Category: Public sector

Following last week’s column featuring the IMF Article IV Consultation on Guyana I learnt that Mr Asgar Ally, former Senior Finance Minister in the post-1992 Cheddi Jagan government currently serves as a Senior Advisor to the IMF Executive Director for Guyana. In fact accompanying the Consultation Report was a statement issued in the name of the Executive Director Paulo Nogueira Batista, Mr Asgar Ally and Ms Nicole Leslie-Ann Des Vignes, another Senior Advisor.

If the report was one-sided, the statement read like the adulation reserved for saints and people who routinely walk on water. No wonder then that the Government of Guyana was prepared to break with the past and to permit the IMF to allow public disclosure of the report. Transparency under IMF rules it seems, depends on whether or not the subject government is pleased with the contents of the report. Indeed the rule can be so manipulated to pressure the IMF into writing favourable reports in exchange for ‘transparency.’

I cannot say this was done in this case but the statement by the three senior officers causes me sufficient concern to warrant my writing to the new Managing Director of the IMF, Ms Christine Lagarde about it. The IMF must know that its work is being critically evaluated by the public and that it can be called upon to justify what it puts on the record. I am allowing a week to pass before publicizing the letter and will also publish any response I receive. Now for this week’s column.

Introduction
Earlier this week I received a copy of a wonderful book called Poor Economics written by professors Abhijit Banerjee and Esther Duflo of the renowned research university, the Massachusetts Institute of Technology. It is one of the best gifts for anyone truly interested in development models and processes to help the poor and who reject the banal notions and mindless efforts of politicians across continents. The irony of our Guyana example is that our politicians have managed, quite spectacularly, to rise over a single electoral cycle from need to affluence even as they pretend to write and implement poverty strategies that will go nowhere and help no one. Poor Economics is a book that simply cannot be praised too much, winning acclaim from across the spectrum, including from heavyweights like Nobel Laureates Amartya Sen and Robert Solow, and journalists from the pro-capitalist Financial Times, Economist and Forbes to the liberal Guardian and El País – no easy feat.

The book is no ivory tower approach to the complex issue of poverty or why a poor person needs to borrow in order to save, why the children of the poor go to school but do not learn, why they pay for drugs they do not need while missing out on easily available life-saving immunizations, why they spend so much on dowries in India and funerals in Africa, why they prefer to buy a television set rather than nutritious food or why the poor can start a business but not grow it. Banerjee and Duflo spent fifteen years on this work, among the poorest of the poor in Asia, Africa and Latin America, taking a ringside view of the lives of people who are no different from each of us, or are, as the authors say, “just like the rest of us in almost every way” – with the same desires and weaknesses, and just as rational if not more so.

In the process the authors manage to humanize the poor rather than to stereotype them with a single label as some faceless group, capable of being analysed, diagnosed and treated as one homogeneous whole. As the authors note, the poor have to be sophisticated economists just to survive, having to make more careful choices about what to have, or more often what not to have. Failure for the poor is to fall off the precipice, not only for the head of the household but the several children and their children as well.

Aliens in our world
Those of us who believe that our circumstances, our thinking and our values are the standard, forget that the poor have limited access to the things we take for granted – things like good newspapers, television and books that provide the very information that can make their lives better. The poor have the additional problem of being aliens in a world not built for them – the financial system, the Blackberry, a retirement plan and health insurance and four-lane highways are not part of their lives or lexicon. For the poor their only experience with democracy is the promises they receive every five years, and their enjoyment of human rights is being able to avoid the police. Their measure is quantity rather than quality, and achievement is gauged by survival rather than success.

Ever since Desmond Hoyte embarked on the IMF-driven Economic Recovery Programme (ERP) we have heard of the safety net without realising that many of the poor were below that net, only to fall further below. The ERP was built on a set of theories hatched in the multilateral financial institutions, embraced by development economists and promoted to unsuspecting governments by aid agencies and donors keen to be seen to be doing something about poverty. That is what makes Poor Economics different. It is the product of experiences, observations, interviews and objective analyses by two accomplished economists who worked in the trenches and communities of the poor. It is about solutions of the poor, by the poor and for the poor.

The IMF brings good news
We are now told by the IMF that the reduction of poverty is a major priority of the Government of Guyana and that the authorities are moving ahead with the revised Poverty Reduction Strategy Paper (PRSP). That is more than a bit surprising for more than one reason: the government seldom acknowledges the existence, let alone the scale of poverty and has done nothing to measure it in any of the ten administrative regions of the country. I find it hard to believe that the geniuses in Vlissengen Road and in Main Street would think that the nature of poverty in Region 8 would be the same as in coastal Guyana or that some one-size-fits-all approach would magically solve the problem.

If indeed we want to find solutions to our poverty issues we have first to understand the scale of the problems faced by the poor, including the reasons why they missed the first wave of poverty alleviation and the structural weaknesses inherent in those earlier efforts. Like in so many countries, the efforts have been the top down approach by politicians who believed they knew all and therefore did not need to speak with the patient whose poverty is the problem to be solved.

The Jagdeo syndrome
Whatever the scale or the numbers, the first challenge to our poverty problem that needs to be overcome is the Jagdeo syndrome which is to throw money at the problem and if that does not work, throw some more. If free books and uniforms do not help the dropout rate or improve our CXC scores, then maybe a more expensive laptop will do the trick. If building one over-priced medical facility does not lead to an improvement in child mortality then build another, usually with loan or grant funds. If one gimmick does not work just try another.

Under this syndrome an absolute no-no is the obvious need to examine the causes of poverty or for an evaluation of the economic, social and psychological effectiveness of aid extended so often as charity rather than an effort to make available to society the human capital locked in that huge mass. Not only would that approach be too complex for the Jagdeo administration but it has no political value, the only currency the government recognises in its transactions with the poor.

Conclusion
Expectedly, the IMF tells us that the revised PRSP is being done with donor assistance. One can expect with the certainty that night follows day that the donor community will be asked to finance the inevitable outcome: that the problem is insufficient resources. This trick produced baskets of aid funds before and the chances of doing so again are high, so why not try it?

Meanwhile no one should deny the success the political directorate has had in transforming their personal poverty reduction to wonderful capital accumulation. It is a real pity that what works for the politically powerful is not available for the powerless masses. That is as true now as it was in George Orwell’s 1984.

Introduction
A report compiled last November by the staff of the IMF in which two officials of the World Bank participated predicts a brighter future for Guyana despite the challenges, risks and threats to the economy. The exercise is done annually under Article IV of the IMF’s Articles of Agreement which requires it to hold bilateral discussions with members, usually every year.

The report was based on information available at the time of these discussions and completed on January 5, 2011 some days before the 2011 National Budget. Surprisingly it took close to six months for the report to wend its way through the IMF bureaucracy – and perhaps discussions with the Guyana Government – before it was published last month.

What is even more surprising is that despite the hands through which the report would have passed and the time it took before release, the report contains some remarkably elementary mistakes.

These reflect poorly on the team and the IMF despite its usual disclaimer about the views expressed being those of the staff team and not necessarily those of the Executive Board of the IMF.

The report included extensive coverage on the Amaila Falls Hydro Electricity Project and the National Insurance Scheme, but in critical areas it seems to have suffered from the absence of proper and independent research and critical analysis.

The shortcomings in those areas make the report less than helpful to someone seeking an objective evaluation of the state of and prospects for the economy. Its attention to oil and its impact on the economy was helpful but its reference to private estimates of Guyana’s potential reserves (15.2 billion barrels of oil) that places it among the top twenty countries seem far too optimistic.

In its introduction the report indicated that the team met with President Jagdeo, Prime Minister Hinds, Minister of Finance Dr Ashni Singh, Central Bank Governor Lawrence Williams, representatives of the private sector, labour, and the donor community, and members of the political opposition.

Yet the report reflects – if only coincidentally – the official line while none of the more frequently expressed concerns about the economy such as the illegal economy, the impact of the drug trade, corruption and governance gets any mention.

Business Page today presents a summary of the main findings and conclusions and offers its own comments where necessary.

Overall assessment
The report reflects a generally positive macroeconomic outlook in the medium-to-long term. It exults that Guyana is on the “cusp of major changes,” led by the government’s Low Carbon Development Strategy (LCDS) and private sector investments in gold, oil, and gas sectors and supports the large PPP (private-public sector partnership) associated with the construction of hydroelectric plant at Amaila.

It notes that the operating surplus of public enterprises is projected to rise from 0.6 per cent of GDP in 2010 to 1.9 per cent in 2011, supported by an expected surge in sugar production. It goes on to quote the authorities’ estimate that GuySuCo’s production in 2011 will rise by about one third to 300,000 tons. The results of the first crop suggest that this is most unlikely and that even the official target of 280,000 tons may not be achieved. While the report avoided any direct indication of the fiscal cost of keeping the sugar company intact or the high cost of production it did include the company as posing a risk.

Under risks, the report identified global uncertainty, volatile commodity prices, delays in grant disbursements, a widening external current account deficit and potential trouble with the NIS. In this connection, it suggested that the authorities would need to pay careful attention to balancing infrastructural needs with fiscal and debt sustainability. In the IMF song book, governance, crime and corruption do not seem to exist.

Amaila
The report notes that the Amaila Falls Hydroelectricity Project will have the capacity to generate electricity – which it states at approximately 154 megawatts – an output far in excess of present demand.

Ignoring the cost of mothballing and the need for redundancy, it predicts that Amaila should enable “a significant reduction” in the electrical tariff rates charged by GPL and lead to a sharp rise in electricity sales as self-generators would be attracted to the lower rates charged by GPL.

The authors note that based on current information, AFHP would eventually result in a 20-40 per cent reduction in the cost of generation as the switch from oil to hydro takes hold, but places the caveat that the precise extent of the pass-through of these savings to the end-user would depend on the PPA and its impact on GPL’s operations.

The report also states that GPL will have an equity interest in the hydroelectricity company, something that Guyanese are hearing for the first time. This would be an act of incurable insanity and would place GPL in a conflict situation and consumers at a real disadvantage.

While the report calls for the impact of the Amaila Falls project to be carefully monitored, both during construction (end 2011-14) as well as at the operational stages (2015 onward), its failure to do any independent examination of key elements of the arrangement leads it into unfortunate and misleading generalizations. The report does not seem to have any familiarity with the statutory procedures for the grant of a final licence and the obligation of the licensee to have power purchase agreements in place before the construction begins.

Incredibly, the report, “welcomed the high level of transparency and public disclosure of the project to date”! Without being ungracious to the team, one has to ask whether they read the independent press or used Fip Motilall as their source.

Oil
Noting that the Guyanese economy relies exclusively on imports for its oil consumption, the report observes that in 2010, oil-related imports represented some 16 per cent of GDP and were a main driver in the widening of the external current account deficit. It calculates that this makes the country vulnerable to oil price shocks and reckons that a 10 per cent increase in oil prices widens the current account deficit by 1¼ percentage points of GDP.

Changes in oil prices also have a significant impact on the fiscal accounts. Under the assumption that changes in the excise tax absorb half of any given increase, a 10 per cent rise in world oil prices boosts tax revenue by 0.6 percentage points of GDP.

Other issues

Poverty reduction
Out of the blue and from the IMF, Guyanese learn that their government in late 2010-early 2011 was currently preparing an outline of the Poverty Reduction Strategy Paper (PRSP) for discussion with the Cabinet Committee on Finance by July 2011. It notes that the architects of the outline are assessing the costs of achieving the Millennium Development Goals with technical donor support. Yet, this important step did not even warrant a mention in the Budget speech of the Minister of Finance presented to the National Assembly only a few days/weeks later.

NIS
Missing the correct date of the establishment of the NIS by nine years, the report dealt extensively with the risks posed to the sustainability of the Scheme with projections showing that after 2011, NIS will shift from small surpluses to growing deficits, largely as a result of rising benefit payments. It identifies as causes, what it calls a mismatch between pension benefits and contributions; contribution arrears and evasion by both workers and employers; and the additional challenge of the large investment of 18.6 per cent of total assets, or 1.3 per cent of GDP that the NIS has in the Clico conglomerate. Whether the team was told this by the government is a matter of conjecture, but that the government has guaranteed the indebtedness is false, wrong, misleading and dangerous.

What is more absurd is the comment that the Clico investment is “due to mature in a few years.” Professionals must do a fact-check of vital information, not repeat nonsense. Clearly they did not inform themselves about the nature of the investment or are aware that once liquidation was ordered by the court, the investments became immediately payable subject to the rules of priority of debts.

Unwilling to attribute direct responsibility for the challenges facing the Scheme to the failure of successive administrations to act promptly on the recommendations of the actuary, the report recommends “more actions” to restore its medium-term financial viability. They apparently did not ask Dr Roger Luncheon, the Chairman of the NIS Board and more importantly Cabinet Secretary to explain the failures of both Cabinet and the Board to address the problems.

The future
According to the report, the country’s future looks brighter, despite identified challenges. It predicts that with a fifth consecutive year of economic growth, Guyana is beginning to lock in gains from recent years of fiscal consolidation. It notes that prudent and sustained macroeconomic policies have developed resilience in the face of external and domestic shocks and notes that there are growing indications that the private sector is building up major plans for the exploitation of Guyana’s sizeable natural resources. One wonders whether they read Appendix G to the National Estimates which tells a different story.

The report predicts that over the medium term, the LCDS should help Guyana compete better on the global stage and unleash opportunities for lowering poverty. The report did not state what competitive advantages would accrue from the LCDS, but one can put that down to the government and the team themselves not being too clear about this.

As far as the team and the IMF are concerned, they have complied with Article IV and have said little that would ruffle the sensitive and preened feathers of the administration and have not given anything to the political opposition.