Latest update April 25th, 2024 12:59 AM
Feb 22, 2021 Letters
DEAR EDITOR,
Proponents are of the view that the budget 2021 fell short on sufficient direct support to private sector businesses in light of the impact of the COVID-19 pandemic that permeated businesses – not only in Guyana but globally as well. Be that as it may, one has to consider the context of the budget as well as the current state of the nation’s finances which the Government inherited. To put this into a quick and simple perspective (given that these issues have been dealt with extensively by this author in previous writings): on the one hand in 2015, the previous Administration inherited close to $100 billion in liquid cash in the bank. At that time as well, there was no global pandemic and the macroeconomic framework of the country was on sound and stable footing.
On the other hand, five years later in 2020, the new Administration was elected into office in the height of a devastating global pandemic which did not spare Guyana unlike other global financial crisis of recent times – coupled with five months of political turmoil. And in particular, the Administration inherited close to $100 billion in deficit balances in the bank contrary to almost $100 billion liquid cash in the bank five years ago. In other words, there was virtually no surplus cash in the bank other than the revenues earned from profit oil and royalty that is sitting in the Federal Reserve in the United States.
With respect to the oil revenues earned so far which is to the tune of some US$200 million sitting in the Federal Reserve Bank, the Government explained why they have not yet utilized any monies from that fund. The explanation given is well in order and must be commended given that the reason is this: The Government, when in Opposition did not agree with the current framework of the Natural Resource Fund and, therefore, the requisite amendments need to be facilitated before any spending – which will allow for greater transparency and accountability of the oil resources. Further, His Excellency also clearly outlined the specific purpose the oil resources will be largely utilized for which is also commendable.
Having said that, despite the argument by proponents that the budget is lacking in adequate direct support to aid in business recovery – this notion cannot be examined in isolation of the structure of the economy and the caveat of budget 2021.
The Budget 2021 which is a continuation of the policies and programmes set out in the emergency budget in 2020 – provided adequate relief packages in the given circumstance – though indirect to the business sector, that will aid in the economic recovery of the macro-economy and on the micro level.
For example, the $4.5 billion household relief in budget 2020 would find its way back into the business sector. In a simple scenario where a village has 500 households at $25,000 per household is equivalent to an injection of $12.5 million into that particular village economy or at the community level. As such, persons within the community will spend in the village shops or grocery shops in the village. By putting disposable income in the hands of consumers or in other words – measures that will increase the disposable income at the household level will in turn drive demand for consumer goods and commodities. Spending power at the household level is good for the businesses.
The budget also seeks to revert basic food and household necessities to zero-rated status and Reducing the cost of connectivity by removing VAT on data from residential and individual use is an example of another measure that will contribute to lower cost of living and in turn, altogether put more disposable income in the hands of Guyanese. Additionally, the application of zero-rated status on imported stone and other building construction materials aims to reduce cost of living as well as make home ownership more affordable for the ordinary working-class Guyanese.
Let’s look at another example. How would the reduction in tariff on fuel translate to the average person on a microeconomy level and on the macroeconomy level?
The average person driving to and from work five days for the week with a 2000cc engine car; would consume on average 217 litres of gasoline at $184 per litre which is $40,000 for the month. Therefore, at $170 per litre, the average person would spend $36,976 instead of $40,000 for the month on fuel which, when annualized would translate to $36,516 ($3,024 monthly savings) in savings for the year just from this one measure alone. This savings of $36,976 in one year is enough to purchase one month’s supply of groceries for a household with two people. This is what this simple reduction can translate to on a micro level.
Now, think of this same scenario multiplied by 200,000 households across the country assuming each of these households have at least one vehicle and drives to work five days for the week. This very scenario can translate to $7.5 billion in household savings on a macro level which means this is another $7.5 billion in additional disposable income of which if:
(1) placed in the bank as savings instead of spending in the economy, the bank will in turn lend to firms to finance private sector investments – hence, back into the economy by creating more jobs and driving demand and (2) this is $7.5 billion household income available for spending in commerce – thus finding its way back into the revenue streams of businesses that suffered losses due to the pandemic.
Now, these are only two examples of only two measures in budget 2020 and 2021 that will put back more than $12 billion into the economy which will be good for business recovery indirectly. Imagine the likely impact of the other measures and the close to $200 billion allocation to finance public investments altogether
It is worthwhile to highlight that more than 50% of budget 2021 is dedicated towards better serving and empowering the people while at the same time advancing the Government’s transformational development agenda through infrastructure development; housing programmes, new road networks, investing heavily in the agriculture and food security sectors and Agro-processing on mega scales. In doing so, tremendous opportunities exist for foreign and local investors to gear up so that they can exploit these opportunities in the various productive sectors.
Yours faithfully,
J.C. Bhagwandin
Chief Financial Advisor/Analyst
JB Consultancy & Associates
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