October 8, 1996 DRAFT
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I. Introduction II. The External Environment III. Future Growth Scenarios A. The High Growth Scenario B. The Balance of Payments and Financing Requirements IV. Concluding Remarks |
Projecting the future course of economic development is a risky business; it is particularly risky to project the medium-term prospects for Guyana beyond the year 2000 given the range of uncertainties it faces. Perhaps the most significant influence on the course of future economic developments will be the speedy and effective implementation of the macro and sectoral policies that have been described in this Strategy in order to overcome key constraints and to unlock the door for renewed economic expansion and opportunities for every Guyanese. Assuming that these policies will be implemented, and recent experience would argue in favor of such an assumption, another important influence would be the Government's commitment to address some of the more troublesome structural, regulatory and legal deficiencies.
As already outlined above, this will mean the creation of an economic policy framework conducive to creating and maintaining international competitiveness, sustaining the high GDP growth rates in recent years, and reversing the rate of environmental degradation. This suggests a range of possible future development scenarios, but only two will be outlined here. The first and best case scenario of future growth prospects is based on the assumption that the Government will implement the Development Strategy along the lines described in the document and will create an enabling environment for expanded growth at a sustainable level and the international economic environment will not turn unfavourable. The second and less optimistic scenario is based on the assumption that the Government fails to take the full range of measures necessary to revitalise the Guyanese economy and that the international economy is less propitious for Guyana's development. In this section, the results of the analysis in the preceding macroeconomic Chapters are brought together within the framework of a formal projection model in an attempt to identify the key strategic issues for future development policies.
In quantitative terms, the two scenarios bracket an aggregate economic growth rate of 6 percent per year. To illustrative the importance and cumulative impact of achieving such growth on a sustained basis, it can be observed that 6 percent annual growth over twenty years leads to more than a tripling of incomes per capita. To be precise, after twenty years of such growth, incomes would be 320 percent of their current level. This is mere arithmetic, but it shows why several East Asian countries have been able to rise to prosperity within the time span of a generation or slightly more. Compounding is a powerful effect if sustained. This kind of growth is not out of Guyana's reach, provided that decisive, growth-oriented policies measures are implemented in a consistent manner, at both macroeconomic and sectoral levels.
Growth prospects for Guyana are dependent in part on growth performance in its major external markets. Present projections for the OECD countries suggests continuing growth of their output with a slight improvement in the rate, from 2.6 percent in 1995 to 2.7 percent in 1997-2001. These growth rates, if attained, will stimulate increased demand for Guyana's exports. In other words, any constraints to export expansion would be found on the side of domestic policies and production.
Similarly, for the remainder of the 1990s, inflation in US dollars is projected to average about 2.1 percent, while the US dollar is expected to depreciate slightly against major currencies. Given that a large proportion of Guyana's imports come from the U.S., such an outcome would be beneficial because it would make such imports cheaper relative to imports from the rest of the world.
However, as discussed in Chapter 12, threatening clouds hover over the future of the preferential prices that Guyana receives for its primary exports, viz., sugar and rice, and therefore the policy reforms for those sectors suggested in Chapters 26, 28 and 33 are urgently required. Diversification of Guyana's export base also is essential in order to realise the country's growth aspirations. For this purpose, the export processing zone discussed in Chapters 34, 35 and 36 is another national priority.
An extensive discussion of the external sector is found in Chapter 12.
The first scenario, which takes an optimistic but not unrealistic view of future developments, is predicated on the assumption that the Government will take early action to introduce trade reforms and investment and land development policies and also begin to correct the existing structural, legal and regulatory deficiencies as described throughout this Strategy. Specifically, it is assumed that Government will:
(i) hold the line on the local component of public sector capital expenditures and raise revenues to bring the overall balance to about 2.9 percent of GDP by 2004;
(ii) rapidly increase nominal wage rates in the public sector so as to reduce the differential between private and public sector wages to about 15 percent;
(iii) carry out the needed reforms in education and training, giving greater emphasis to primary education and involving the private sector in decisions on labour force training;
(iv) continue to work toward achieving a more competitive real exchange rate;
(v) privatise GEC and carry out the prescribed improvements in harbours, roads and air transport facilities;
(vi) implement far-reaching trade policy reforms so as to reduce the anti-export bias of the current incentive structure;
(vii) promote increased savings through financial sector reforms and measures for public expenditure reduction;
(viii) move quickly to clarify and codify investment incentives;
(ix) simplify and make more uniform the tax regime;
(x) simplify the registration procedures for small businesses;
(xi) in the natural resource sectors, put into place new measures for introducing greater security of land tenure, flexibility in land markets, longer forestry concessions and better management of fisheries stocks.
(xii) undertake measures needed to maintain a balance between the environment and production.
The successful implementation of these measures would , in the short term, go far towards maintaining the existing growth rates. Moreover, the shift in relative prices favouring tradeable goods, brought about by an exchange rate policy that is more propitious for growth, should lead to increased utilisation of resources towards finding a niche in the world market in the context of efficient export-oriented growth. On balance, in this more favourable scenario, the economy is projected to grow at an average annual rate of 7.3 percent during 1996-1999, and 6.8 percent thereafter.
Prospects for Guyana maintaining its sugar and rice quota, given projections of recovery in the European Union are favourable. Nevertheless, the outcome also depends, in the case of rice, on the continuity of the current arrangements of rice exports to the EU through the OCT. There are some concerns that this loophole may be closed. Even so, the assumption is that there will be positive resolution of this issue, thereby generating the same outcome of rice exports. Beyond 2000, however, the projections assume that there will be no preferential market arrangements for rice. Thus, the growth in rice production is predicated on the industry taking early actions in reducing cost of production, improving yields, and processing rice into cereals and other rice based products for markets in the Caribbean. For sugar, the assumption is that some protocol with the EU would exist after 2002, but that the real price will continue to slip.
Table 16-1
Medium-term Prospects, High Growth Scenario
| Preliminary |
Projections | ||
|
|
|
| |
|
Annual Percentage Growth Rates (1994 constant prices) | |||
| Gross Domestic Product | 5.1 | 7.3 | 6.8 |
| Agriculture | 7.2 | 6.4 | 5.4 |
| Industry | 0.9 | 11.8 | 9.8 |
| Services | 3.0 | 3.0 | 3.0 |
| Exports (GNFS) | 9.4 | 5.4 | 5.1 |
| Imports (GNFS) | 5.8 | 6.9 | 5.7 |
| Total Expenditure | 1.4 | 8.1 | 6.8 |
| Consumption | -3.5 | 8.8 | 8.1 |
| Investment | 17.5 | 6.0 | 2.2 |
| Gross Domestic Income | 9.8 | 7.8 | 6.4 |
| Gross Domestic Savings | 63.1 | 0.6 | 0.3 |
| Memorandum Items | |||
| Per capita GDP | 4.8 | 7.0 | 6.5 |
| Per capita GNP | -4.0 | 9.4 | 6.6 |
| Per capita total consumption | -3.8 | 8.5 | 7.8 |
| Per capita private consumption | -7.6 | 6.0 | 9.9 |
Source: Ministry of Finance.
In addition, capitalisation of the sugar industry, and cost reductions and efficiency gains at the farm and factory level, are expected to improve Guyana's competitiveness at least in the Caribbean. Thus, rationalisation of the industry in the next few years will be critical in attaining the medium-term objectives for the entire economy. Based on these factors, the volume of sugar production is expected to decline by a third in 2000 and thereafter grow at an annual rate of 2.5 percent over the medium term.
The mining sector output is projected to grow at 9 percent over the medium term on account of conclusion of investment agreements between the Government and investors from Canada and Australia. The formulation of a clear mining policy in addition to recent reforms in sale and gold exports are expected to generate more domestic interest in gold exploration and mining. Between 1996 and 1999, the manufacturing sector's output is projected to remain fairly constant as the sector undergoes restructuring. From 2000 onwards, as incentives shift toward export oriented activities, manufacturing output is projected to expand at an average annual rate of 8.3 per annum. Services, in particular banking, are expected to respond positively to the projected increases in manufacturing and mining output. Beyond 2000, diversification and industrial value-added could contribute to continuing expansions of domestic output.
The expenditure policies discussed above are projected to reduce real growth of the local component of the capital programme below that of GDP and, jointly with financial sector reforms, enable domestic savings to increase from 30.2 percent in 1995 to about 35.5 percent of GDP in 1998 and to 31.1 percent by 2004. Public savings are projected to average about 7.9 percent of GDP throughout the projection. Apart from high wage increases, the restrained growth of local investment programmes envisioned in the medium term will be necessary to establish and maintain viable macroeconomic balances.
Over the medium term, it is anticipated that the implementation of the policies proposed will stimulate private sector investment in the core productive sectors as well as new investments to improve physical infrastructure. Thus, gross investment is projected to reach 44.2 percent of GDP by 1999 and thereafter decline steadily to 37.8 percent of GDP by 2004. The incremental capital- output ratio will decline from its high level of 9 in 1995 to about 6.9 in 2004.
Another important element of the medium-term economic outlook is the viability of the balance of payments. The terms of trade are not projected to improve over the medium term, based on the World Bank's current long-term price projections and current preferential trade agreements. If implemented in a timely basis, the impact of macroeconomic and trade policies on sectoral outputs would offset the negative effects of the deteriorating terms of trade. Under the high-growth scenario, real exports of goods and non-factor services are projected to grow at 5.1 per year between 1996 and 1999 and 3.5 percent per annum thereafter. Real imports, on the other hand, are projected to grow at 5.2 percent per year between 1996 and 1999 and 3.8 percent per year thereafter. The current account deficit of the balance of payments is projected to decline from 12.4 percent of GDP in 1995 to 7.6 percent of GDP in 2004.
Guyana's past debt strategy has led to increased foreign indebtedness and high debt service ratios. As a result, the country has become vulnerable to debt servicing problems especially if access to external finance were to become unduly restricted. However, it is assumed that with viable macroeconomic balances, access to concessional financing from the IFIs and bilateral agencies will be enhanced.
The projected fairly steady medium- and long-term disbursements have been assumed to consist mainly of concessional financing from the IFIs. Predicated on the timely adoption of the above measures, debt servicing is not projected to create undue strain to the economy. The debt service-to-export ratio is projected to decline from 39.0 percent in 1995 to 15.9 percent in 1999 and to average 16.5 percent per year thereafter. The interest burden ratio is projected to decline sharply from 19 percent in 1995 to about 7.0 percent in 2004.
The ratio of debt service to government revenue is a useful measure of the burden of debt, since the only way in the long run that a government can honor its debt is through payment out of its revenues. A long-run ratio of debt service to government revenue more than 20 percent would impose significant pressure on public sector finances and limit capacity to undertake needed public sector reforms. On average, debt service to revenue is projected at 33 percent implying less flexibility than is desirable for Government in the use of its revenues. It also implies that efforts will have to be redoubled to improve revenue administration and collection.
Table 16-2
Balance of Payments under the High Growth Scenario
| Preliminary | Projections | ||
| 1995 | 1996-1999 | 2000-2004 | |
| US$ millions | |||
| Resource balance | 17.8 | -26.5 | -58.6 |
| Exports of GNFS | 423.6 | 516.9 | 713.3 |
| Imports of GNFS | 441.3 | 543.4 | 771.9 |
| Net factor payments | -93.2 | -63.2 | -88.2 |
| of which interest on public debt | -86.0 | -48.9 | -55.2 |
| Net transfers | 23.7 | 27.8 | 31.1 |
| Current account balance | -77.7 | -50.9 | -102.4 |
| Long-term capital inflows | |||
| Direct foreign investment | 27.0 | 27.6 | 57.1 |
| Net long-term loans | 11.0 | 62.2 | 51.9 |
| Disbursements | 44.0 | 81.6 | 91.7 |
| Repayments | 61.0 | 30.3 | 45.9 |
| Other long-term inflows (net) | 28.0 | 10.8 | 6.1 |
| Changes in reserves (- = increase) | 64.8 | -29.0 | -23.1 |
|
Ratios | |||
| Memorandum items | |||
| External debt indicators | |||
| Debt/GDP | 326.8 | 193.1 | 114.3 |
| Debt service/XGS | 39.0 | 19.8 | 16.7 |
Source: Ministry of Finance.
C. The Low Growth Scenario
In contrast to the scenario described above, the low growth scenario envisages an economy operating at a reduced scale, generating lower rates of output, employment and income growth. This scenario will also require as a minimum, policy measures to improve Guyana's competitiveness, except that some of the more structural constraints would not be addressed. The scenario envisages a fiscal effort of lesser magnitude, in particular with revenue generation which keeps the overall deficit at about 5.8 percent of GDP throughout the projection period. In this low growth scenario, no major rationalisation and realignment will take place at Guysuco, and issues with the power generation and distribution system will take longer to resolve. Investment is assumed to grow modestly at about 39 percent of GDP over the projection period. Furthermore, the efficiency of investment is expected to fall as a result of continued distortions in the incentive framework.
Table 16-3
Medium-term Prospects, Low Growth Scenario
| Preliminary |
Projections | ||
|
|
|
| |
|
Annual Percentage Growth Rates (1994 constant prices) | |||
| Gross Domestic Product | 5.1 | 6.1 | 4.9 |
| Agriculture | 7.2 | 6.4 | 5.4 |
| Industry | 0.9 | 11.8 | 9.8 |
| Services | 3.0 | -2.8 | -14.8 |
| Exports (GNFS) | 9.2 | 5.1 | 3.5 |
| Imports (GNFS) | 5.2 | 5.2 | 3.8 |
| Total Expenditure | 1.4 | 6.1 | 5.2 |
| Consumption | -3.5 | 6.2 | 6.3 |
| Investment | 17.5 | 6.0 | 2.2 |
| Gross Domestic Income | 9.8 | 6.6 | 4.5 |
| Gross Domestic Savings | 63.1 | 5.7 | 0.06 |
| Memorandum Items | |||
| Per capita GDP | 4.8 | 5.8 | 4.6 |
| Per capita GNP | -4.0 | 8.2 | 4.8 |
| Per capita total consumption | -3.8 | 5.8 | 6.0 |
| Per capita private consumption | -7.6 | 2.8 | 8.0 |
Source: Ministry of Finance.
Since this scenario does not assume a full measure of cost reduction policies in Guyana's export products nor a significant reduction in the anti-export bias of the system of tariffs and the exchange rate, the export and overall economic potential of the economy would be limited. Exports of GNFS will grow at an average annual rate of 5.5 percent throughout the projection period and imports of GNFS by 4.3 percent. As a result of slowed growth of exports, the current account of the balance of payments is projected to improve between 1996-1999 and thereafter deteriorate averaging 6.2 percent of GDP between 2000-2004. The larger financing requirements that this scenario would require would make it difficult to implement some of critical public sector reforms that are essential for implementation of policies and programmes.
Table 16-4
Balance of Payments under the Low Growth Scenario
| Preliminary | Projections | ||
| 1995 | 1996-1999 | 2000-2004 | |
| U.S.$ million | |||
| Resource balance | -17.8 | -19.1 | -36.8 |
| Exports of GNFS | 423.6 | 514.6 | 670.9 |
| Imports of GNFS | 441.3 | 533.7 | 707.7 |
| Net factor payments | -93.2 | -62.7 | -78.3 |
| of which interest on public debt | -86.0 | -48.8 | -34.4 |
| Net transfers | 23.7 | 27.2 | 28.1 |
| Current account balance | -77.7 | -46.9 | -73.9 |
| Long-term capital inflows | |||
| Direct foreign investment | 27.0 | 17.4 | 19.7 |
| Net long-term loans | 11.0 | 52.4 | 19.2 |
| Disbursements | 44.0 | 71.9 | 59.0 |
| Repayments | 61.0 | 30.3 | 45.9 |
| Other long-term inflows (net) | 28.0 | 10.8 | 6.1 |
| Changes in reserves (- = increase) | -64.8 | -29.1 | -22.7 |
Source: Ministry of Finance.
Guyana requires rapid and sustainable economic growth, and the projections developed in this Chapter demonstrate that it is feasible. For it to take place, a shift has to occur from the policy preoccupation with short-term issues of crisis management and stabilisation to fundamental issues regarding the ways to encourage durable and rapid growth which benefits all segments of the population. Policy decisions require a longer-term orientation and need to be based on a clear analytic framework such as that developed in this Strategy.
On the side of international markets, the long-term outlook for Guyana's major export commodities viz, sugar and rice is unclear. To overcome this obstacle and other constraints, the effort required will have to be massive and well-coordinated, and must fit into a well-defined, well-comprehended, overall Strategy. In this regard, the quest to achieve macroeconomic stability should not be viewed as an end in itself but a means to spur and support economic growth. It has to be recognised that, however, genuine and well-intentioned the restructuring effort may be, nothing will survive on a sustainable basis, unless there is macroeconomic order. This complementarity can best be achieved through a properly sequenced and phased macroeconomic programme. However, no programme of macroeconomic stabilisation can succeed unless appropriate structural changes are introduced. The link is a critical one and has to be preserved in order to prevent reversals and failures.
The recommendations made in this Strategy take cognisance of all the above. To ensure a continuation of sound policy formulation, there must be a mechanism for regular monitoring and critical evaluation of the policy measures adopted and procedures to utilise this feedback for developing further rounds of policy reforms as they are required.