October 10, 1996 DRAFT
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I. Introduction II. The Objectives of Macroeconomic Policy III. Macroeconomic Policy in Guyana Today |
On an international scale, the prevailing conceptions of macroeconomic policy have experienced a marked evolution over the past few decades. In the more industrialised nations, the focus of policy has moved away from countercyclical fiscal prescriptions. This has occurred partly because of increasing recognition of the difficulties of timing countercyclical responses correctly, and partly because of other factors: the increasingly open nature of large economies plus the shared emphasis on coordination of policies, which together have brought a concomitant reduction in the degree of independence of national economic policies; and the overshadowing of cyclical concerns by secular issues, especially those related to budget deficits and entitlement programmes.
In those economies, interest rate policy has become the major instrument for seeking the correct balance between stimulus and stabilisation, with more stress being placed on the latter than was formerly the case. Improvement of international trade policies around the world is seen as a principal avenue for promoting economic expansion in all trading partners.
In developing nations, the approaches to economic policy have moved away from attempting to plan the expansion of output, by sectors and principal products, and toward efforts to devise policy reforms that guarantee a sound macroeconomic climate and remove structural impediments to growth at the sectoral level. At the same time, policies for investment have broadened from the calculation of gross external financing requirements, which still is an integral part of policy work, to include the development of policies that will stimulate domestic saving and encourage investment flows, both domestic and foreign. Generally, the pendulum has swung in the direction of removal of direct controls on the economy and in favour of policies that enable decentralised decision makers (household, firms) to function more effectively. This is seen as a more fruitful way to generate additional employment and increases incomes. At the same time, there is full recognition that lower income groups require special assistance of various types, and that another important role for Government is to assure the provision of adequate physical and social infrastructure. It is generally felt that Government does not necessarily have to provide such infrastructure itself, but it is responsible for guaranteeing that those needs are met.
These changes in orientation have been accompanied by an emphasis on different classes of macroeconomic policy instruments. Now policy in developing countries tends to be constructed around fiscal instruments (revenue and expenditure policies), debt instruments, monetary targets, trade policies, foreign exchange reserve management and interest rates. In some countries, reserve ratios still play a role in monetary management. Trade policies involve customs duties more than quantitative controls. In addition, the institutional and regulatory frameworks are increasingly seen as central to adequate functioning of the economy, and a considerable amount of policy work throughout the developing world deals with issues such as budgetary processes, public service reform, rates and tariffs on public services, investment and taxation codes, privatisation of state-owned enterprises, financial regulations, land tenure issues, labour market regulations, environmental regulations, rules for management of natural resources and the role and financing of local government.
In such areas, the dividing line between macro and sectoral policies inevitably blurs. Nevertheless, decision makers at the macro level are responsible for ensuring that all such policies have a consistent focus and complement each other. That is one of the reasons for drawing up a document such as this National Development Strategy.
The context of our macroeconomic policy has changed significantly in recent years. At the end of the previous decade and the beginning of the current one, the emphasis was necessarily laid on structural adjustment. As acknowledged in Chapter 17 of this Strategy, at first the adjustment process exacerbated the poverty problem, accelerated inflation and created dislocations for many Guyanese. Nevertheless, owing to the sustained commitment to sound policies that has been made in this decade, the era of adjustment is mostly behind us and new priorities are being adopted for policy making.
The successes of macroeconomic policy include, among other things, bringing inflation under control; freeing up prices throughout the economy, including interest rates and the price of foreign exchange; shedding state-owned assets to make them more productive; increasing fiscal revenues; rationalising the public sector workforce and reducing the fiscal deficit; lowering average customs duties; generating adequate levels of foreign exchange reserves; reducing substantially the external debt obligations; and strengthening the country's financial institutions. Problems remain, even in several of these areas, as is pointed out in the preceding Chapter. Nevertheless, the broad picture is quite different from what it was at the commencement of the decade, and for that reason the priorities of macroeconomic policy can now begin to embrace the growth process itself, addressing questions of how to promote growth, how to ensure its sustainability, and how to ensure that its benefits are as widely distributed as possible.
In the broadest sense, therefore, macroeconomic policy is directly concerned with the aims of growth, distribution and sustainability that have been recognised as overriding national objectives in Chapter 2 of the Strategy. Specifically, the objectives of macroeconomic policy for the next ten years may be summarised as follows:
Promote continuing high growth rates of output and employment.
Ensure that inflation remains at relatively low levels.
Ensure that the population's basic needs are met and that the growth process contributes to a reduction of poverty.
Ensure that the growth path is sustainable in fiscal, environmental and institutional terms.
In order to satisfy these objectives, it will be necessary to meet a number of subsidiary objectives, or more specifically macroeconomic criteria. The principal criteria of this nature would include:
Enhancing the institutional and financial effectiveness of the public sector to fulfill its roles and responsibilities.
Adopting policies that encourage exports and improvements in the international competitiveness of Guyana's producing sectors and firms.
Continuing to improve the solidity and efficiency of the system of financial intermediation, to promote both savings and investment and safeguard the system's integrity. This thrust includes reestablishing the positive net worth of the Bank of Guyana, as a basic step toward strengthening its independence as an institution.
Promote policies that enhance the role of the private sector in the economy and encourage greater levels of participation in decisions related to economic development and economic management on the part of families, communities, associations of diverse kinds, and local governments.
Fulfillment of these subsidiary macroeconomic objectives will not only promote achievement of the broad objectives but also will strongly facilitate implementation of the strategic orientations of this development programme that are described in Chapter 5.
At the most aggregate level, macroeconomic policy consists of the triad of monetary, fiscal and exchange rate policy. New directions in any one of these areas have to be conceived and carried out in full coordination with the other two areas. Without question this circumstance imposes some constraints on the flexibility of macroeconomic policy, but nevertheless in today's economic environment there is room in a sound macroeconomic policy for fully addressing concerns for both stability and growth, and also for fostering growth with equity.
In light of these policy interrelationships, and to fulfill the objectives established above, the following principal orientations will govern the continuing process of formulating and refining macroeconomic policy so that it continues to serve the needs of contemporary Guyana:
Broadening the base of fiscal revenues, thereby continuing to reduce the fiscal deficit progressively. This is a sine qua non without which progress will be curtailed on many fronts, not least the maintenance of price stability and the alleviation of poverty through public sector programmes. Tax revenues will have to increase on the order of 14 percent per year, in nominal terms, over the next five years. Achieving this goal will require development of new revenue source, improved collection from existing sources, and stronger legal sanctions for failure to comply with tax obligations.
Further increasing the reliance on indirect instruments of monetary policy. In addition, reducing the volume of bond emissions for purposes of liquidity sterilisation, because those bonds ultimately aggravate the problem of fiscal indebtedness and also because it is now clear that the economy is on a sustained path of more rapid growth than was envisaged even two or three years ago, and rapid growth of output requires correspondingly more rapid increases in the money stock. At the same time, government debt instruments will acquire a longer term. The implications of these decisions are manifold and include a lessening of the pressure in financial markets that has tended to keep interest rates relatively high. Correspondingly, the monetary targets will be revised to reflect the higher growth expectations, always being careful to safeguard the monetary stability that has been achieved.
Government will build up its deposits in the Bank of Guyana and redeem a share of the treasury bills held by commercial banks. Government also will maintain its current flexible interest rate arrangements, under which lending and deposit rates of the Bank of Guyana are adjusted in line with the average rate determined by competitive bidding in auctions of three-month treasury bills. Interest rates are expected to decline further as inflationary expectations continue to wind down and as financial intermediation expands with the implementation of the FIA and other financial reforms. Even so, there is further room for narrowing the spreads between lending and deposit rates.
Assigning priority in fiscal expenditure programmes to improving the wage scale in Public Service and augmenting real outlays on health and education.
Implementing measures of partial cost recovery for many classes of basic services, always taking due care to assure that families of limited means will not be denied access to health care and education. At the same time, putting in place more effectively targeted subsidies for such families for purposes such as paying rentals on homes or purchasing homes, in addition to receiving medical care and schooling.
Continuing the drive to narrow the range of values of custom duties and consumption taxes, in the interest of more uniform treatment of all components of the economy.
Continuing the process of privatisation of enterprises that would be more efficiently recapitalised and managed in private hands, with emphasis on making the privatisations as participatory as possible.
Completing the liberalisation of the exchange market, e.g., by eliminating mandatory requirements for surrender of part of foreign exchange receipts and developing measures to strengthen the domestic interbank market in foreign exchange.
As the fiscal deficit continues to shrink, adopting measures to ensure that the exchange rate stays at levels that will improve the competitiveness of Guyana's export sectors, thus eliminating the implicit "exchange rate tax" that falls on the tradeable goods sectors. (This issue and alternative ways of dealing with it are reviewed in Chapter 12, Section IV.B.) Such measures will be absolutely crucial to successfully surmounting the hurdles represented by the expected decline (in effect, a continuing decline) of real prices received by exporters of sugar and rice, and avoiding having the economy slip backwards as those changes in external markets come to pass.
Strengthening the regulatory and development policy frameworks so that they more effectively protect investors; depositors; consumers; women; farmers and fishermen; workers in logging, industry, services and other sectors; Amerindians; and smaller entrepreneurs.
These lines of macroeconomic policy are developed more fully in Chapters 12, 13, 14 and 15 that follow. In order that these policy orientations yield a full set of benefits in terms of economic growth and the distribution of its benefits, they need to be complemented by implementation of the sectoral policies described in Volumes III through V of this Strategy.
At both macro and sectoral levels, the economy's requirements obviously will be changing over time, so the policy prescriptions will have to be updated in the course of implementation. This Strategy provides a valuable starting point for the process of policy reform but no document of this nature can provide definitive answers for an entire period of several years. Therefore it will be essential to translate the Strategy into a sequence of annual implementation plans, which will then constitute its linkage to the annual Budgets, the investment programmes, packages of administrative and institutional reform, and the legislative agenda.
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All comments and suggestions will be forwarded to the Ministry of Finance for review.
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