrics noted that the Guyana Threshold Country Plan Implementation Project would be conducted through the following six tasks:

1) Strengthening tax administration

2) VAT implementation

3) Creating tax policy and forecasting analysis capability

4) Improving expenditure planning, management, and controls

5) Empowering and creating capacity within two principal parliamentary fiduciary oversight committees

6) Business registration and incorporation

Assessing success
It is submitted that it is against these objectives that the success – or failure – of the project should me measured. Let us look at these, though not necessarily sequentially. Item 2 of course came one year after VAT had been introduced, and it would be disingenuous for the project managers to claim any success from VAT’s implementation. Mr Chaka’s praise of the collection of “more taxes and customs revenue” was not only ill-informed but is also not the kind of comment one expects.

Did he know, for example, the government’s commitment to make VAT and excise tax revenue neutral, when in fact it turned out that collections were 48% over budget, because of an error in the rate? Had any work been done by the consultants, they would have realised that the government, even after discovering its error, never publicly admitted or corrected it, or honoured its revenue-neutral commitment.

An informed analysis of the tax collections should extend beyond crude numbers to the composition of the direct and indirect taxes garnered by the GRA. The analysis should examine the composition of the taxes collected by revenue type, sectors, regions, and classes of taxpayers. Did any of the consultants realise that using loopholes and tax shelters one major entity subject to a nominal rate of tax of 45% pays only 14% of profits in taxes? And that many others in a similar situation are not that different? Or that a person receiving a $10 million dividend from any such company pays no income tax, while an employee of the company earning $100,000 per month is required to pay income tax of $260,000 per year? Or that any pension, without limit, is tax free? Perhaps the consultants should have explained their concept of tax equity, to allow a fairer assessment of their own measure.

The missing GRA’s Annual Reports
It will take a dedicated column to examine the tax take and how the self-employed continue to evade taxes on a massive scale. The consultants should have asked the Minister of Finance why he has not brought in regulations to give teeth to the section of the Income Tax Act which empowers the Revenue to apply a presumptive method of determining the income of certain self-employed individuals. Suffice it to say that all the self-employed taxpayers of the country pay a mere 2% of the total income and corporation taxes collected by the GRA. This modest increase by this large group is partly because, as this column has consistently pointed out, a number of previously incorporated trading companies have de-registered, immediately and automatically reducing their tax rate from 45% to 33⅓% and excluding them from the minimum corporation tax of 2% of turnover. If proof be needed, the numbers show that corporation tax as a percentage of tax revenues has declined from 23% to 20% from 2006 to present. Yet, the self-employed percentage has remained fairly flat.

But tax administration would also require better governance, accountability and transparency in the Revenue Authority. I have recommended on numerous occasions that the annual report of the GRA provide useful statistical data on revenue collections to enable informed statistical analysis. Instead, in blatant violation of section 28 of the Revenue Authority Act, the Minister consistently fails to lay the annual report in the National Assembly. This is the same Minister who in his 2010 budget speech railed against persons not providing information to his Bureau of Statistics, describing non-compliance as “unacceptable and unlawful,” and threatening steps to enforce the law.

The missing tax policy
In relation to task 3 above, there has been no progress and therefore, not surprisingly, no report. The consultants were of course at a disadvantage. If the government and the Minister are not serious about tax policy, no consultants could make them become so. It takes a special government to care about tax sources or their impact.

Others care only about quantum and this government has been almost unique in that it has never been hard-pressed for revenue to finance its policies – some good and others less so. Debt-write off, on the back of poor country status, helped the government increase expenditure on the social sector, such as health and education. And just when the write-offs started to dry up, there came the annual windfall from the VAT and Excise Tax. VAT and Excise Tax in 2010 will double the collections in 2006 of the taxes they replaced, even as the economy grew by an average of 3% over the five year period.

Bureau of Statistics workshop
The consultants also probably did not notice, but according to the 2010 budget speech, the country is not nearly as poor as the government was representing it to be. With the Finance Minister now saying that the economy is actually 69% better off than would have been previously calculated, each Guyanese is now much, much better off than we had been told, if not felt. No one has bothered to say how rebasing could actually increase the value of goods and services produced in the country, but the public would no doubt be looking forward to the workshop which the Minister of Finance promised that the Bureau of Statistics would host “shortly” to provide technical details on the rebasing exercise.

Had the rebasing been done earlier, we may very well not have qualified for some of the assistance and concessions we have received from all and sundry.

But there is a more direct connection to tax revenues. The working person is paying income tax at 33⅓% taxes and VAT at an average of a minimum of 10% (to allow for zero-rating and exempt supplies), averaging about 40% and on top, another 5% to NIS which is a form of taxation. At the other extreme are companies, self-employed persons including the new army of government consultants and contract employees; those whose salaries are exempt and whose income comes from unearned income, such as dividends, interest and rents, bear considerably less than half the tax borne by the employed persons.

Since 1994, I have pointed out the inequities in our tax system. These were later identified in National Development Strategy 1 and 11. In fact this is what NDS 11 says, in part, about our tax system:

“Income taxes in Guyana appear to be inherently unfair, since persons in the informal economy, and almost the entire agricultural sector, indeed almost all in the self-employed category, do not pay them…”

If anything, despite all the studies, consultancies and promises, the situation has become worse.

To be continued

Numbers are what you want them to be

Introduction
Mark Twain said, “there are three kinds of lies: Lies, damned lies, and statistics.” I won’t be allowed to say that in these hallowed columns, particularly in relation to the National Accounts announced by Senior Minister of Finance Dr Ashni Singh in Budget Speech 2010. But I do draw attention to that speech and specifically paragraph 4.146 in which the Minister announced that the Bureau of Statistics had completed the technical work required “towards the rebasing of our National Accounts framework as well as updating the basket of goods and services underlying computation of our Consumer Price Index (CPI).” As if to lend some authority to that work, the Minister announced that this was done “with external assistance and support.” The National Accounts presented by the Minister are now “rebased to 2006 prices” and are introduced from January 2010, along with the new CPI.

Of course, the Bureau of Statistics has not distinguished itself for its independence, nor has its professional image been helped by the government and this Minister in particular. Business Page of February 7, 2010, under the caption ‘Budget 2010 – Looking back,’ noted that the Minister would be ahead of the bureau if, soon after he announced his statistics on GDP and CPI, the bureau gave those numbers its blessing. There is no prize for guessing that what was feared, actually happened. The official website of the Stats Bureau has now endorsed the Minister’s numbers. Perhaps the bureau would also explain how VAT collections declined by 3 % while the sector to which it most applies – distribution – is reported to have grown by 6%. And why all the hard-to-measure sectors, like transportation and rental, reflected growth. Are we so dumb as to take these at face value?

Singular control
It is fortunate for Dr Singh, but less so for the country, that directly or indirectly, he either influences or controls the spending (as keeper of the Consolidated and Contingencies Funds), the record-keeping (the Accountant General Department) and the measurer (the Stats Bureau). In addition, he has the potential to influence the auditor (the Audit Office). Each of these entities is headed by an employee on contract, which is not an arrangement conducive to demonstrations of independence.

This column supports rebasing which is recommended by the UN and is done routinely across continents. But it would have been useful if we had used the expertise of the University of Guyana in the exercise and done it with some form of consultation, explanation and information. With so much of the information on consumer spending empirical, anecdotal and incapable of precise measurement, it would have been helpful to have the widest possible engagement on its construction, but this is simply not this Minister’s style.

The justification for rebasing is simple enough. As the Minister explained, up till 2009, the base year for Guyana’s National Accounts was 1988. He further explained that as the years progressed, there was increased likelihood of errors in measuring the level of growth and other components of the National Accounts.

This is because the prevailing price and cost structures in the base year become progressively less relevant for calculating volumes of output and for estimating value added. Also of relevance, is what is called the industry cycle as new products, technologies, and industries take the place of, or add to, those prevailing in the base year.

Never was so good
The Minister announced that the results have been predictable and that as a result of the rebasing to year 2006, the estimated weight of agriculture, fishing and forestry and of government has declined, while the weight of mining and quarrying, manufacturing, and services has increased. The rebasing has resulted in an upward revision in the estimates of nominal GDP. (See table and chart extracted from the Minister’s data.) Prior to the rebasing being brought into effect, Guyana’s GDP at market or purchaser prices for 2010 would have been estimated at $268.5 billion, but with rebasing, this has increased by 69% to $448.1 billion.

Adjusted for the rebasing, this is how the economy’s performance appears for the years 2006 to 2010 projected.

But rebasing has other consequences. In addition to the economy being larger, it means that other figures, like the amount of debt to the size of the economy, are better, while tax to GDP or government spending as a fraction of the economy, are lower. Based on his rebased numbers, Guyana is now one of the least taxed countries in the region, despite having the highest corporate tax rates and the most punitive system of personal taxation. It is true that many major sectors – like sugar, bauxite and forestry – make only a small contribution to the tax revenues of the country. Rusal and BOSAI enjoy generous tax concessions in bauxite while Barama’s capacity to make losses and still survive goes down in the business folklore of Guyana, and perhaps the world.

The private sector’s understanding
The concept of transfer pricing, one of the most common forms of exploitation by multinationals, clearly does not apply to Guyana. And what seems not to be understood by our captains of industry – who are also the beneficiaries of tax concessions and a liberal interpretation of the tax laws – is the difference between the nominal rate of tax and its effective rate.

Take our commercial banks for example. The nominal rate of corporation tax that applies to banks is 45%. Yet, according to their most recent reports, these banks paid an average of 26%, within the range of 14% and 39%. And the shareholders pay no tax on the dividends. Quite what the President of the Georgetown Chamber of Commerce therefore means when he suggested that his Chamber was not too concerned about Budget 2010 since tax reform is on the horizon, is anyone’s wild guess.

But let us for one moment accept the Minister’s new numbers. It means that tax evasion by the business community is taking place on a scale previously unimaginable and/or the incidence of loss-making and tax exempt operations is much bigger than we think. The Auditor General (ag) simply ignores the law that requires him to do an annual audit of concessions under the Tax Holidays Act. But there is no ambiguity or uncertainty that the workers are taxed at close to 50%, taking income tax, VAT and NIS into account. On the other hand, the business community as a whole probably bears tax at less than 10%! Yet, the Minister of a government that claims working-class roots could not see it fit to reduce the personal tax rate of 33⅓%, or increase the measly US$175 per month personal allowance.

Know only mistrust
While I know a little about taxation, I confess that economics is not my field, and I therefore called several entities to help me understand the re-basing. The Minister of Finance Dr Ashni Singh, as usual, did not take my call; the head of the Stats Bureau, also as usual, was out of the office and at the Ministry of Finance, while relevant academics at the University of Guyana claimed no participation in the exercise by the Stats Bureau.

With mistrust everywhere it is sad, but not unexpected, that official statistics and reports of transactions are not well regarded by Guyanese. Think of the ‘now you see them now you don’t’ state-owned properties that are sold off; or of the conflicts of interest among important state institutions; or of the violations of the constitution and the Fiscal Management and Accountability Act; or of the incestuous relationships between the politicians and some members of the business community; or of the government’s unwillingness to entertain MP Raphael Trotman’s Freedom of Information Bill. It would be hard not to be cynical and distrustful.

And those who care only about the bread and butter or rice and curry issues, are hardly likely to be impressed by the announcement that her/his personal GDP has jumped to US$2,308.50 but s/he still cannot find a job, or is in receipt of a pension of $6,600 per month. And even for those who have jobs, their food basket costs easily exceed their income. These issues do not seem to matter to the Minister of Finance or his Bureau of Statistics.