Mid-year 2013 report – a financial commentary

Once again the mid-year report required under the Fiscal Management and Accountability Act (FMAA) was published within the statutory deadline and once again publicly released before being laid in the National Assembly. As the calendar would have it, the National Assembly is usually on its two months recess when the mid-year report is scheduled for release. In a positive kind of way the report is unremarkable, no dramatic developments one way or the other, except perhaps in sugar where GuySuCo continues to cause serious headaches for the Government and no doubt those closely associated with or dependent on the sub-sector and the slow start to the capital expenditure programme.

Unlike his annual Budget Speech which is well-known for its prose and politics, Minister of Finance Dr. Ashni Singh stuck to a pattern of using only as much language as to place whatever numbers he wants to discuss into context. The report cannot be faulted in its requirement to give an account of the year-to-date execution of the annual budget but does seem short on explanations and clarification as well as on the prospects for the remainder of the year. The FMAA requires the report to address a number of other issues which this report at best only addresses tangentially or not at all. It specifically requires:

(a) an update on the current macroeconomic and fiscal situation, a revised economic outlook for the remainder of the fiscal year, and a statement of the projected impact that these trends are likely to have on the annual budget for the current fiscal year;

(b) a comparison report on the out-turned current and capital expenditures and revenues with the estimates originally approved by the National Assembly with explanations of any significant variances; and

(c) a list of major fiscal risks for the remainder of the fiscal year, together with likely policy responses that the Government proposes to take to meet the expected circumstances.

The report does not have a specific section dealing with Outlook for the second half of the year and the Conclusion, consisting of two paragraphs, is a very brief summary of the contents of the completed half-year. There is not sufficient information to support some of the broader statements in the report which does not capture, in particular, (c) above, factors of relevance not only for the macro-economy but individual businesses and segments as well.
Continue reading Mid-year 2013 report – a financial commentary

Mid-year report 2012 shows mixed performance

For years, this column has made some sharp comments about the Finance Minister over his presentation of the economy’s mid-year report required under the Fiscal Management and Accountability Act. That cannot be said for this year. I am not only sure that its presentation to the media at a hastily convened press conference on September 1, 2012 had no publicity intentions, but I accept that it was as good as meeting the statutory deadline of sixty days after the end of the half-year. Even more, I give the Minister credit for presenting the report to the public even before its laying in the National Assembly, which is what the Act requires. With this kind of precedent and epiphany, Guyanese might now hope that all other reports for which the Minister has responsibility will be tabled in the National Assembly and made available to the public within their respective statutory deadlines.

Before looking at the 2012 mid-year report it seems necessary to make a point that appears to have been excluded from the report itself and the reporting on it which followed publication. It appears that the method used to describe the growth figures is not only unclear but may actually mislead. The figures compare a period to its corresponding period – as in this case, Jan-June 2012 against Jan-June 2011. There is logic for this: it removes the skew that would be due to seasonality. It would not be a fair representation to compare growth in the first half of 2012 with a period in 2011 that included the second half of 2011, if there were seasonal factors unique to the second half.

So what this means is that when the Minister reports a 2.8% half-year growth, he is comparing half-year 2011 with half-year 2012. Worse, had the Minister given any comparison with the corresponding measures in 2011, Guyanese would have learnt that half-year growth in 2012 is less than half the real economic growth of 5.9% recorded in 2011. That is quite a dramatic slowdown which if it continues will translate into substantially slower growth in 2012 than the 4.1% expected at the time of the presentation of the 2012 budget. We recall that that 4.1% was actually lower than the 5.4% for the full year 2011.

Let us now look at the disaggregated numbers under two groups – those that have done better in half-year 2012 than they did in the same period in 2011 and those which have done worse.

The stars
Rice improved over the corresponding period in 2011 by 1.4% but this was well down on the 23.3 % increase in 2011 over the corresponding period in 2010. Despite the modest improvement in the first half of 2012, the full year growth is projected to remain at 2.6%.

The fisheries industry recorded an estimated growth of 13.8% compared with a contraction of 2.2% during the corresponding period in 2011. On this basis, the annual growth projection has been revised from 5% to 9.7%. Since the fisheries industry is not a significant sub-sector in the economy, the revision is not expected to affect the overall growth for the economy in full-year 2012.

The mining and quarrying industry continued to record strong growth (16.4%) in the first half, mainly supported by bauxite and gold. By comparison, however, the growth is modest when placed against the increase of 38.6 % in 2011 over the same period in 2010. The Minister cautiously noted that as a result of more recent domestic developments in Linden along with possible volatility in the external fortunes of the two industries, the overall growth rate for the sector for the year would be revised to 1.4 %, down from 1.8% in the budget.

The transportation and storage industry at the time of budget was projected to grow by 9.5% in 2012. In fact, the Minister reported that “indicators” for the first half of 2012 showed growth of 20.2% when compared to the corresponding period in 2011. Quite what he meant by “indicators” is neither clear nor helpful since it raises questions about just every other sector for which performance is reported.

Financial and insurance services grew by 5 % in the first half of 2012, with all of the key indicators of the sector showing positive signs of growth. By comparison, in 2011 the industry had recorded a half-year growth rate of 16 % over 2010.

The Wholesale and retail trade, comprising the distribution both of imported consumer, intermediate and capital goods, and domestic products, reported growth of 11.6% in the first half of 2012 compared with a growth of 21.7% for the same period in 2011. The sector’s projected growth for the year of 6.5% is maintained.

Education which now includes increasing private participation also recorded slower growth (1.2%) compared with 3.0% in 2011, but here too the projected growth of 1.8% for the full year is maintained. The story for Health and Social Services is similar with growth of 2.4% in 2012 compared with 3.4% in 2011 while the projected growth rate of 5.7% for the full year is maintained.

The dogs
For the period January-June 2012, sugar production was 71,147 tonnes, down 33.4 per cent from the 106,871 tonnes for the corresponding period in 2011. The performance of the sugar industry must be quite exasperating to the Minister who in 2011 was encouraged enough to remark that the sugar industry’s path to recovery had commenced. The Minister displays that exasperation by blaming industrial relations disruptions and inclement weather – the two usual whipping boys of the industry. Despite this setback, the industry is projected to grow for the full year by 1.5%.

Like sugar, the other crops sector on which so much of the country’s diversification strategy had been pinned saw its performance decline from a growth of 5.7% in 2011 to an estimated mid-year growth of 2 per cent. The sector is projected to grow by 4% for the full year.

The forestry sector recorded a decline of 10.3% with the production of logs declining by 19 % and sawn wood increasing by 8.6 per cent. Full year decline for the sector is projected at 10.3%.

As a result of activity in the sugar sector, manufacturing contracted by 2.2% compared with a growth of 10.6% at the half year 2011. The growth projection for the full year is revised to 3.2%, down from the 3.9% in the 2012 budget.

Postal services declined by an estimated 11.5% for the period from January to June of 2012 compared to the same period in 2011. On this, the Minister went into some detail, explaining that the despatch of both in and outbound mail and parcels, has continued to decline and that the continued trend underscores the well-known shift to digital forms of communication. One might have expected the decline to have been replaced by telecommunications which are at least as costly, and by courier services which are vastly more expensive.

The construction industry contracted by 8.8% in the first half 2012, compared with a 4.0% in 2011. Despite this contraction, the end of year projection of 6.3% has been maintained in the expectation that recovery will take place.

Faced with these performances and what he referred to as the updated outlook for the various sectors, the Minister projected the economy would grow by 3.8% for full-year 2012, down from the 4.1% projected in the Budget.

While these developments are not without interest – as is the omission of any reference to oil exploration – it seems too early to say that the economy is slowing, particularly given the possibility of the government undertaking those big ticket items like Amaila and the Marriot over which concerns continue to circulate.

Other developments
At the end of the first half of 2012, the balance of payments had recorded a deficit of US$50.5 million, compared to a deficit of US$19.6 million in the corresponding period in 2011. Export earnings grew in 2012 by 9.2% to US$582.1 million, compared with the US$533.2 million registered in half-year to June 2011.The Minister did not indicate whether or how he expected the worse than expected deficit in the first half of 2012 to affect the budgeted overall balance of payments surplus of US$136.3 million for the year.

Whereas the value of sugar and rice exports expanded in 2011 by 32.4% and 35.1% respectively, in 2012 the earnings on sugar declined by 14.1% while the earnings from rice declined by 8.7%. On the other hand, the export value of gold grew by 16.8% in 2012 compared with a 54.6% increase in 2011.

Merchandise imports for the period increased by 10.2% to US$949.4 million primarily attributed to a 12.7% increase in capital goods to US$221.7 million associated with the expansion in the mining sector, while consumption goods increased by 8.1% to US$209.4 million.

The capital account recorded a surplus of US$174.9 million compared to US$162.4 million owing to higher capital transfers and foreign direct investment, which were concentrated mainly in the mining, energy and telecommunication sectors.

During the first half of the year, private sector deposits increased by 7.8%, with business deposits expanding by 13.3% to $43.3 billion, while deposits of individual customers grew by 6.6% to $181.4 billion.

The commercial banks weighted average lending rate declined by 22 basis points to 11.46% per annum, while the small savings rate declined by 23 basis points to 1.75% per annum. The annualised rate on 91-day Treasury bills declined by 53 basis points to 1.82%.

The domestic consumer price index (the inflation rate) moved by a moderate 1.8% in the first half of 2012 compared with a 3.0% increase in 2011. This rate measures the rate of growth over the period since December 31, 2011.

To be continued.

Mid-year report and the Debt party (no pun intended)

Almost invariably in discussing recent mid-year reports which the Minister is required to present to the National Assembly under Section 67(1) of the Fiscal Management and Accountability (FM&A) Act 2003, I have made two broad prefatory comments. The first is that it is always misdated.

The Act requires that the report be presented “within sixty days” after the end of the half-year. The second is that comparing it with the half-year report of the Bank of Guyana submitted to the Minister of Finance long before he completes his own report, is like comparing cheese with brick. In content, comprehensiveness and quality they are poles apart.

In 2007, the first full year of tenure of this Minister of Finance the mid-year report was not presented until late November. Subsequent years have seen some wide disparity, none of which however met the deadline, notwithstanding the mis-stating of the date on the reports themselves.

This year the Minister, who was cited by AFC MP attorney-at-law Khemraj Ramjattan for misleading the National Assembly in the small matter of the payment of $4 billion to GuySuCo, dates his report August 27, 2010 two days before the statutory deadline. Until I’m convinced, I shall withhold my congratulations for timely presentation.

As readers are aware the Speaker of the National Assembly Mr Ralph Ramkarran said he did not find a prima facie case against the Minister in the GuySuCo matter although he did find one against the Minister of Housing and Water, despite the Minister of Finance being at least an accessory if the accusation is in fact upheld.

However, it must also be said that the Minister does his reputation no good by the wide disparity between the dates he places on the reports and the dates on which they are tabled.

Breaks and gaps
Since it is routine for reports to be lodged with the Parliament Office between recesses, the Minister would be well advised to lodge the report as soon as it is completed, and issue a press statement to that effect. He can add that “unfortunately, the contents of the report cannot be released until I have had the opportunity to lay it in the National Assembly.” He must also not issue any instructions to the Bank of Guyana or the Bureau of Statistics to withhold their own publications until his report is tabled.

To place in some context what the report should include but does not, I can only draw attention to the concluding part of my commentary on the 2009 mid-year report published in December 2009. I noted there that the mid-year report required more than the year-to-date execution of the annual budget. It requires the report to set out the prospects for the remainder of the year. It also mandates the inclusion of a revised economic outlook for the rest of the year, a statement of the projected impact of the trends on the remainder of the year, and very importantly, a list of major fiscal risks for the second half of the year with likely policy responses that the government proposes to take to meet the expected circumstances.

It was clear then and is more egregious now that the report presented by the Minister falls very short of the requirements of the Act. The result is a report of very limited use and, for any serious reader, when compared with that of the Bank of Guyana, of no practical use.

The best and the brightest
As if to prove that one can fool some of the people all the time, some time in early July, the Parliamentary Sectoral Committee on Economic Services suggested in its fifth Periodic Report that it was likely to recommend that the National Assembly extend the deadline for the submission of the mid-year financial report by the Finance Ministry.

The report suggested that a recommendation be made to the National Assembly that the FMAA be amended to allow for the extension of the deadline for submission to October 9 to coincide with the end of the parliamentary recess. In fact, the committee noted that all the data necessary to compile the mid-year report would not be available by the end of June/early July. Well how much more misinformed can a parliamentary committee be! The deadline is the end of August, not June or July and the committee must have heard of the billion dollar software (IFMAS) in which the government has invested that allows for considerable real time data availability.

And while that ill-informed suggestion would have been music to the ears of the Minister, it is clearly not reading from the same song-sheet as the Chairperson of the Public Accounts Committee Chairperson, Ms Volda Lawrence, who in relation to the 2007 report called the delayed report scenario “gross disrespect” for the people of Guyana and said that it was time people stopped taking such behaviour sitting down.

For purposes of this column and for reasons mentioned in the first paragraph, this column relies on the report of the Bank of Guyana rather than that of the Minister, although it must be said that unlike 2009, the two reports agree on the GDP growth statistics.

The economy showed what the Bank of Guyana described as modest growth of 2.8 per cent during the first half of 2010. Significantly, the government has now revised the budgeted growth in 2010 from 4.4% to 2.9% for the full year. This would represent the lowest rate of growth in the economy since 2006. In his report, the Minister gave no reason for the significantly lower growth projections, a lacuna that pervades his entire report. And to ensure that they rhyme this year, the Bank of Guyana also projects a 2.9% growth for full year 2010 without indicating whether this is its own estimate of merely a repetition of the Minister’s.

The National Income Accounts was last year rebased to 2006 and until some pattern has emerged it is difficult to assess any one of those indicators.

It would have been useful for the Minister to comment on the impact of the rebased national accounts on the growth statistics particularly in the light of the attention and issues raised by Professor Clive Thomas in his recent columns under captions such as ‘Magnification or manipulation’ and ‘Statistical illusion or real changes’ in the Sunday Stabroek of October 3 and 10, 2010 respectively.

The growth in the economy was attributed to improved performances in the agriculture and services sectors. The livestock and bauxite industries experienced a decline in output while a stable performance was registered in the manufacturing sector.

Bitter sugar
For the first half of the year sugar output was 81,864 tonnes, 1.8 per cent lower than the level at end June 2009 – the year of the turnaround plan – and represented 29.0 per cent of the 280,000 tonnes targeted for 2010. The Bank of Guyana explained that the adverse outturn was due to unfavourable weather conditions in the first quarter of the year which affected cane transport, replanting and irrigation of planted canes.

From an original 2010 target of 280,000 tonnes, the Minister of Finance has announced a revised target of 260,000 tonnes, which would confuse the GAWU members who are being told that their target is 264,000 tonnes. This is not the only confusion in the industry. While the Minister of Finance announces that “works continue on the turnaround plan which would see the realisation of increased acreage under cultivation and improvements in the cane to sugar ratio, the President is expressing fears about the future of the industry due to the failures of “a few individuals.”

Rice output was 168,267 tonnes, 4.6 per cent more than the corresponding 2009 level and represented 49.0 per cent of the 343,373 tonnes target for 2010. The improved performance has to be seen however against the significant amount of “government assistance,” a euphemism for subsidy to the sub-sector, to cushion the effects of the dry weather spell.

Bauxite, another industry that receives wide and valuable government support, saw a decline in its performance which helped to produce in the mining sector a 4.1 per cent decline in growth in real terms. The Bank of Guyana explains that the outcome reflected the decrease in bauxite and diamond output, due to the fall in demand and the “decline in motivated workers.” One cannot but help notice the contrasting attitude of the government to rice/sugar and bauxite, although the government would stoutly challenge any suggestion that ethnicity and politics play a part.

Gold and dollars
Gold again remains an outstanding contributor to the economy and but for its performance the real economy would more than likely have experienced negative growth. Yet, the government continues to hem and haw and dilly-dally on recognising that gold-mining is a key sector that warrants serious attention.

Total gold declarations increased by 8.1 per cent to 142,212 ounces and were 46.0 per cent of the 311,816 ounces targeted for the year. Gold remains by far the largest single export earner with export receipts amounting to US$146.7 million, 22.4 per cent or US$26.8 million more than the June 2009 level. The average export price per ounce increased by 26.3 per cent to US$1061.2 per ounce while export volume declined by 3.2 per cent to 138,242 ounces.

After a much-hyped improvement in the exchange rate of the Guyana Dollar to its US counterpart, the Guyana dollar, vis-à-vis the US dollar, depreciated by 0.25 per cent compared with an appreciation of 0.37 per cent at end-June 2009. According to the Bank of Guyana, the relative stability of the currency is supported by an adequate flow of foreign exchange to the market. It did not add however that the US Dollar itself has been depreciating against some major countries, so the comparison of the Guyana Dollar to the US Dollar is not an accurate measure.

A seemingly unrelated issue is the attraction to keep money in Guyana rather than converting and exporting it to another currency. Interest paid to holders of bank deposits decreased by 17.0 per cent in 2010, showing increases in domestic expenditure. This means that while depositors’ funds in the banking system are increasing their returns are decreasing. That cannot be good news either for the exchange rate or depositors, though it must be added that the extent of the decrease is quite surprising.

Other issues
The NIS also gets a mention by the Bank of Guyana but not the Minister under whose portfolio it falls. The National Insurance Scheme’s (NIS) receipts grew by 12.3 per cent to G$5,328 million as contributions rose by 9.7 per cent to G$4,633 million, and receipts from debtors grew by 91.3 per cent to G$437 million. While the decline in investment income by 10.8 per cent to G$259 million gets a mention, nothing has been said of the increased benefit payments and the status of the 2008 financial statements and annual report. These are languishing on the desk of the Minister of Finance and not being tabled in the National Assembly as the law requires, an indirect casualty of the Clico debacle.

And the debt spree continues as both domestic and external borrowings continue into the stratosphere. The stock of domestic and external public debt increased by 13.2 per cent (to G$94,760 million), and 12.1 per cent (to US$966 million), respectively from end-June 2009 level. The former is attributed to an increase in the issuance of treasury bills to sterilize excess liquidity, while the latter is due to disbursements from the IDB and bilateral credit delivered under the PetroCaribe Initiative. Both domestic and external debt services were higher on account of higher principal and interest payments.

External debt service increased by a substantial 80.4 per cent to US$12 million from its end-June 2009 level, made up of principal and interest payments amounting to US$6.4 million and US$5.8 million respectively.

The cost of carrying GuySuCo and other public sector entities while the government itself engages in some seriously costly and wasteful expenditure, is borne out by the overall cash deficit of Non-Financial Public Enterprises (NFPEs), including the Guyana Power & Light (GPL) and the NIS. This increased to G$5,026 million at end-June 2010 compared with a deficit of G$721 million in June 2009.

The result of these is that current operating cash balances of the NFPEs moved from a surplus of G$2,298 million to a deficit of G$2,097 million at end-June 2010. This decline was mainly due to a 26.7 per cent increase in expenditure which more than offset a 14.0 per cent growth in revenue.

That perhaps, even more than over-taxing the people of this country, is the story of the financial management of the public sector of Guyana in the first half of 2010.

Economy firewall malfunctions – Conclusion

This is the fourth and final part of a review of the Mid-year Report 2009 presented by the Minister of Finance to the National Assembly under the Fiscal Management and Accountability Act, 2003. As I promised last week, the purpose of this closing part is to pull the strands of the three preceding segments together and to look for any causes of optimism in the economy and its management.

Despite its title, the Act requires of the mid-year report more than the year-to-date execution of the annual budget. It requires the report to set out the prospects for the remainder of the year. It also mandates the inclusion of a revised economic outlook for the rest of the year, a statement of the projected impact of the trends on the remainder of the year, and very importantly, a list of major fiscal risks for the second half of the year with likely policy responses that the government proposes to take to meet the expected circumstances. In my view the report presented by the Minister falls very short of the requirements of the Act, and he spent no more than a few sentences on the revised economic outlook, fiscal risks and proposed government responses for the rest of the year. If proof be needed, then the Minister himself provided it this past week when he brought before the National Assembly requests for $5 billion, mainly for spending in the second half of the year, which must have qualified for – but did not receive – inclusion under projected trends and major fiscal risks. It is also a case of how bad and weak the Ministry of Finance is when it comes to budgeting and planning.

Before proceeding, I digress to repeat what I consider a major concern about the report, and that is its lack of timeliness and therefore its limited practical value. The report is by law due no later that August 30 of the year. It is now normal not only for the report to be issued months later, but also for it to bear a date that is very misleading, sending a signal to others that it is okay to do so. For 2009 it was presented on November 12, but bearing the date September 25. The Minister must be aware not only that the National Assembly has a registry to receive reports when it is in recess, but that it is wrong to send signals to subordinates that such conduct is acceptable.

In part 2 of this short series I drew attention to an item in the Bank of Guyana Half-year Report submitted to the Minister of Finance, in which the performance of the economy in the first half of the year was addressed in considerable detail. I noted an obvious conflict between the numbers presented by the Minister and those presented by the Bank of Guyana; while one was reporting growth, the other was reporting a decline. Clearly they both could not be right, and the public would have expected, both out of duty and professional self-respect, either or both of these entities to have addressed the issue. Neither has done so, further evidence of the Minister’s disdain for the public, recalling his response to a Kaieteur News article on grossly excessive payment by the government for the purchase and supply of equipment, when he suggested that the newspaper should start bidding for contracts!

LCDS and accountability
The Minister must be aware that the President’s attempt to raise money internationally for Guyana’s proposed low carbon development strategy is also drawing attention to the country and its management. Everyone, including the General Secretary of the ruling party, now admits that corruption is taking place in the country – any difference being only the matter of degree, with most independent opinions leaning towards corruption on a massive scale. That view is reflected in Guyana’s ranking in the Corruption Perception Index by the internationally respected, German-based Transparency International, where Guyana is rated at 126 of 183 countries, the worst in the region.

This series on the mid-year report pointed to one of the most celebrated cases of flagrant breaches of financial procedures – that involving the purchase of drugs by the government, largely from an entity with which the President admitted to having close ties, and which had earlier been singled out for unlawful tax concessions. But that is only one case among many that are surfacing daily with contractors, whose low expertise in construction is only matched by high level connections, and who receive multi-million dollar contracts that cost as much in rework in some cases, almost as soon as the work is signed off and payment made. Corruption is one C-word that is alien to any half-year or full-year review done by the Minister.

Unlike the Minister of Finance and the President, Norway, the government’s LCDS benefactor, is not oblivious to or unaware of the endemic problems of corruption in Guyana, neither does it seem willing to sweep them under the carpet. That country’s Environment and International Development Minister Erik Solheim has made its position on corruption clear by prescribing robust anti-corruption measures before Guyana can draw down on the six-year US$250 million promise made by Norway. That understanding is still only at the MOU stage and may therefore be subject to further refinements and a formal and binding agreement.

It is almost a joke to speak of a transparent financial mechanism while simultaneously and strongly refusing to put into effect constitutional provisions regarding the procurement of goods and services or an Audit Office headed and staffed by persons with appropriate qualifications. That the current head of the Audit Office is merely acting has as much to do with the fact that he has no professional accounting or audit qualification as that it serves the government well to have someone hold a key constitutional, accountability position purely at its whim and for its convenience. Those in acting positions know that if they rock the boat they risk sinking with it, a chance that out of self-interest, they will not take.

If the Norwegians are any more careful with their taxpayers’ funds than say the multilateral IDB or the World Bank, the chances of Guyana drawing down the entire sum must be low. If US$250M buys the Norwegians sufficient carbon credits to embellish their questionable record as an environment polluter, they may feel they have obtained a basement bargain. On the other hand, Guyana gives up major rights and opportunities, raising the question whether the country should not have had an indigenous low carbon development strategy rather than one dictated by the Norwegians, acting in their interest.

Contract employees
Another issue highlighted by this series was the increasing prevalence of the use of contract employees to get around the rules of employment in the public service. I had drawn attention to the more than $3 billion paid in salaries to this group of hand-picked persons, with another huge amount paid in benefits to them, including a 22% gratuity every six months. The really lucky ones get cars, drivers and duty concessions on top. This means that even the non-contract employees are really a benefit to the contract employees. Who these lucky ones are is intended to be a secret, but the Office of the President is a wonderful case of abuse. Of 201 employees in the Office of the President, ninety-five are contract employees and fifty-four are temporary. Among the contract employees are former ministers, all of whom are reported to be employed at the pleasure of the President on the same salaries and with the same benefits that they received as ministers. The Ministry of Local Government has two former ministers who must still be financed by the taxpayers.

Ironically, both the Public Service Commission and the Public Service Ministry which are expected to protect the integrity of the public service are themselves serial cases of the contract employee syndrome, while the culture also seems embedded in the Ministry of Culture, Youth and Sport.

The implications of this are huge and costly. It gets around the constitutional provisions for employment in the public service, creating a huge army of often highly paid loyalists but more importantly, it destroys the public service and its structures. What institutional memory will remain if on a change of government, the holders of all major key positions are not retained? Are we again going to turn to the British government which in the late eighties paid huge sums on financing a study that led to sweeping changes in the public sector and a dramatic reduction in the number of ministries? But that was before we had VAT that provides an annual windfall in revenues for the government to (mis)spend as it pleases, even as the half-year report discloses increasing borrowings without any indication of the actual amount of funds in the Treasury. That simply cannot be responsible financial management.

We noted in paragraph one that the Minister had approached the National Assembly for close to $5B to pay for unbudgeted expenditure on the army, Office of the President, LCDS, GuySuCo and other agencies and ministries. But we had also noted from the first-half report the low level of spending in that half year. The country’s financial rules provide for the reallocation of funds from one budget area to another. There is no indication that this sensible practice is ever employed instead of the simplistic approach for the National Assembly to rubber stamp excess and excessive spending. Simplistic too is its approach to sugar into which it continues to pump billions while its relationship with its major stakeholder – the workers – deteriorates rapidly. It is easy to forget that the government defied the World Bank and informed the public concerned about the Skeldon Project, the largest single public investment ever undertaken in this country. The results so far have been more than merely disappointing.

Where next?
Ram & McRae will this Thursday publish its report on its annual Business Outlook Survey which would give a good indication of the private sector’s take on the economy. From the empirical evidence only a few sectors are doing well but none of these is in manufacturing or production. Our financial sector continues to do well, as does distribution, but important as these are, they provide an intermediary function. The state-owned power company, whose costs feed into the rest of the economy, continues to struggle to reduce inefficiencies and costs. The public sector wage bill keeps mounting while services remain stagnant. The bureaucracy and its sibling, corruption, impose a huge cost on the highly-taxed economy, in which equity and fairness hardly exist.

It would not be right to argue that there have not been improvements in infrastructure, health and education, which were tied to the huge debt reliefs enjoyed over the past two decades. We have, however, failed in diversifying and strengthening our productive capabilities. Until we do that we cannot declare that we have accomplished the mission set by the PPP/C when it assumed control of this country, including making the country a place where rights, responsibilities and rewards were borne and shared equitably.

Economy firewall malfunctions – part 3

This is the third and penultimate instalment of a short series reviewing the mid-year financial and economic report presented last month by the Minister of Finance. This review has benefited and drawn from the half-year report presented to the Minister of Finance by the country’s central bank, the Bank of Guyana. We will also look at two developments this week – the two supplementary papers presented on Thursday to the National Assembly by the Finance Minister Dr Ashni Singh seeking another $4,677,208,405, roughly the equivalent of US$25M, some of which has already been spent. The other is the news that the state-owned sugar company is experiencing cash flow difficulties in meeting its payroll obligation, while also being the beneficiary of another $1.4B for its capital expenditure programme. The inability to meet one’s payroll obligation is one of the worst signs of serious financial difficulties a business can encounter, and one wonders how the corporation which is top heavy with accounting expertise did not foresee this and take preventive action.

This request for additional funding of roughly 5% of the 2009 budget is itself troubling since the Minister’s mid-year report had shown key ministries being unable to absorb and spend the money authorised by the National Assembly in the 2009 Budget. Readers will recall from last week that the key sectors identified by the Minister had only been able to spend 34.6% of the 2009 full-year budget allocation, compared with 38% in 2008. By way of an explanation for the capital expenditure in half-year 2009 falling behind schedule, the mid-year report identified “some delays as a result of logistical and other issues.”

A large proportion of the money is for areas controlled by President Jagdeo – the army and the burgeoning Office of the President. The current request brings to more than half a billion dollars the additional sums given to the GDF, an entity that is regularly reported as failing to meet proper standards of accountability. The Office of the President – Presidential Advisory will receive an additional $50M to meet expenditure in relation to the Office of Climate Change and the Low Carbon Development Strategy. It is uncertain whether this money will be reimbursed by our Norwegian benefactors under the Guyana-Norway LCDS MOU which provides for a possible grant to us in 2010 of US$30 billion Guyana dollars.

The Public Works Ministry which is one of the sectors whose expenditure is not on target is yet being given additional sums, while the $400M promised by the President to the rice sector is now part of those supplementary funds. Sugar, rice and electricity, three sectors with an all-pervasive government involvement are proving a heavy burden on the national coffers, raising serious doubts about the capacity of those sectors to deal with their apparent incessant problems, some of which may be weather related.

Let us return to the mid/half-year reports which include the following table of the country’s principal export commodities. While rice export is showing a substantial increase, half-year output in 2009 was 7% lower than in 2008, suggesting a substantially lower level of domestic consumption or lower stock levels at June 2009.

Exports of Major Commodities

Source: Bank of Guyana Mid-Year Report

The country’s import of merchandise also declined – by 16.2 per cent or US$104.3 million to US$538.5 million. This is partly attributed to a decline in import prices, mainly of fuel and food. While the decreases in other intermediate goods may not warrant major concern, that cannot be said for capital goods; the import of all categories of machinery declined by 16.1 per cent or US$21 million. What must be of concern, however, is the import of consumption goods which expanded by 7.6 per cent or $11.6 million primarily due to increases in other non-durables and motor car subcategories. We seem to have a mindless non-policy on vehicle imports, a significant proportion of which are for the growing band of contract employees and others in receipt of duty-free concessions, while the statistics highlight the increasingly visible extravagant lifestyles and conspicuous consumption of a fortunate few.

The Bank of Guyana report shows the extent to which Clico – the country’s largest insurance company has impacted on the economy. As a consequence of that failure, the total resources of the domestic insurance companies (life and non-life segments) declined by 34.7 per cent to G$25,640 million. The life component, which amounted to 64 per cent of the industry’s resources, fell by 46.8 per cent to G$16,321 million, whilst the non-life component rose by 8.8 per cent to G$9,319 million. The resources of the insurance companies are available for investment in other sectors of the economy but because of the surplus liquidity in the banking sector the impact has not been as strong on the rest of the economy. In respect of the savings and pensions of thousands of individuals – either held directly with Clico or indirectly through pension schemes – the impact has been dramatic if not visible.

This column has been strongly critical of the poor management and governance of Clico and the equally inadequate regulatory oversight that allowed the company to break all the rules. It also believes that more thought should have been given to saving the salvageable segments of the company. If the die has been cast and extreme unction has been administered, then there are compelling reasons for the payment of a first dividend to those with savings and pensions in Clico. What a good Christmas gift that would be.

In foreign exchange, net current transfers declined by 17.2 per cent to US$120.5 million as a result of lower inflows to the private sector in the form of worker remittances. The main sources of outflow were workers’ remittances and remittances to bank accounts, which amounted to US$54.4 million and US$29.7 million respectively. The issue of outward worker remittances highlighted in the Bank of Guyana report, amounting in the half-year to more than ten billion dollars is a serious development in the economy, but instead of addressing it, the Minister misrepresents the data in his own report.


Sources: Mid-Year Report 2009 and Bank of Guyana Half Year report

Once again the country is burdened with additional external and domestic debt. The total external public debt rose by US$27.2 million from December 2008 to US$861.5 million at end-June 2009 but it is the composition of the debt that must cause some concern. Over the past twelve months, the stock of outstanding public and publicly guaranteed debt rose by 11.3% to US$862 million with the IDB and the Venezuelans contributing equally to a $100 million in disbursements in the case of the IDB and trade credit by Venezuela under the Petrocaribe agreement. It must be a matter of speculation whether there is any co-ordination between those who manage our external affairs and those responsible for borrowing and spending.

Domestic debt continues its mountainous climb reaching $84 billion dollars in June 2009, an increase of 15% over the 12-month period and 11% during the first half of 2009. Ten years ago the total public bonded debt was $41.6 billion, meaning that over less than ten years the domestic debt has doubled, a situation that would have been replicated in the country’s external debt had it not been for debt-write off.

The reason for this is that what we cannot do by taxing, we do by borrowing – for anything and everything. To bring the New Building Society under the Financial Institutions Act requires the addition of just five words to the definition of a company subject to the licensing requirement of the FIA and the regulatory supervision of the Bank of Guyana. But in public finance and indeed in public management in Guyana, nothing is straightforward. We must have the obligatory consultant to come and tell us for tens of thousands of United States dollars how to do it. What a waste.

Next week we close this series by pulling the various strands together and looking for any cause for optimism in the economy and its management.