I wish to address a few macroeconomic fundamental errors both in interpretation and calculation made by Volda Lawrence, a Member of Parliament (M.P), and one of Guyana’s most prominent chartered accountants, Mr. Christopher Ram. In her budget debate presentation, the Opposition (MP) argued that the economy is caught up in the jaws of the oil sector by showing the share of oil exports of the total exports which stood at over 80% in 2022 and projected to remain over 80% in 2023.
This argument was made in the context of the Dutch disease. However, there is a fundamental error in this interpretation on the part of the opposition member. The total value of exports for crude oil reflected in the balance of payment (BOP) account is in fact nominal exports and not real exports. The nominal value of crude oil exports includes 100% of the crude oil produced offshore Guyana which is correctly reported as part of the total export value for crude oil simply because it is a natural resource owned by Guyana and produced in Guyana.
On the other hand, the real crude oil export value that Guyana actually earns in foreign exchange (FX) is from the portion that Guyana earns in profit oil. And as is well known by now, profit oil is a fraction of the total production of crude oil calculated based on the profit oil formula in accordance with the fiscal terms in the Production Sharing Agreement (PSA), and which is deposited into the Natural Resource Fund (NRF).
In a virtual discussion panel, Mr. Christopher Ram cited an incorrect figure representing the fiscal deficit obtained in 2022 of $193 billion. To arrive at this figure, Mr. Ram took the 11.8% fiscal deficit reported by the Minister in the budget speech and multiply it by (2021) GDP of about US$8 billion. Mr. Ram failed to observe that the fiscal deficit of 11.8% reported by the Minister is actually on the non-oil GDP figure for 2022 which stood at G$1.107 trillion, while the fiscal deficit relative to the overall GDP (2022) which stood at G$2.918 trillion is actually 4.52%, or $132 billion.
This figure can be verified in the budget estimate (Vol.1). Additionally, the fiscal deficit projected for 2023 is lower than 2022 at $92 billion, $40 billion or 30% less than in 2022. Another poor interpretation by Mr. Christopher Ram is in relation to the inflation rate where he posited that he does not believe that Guyana’s inflation rate is as low as reported. In Ram and McRae’s budget focus report, Mr. Ram contended that the 7.2% inflation reported for 2022 is the highest reported inflation in twenty years.
He cited in his report that the highest inflation rate reported in the last twenty years, barring the flood year in 2005 is 5.75% in 2021 which was attributed to imported price pressures, compounded by shocks in the agriculture sector. Again, Mr. Ram is incorrect in the foregoing assertion in his report. The last twenty years would span the period 2003 – 2023. The highest inflation rate was actually obtained in 2007 at 14% (see budget speech 2008). This was attributed to “imported price escalation, particularly in fuel and food categories, unseasoned rains, and flood conditions in food-producing areas exerted upward pressures on domestic prices.
These were compounded by challenges in the transition to value-added taxes, where there was evidence that some retailers did not adjust for consumption tax transitional relief and input tax credits that they would have benefited from and merely added the value-added tax on top of their existing prices” (Budget Speech, 2008). For the readers’ benefit, when the VAT was introduced in 2007 at a rate of 16%, it replaced a consumption tax of 30% at the time. Furthermore, while Mr. Ram may have his reasons known to him only why he does not believe that the low inflation of 7.2% obtained in 2022 which is projected to slow below 5% in 2023, he ignored altogether the impact of the Government’s intervention to combat inflation that would have credibly and tangibly led to this outcome.
To this end, as I have explained in my own budget analysis report, the Government implemented a suite of measures to combat inflation which is largely impacted by external factors within the global economy – that is, (1) imported inflation attributable to the fact that Guyana imports more than 80% of consumption goods, intermediate and capital goods. This aspect of inflation is impacted by events in the global economy such as supply chain disruptions leading to cost-push inflation and demand-pull inflation, and (2) the inflationary impact within the domestic economy is also driven by strong domestic demand across all sectors as demonstrated by the vibrant double-digit growth in the overall economy and in the non-oil sectors.
The total estimated cost of the COL measures implemented by the government in terms of direct cost to the treasury and foregone revenue to the treasury–is approximately $89 billion. This represents 11.3% of the total budget, 28% of tax revenues, and 43% of the NRF withdrawal to finance budget 2023.
Effectively, the impact of these measures altogether would translate to about $404,545 on an annualized basis per household using a total estimated household of 220,000 as per the 2012 national census data – albeit indirectly. The indirect impact of these measures at the household level and on inflation cannot be ignored.
Financial & Economic Analyst