October 13, 2024
Focus on Budget 2025?
Introduction
In what was probably his most consequential address to Parliament, President Ali, this past Thursday, gave us more than a glimpse of what will be announced in Budget 2025 – an election year. It was a comprehensive and ambitious presentation, embodying responses to calls by various stakeholders for several years. The President also reflected on his Government’s achievements since retaking power in 2020, outlining them in detail before turning to the future – 2030 and beyond. With oil revenues driving the economy and the agenda, the President committed vast sums to reshape Guyana’s future, improve living standards, and build a modern, resilient nation.
At times, the address felt personal, with the President using the word “I” more than fifty times as he laid out his vision for harnessing oil revenues to fund large-scale cash transfers, subsidies, and public investments.
The headline-grabbing measures included a one-off $200,000 cash grant per household, the abolition of bridge tolls (primarily benefiting those crossing the Berbice River), a 50% reduction in electricity costs, free university tuition, and a child allowance for tax purposes. Additionally, the President committed to raising the public service minimum wage to $100,000 and transferring $10 billion to the National Insurance Scheme (NIS) to help contributors who did not make the 750 contributions required to earn a pension. These policies aim to provide immediate financial relief to citizens, while other cost reduction measures seek to further ease economic burdens.
Economic Risks and Sustainability
From all the vibes, the initiatives are popular and have the potential to improve living standards, but they do come with risks that demand serious attention. The pace and scale of spending raise concerns about fiscal sustainability, particularly given the reliance on the Natural Resource Fund. If the economy overheats, as it certainly will, there would be significant inflation, pressure on the exchange rate, and the exacerbation of challenges related to Dutch Disease and the Resource Curse. Delay or failure to engage in robust and meaningful planning only heightens these risks. Seizing this unique opportunity without falling victim to the maladies of other resource-rich nations will require prudent fiscal management.
Inflationary Pressures and Economic Imbalance
It is likely that even the private sector might have been caught off guard by the influx of billions of dollars into the economy, with little time to adjust internal supply capacity and imports at this short notice. If available goods and services do not meet the increased demand, inflation is inevitable. There is also the risk of price gouging, particularly in sectors controlled by a small number of players and groups which dominate the distribution sector. The economy, already growing at breakneck speed – averaging a 40% annual GDP increase over the past three years – may face inflationary pressures that could diminish the value of the very cash grants intended to assist citizens.
The Government has yet to clarify how it plans to mitigate these problems. Even if inflation is partially managed, the impact will still erode the purchasing power of citizens, creating the risk of a cycle of handouts followed by price increases and further economic instability. It will be crucial for the Government to find ways to ensure this does not happen.
Exchange Rate Management and Dutch Disease
Despite the talk of food security, many consumables – including an increasing range of food products, and water – are imported and paid for in foreign currency. The economy is already experiencing tight foreign currency liquidity, which could worsen unless the Government, through the Bank of Guyana, takes proactive measures to address this strain. The paradox of a highly successful economy that exports vast quantities of oil, yet experiences foreign currency shortages, is glaring, especially with much of the Natural Resource Fund already spent. Labour, too, is increasingly being redirected to the petroleum sector, with implications for Dutch Disease.
Even as the Government finances large-scale social and physical infrastructure projects, these investments may undermine the competitiveness of sectors such as agriculture and manufacturing. Diversifying the economy beyond oil is not just a goal but a necessity for long-term stability. The Government has to pay more attention to this reality.
University of Guyana and the Guyana Power and Light Inc.
While free tuition to the tertiary level is a long-overdue constitutional goal and is welcomed without reservation, this is a recurring cost of billions of dollars. The same goes for the electricity subsidy, which offers short-term relief but does not address the underlying inefficiencies of Guyana Power and Light Inc. (GPL). Some might view the electricity subsidy as merely a way to prop up an outdated model of generation and transmission, rather than modernising the system to meet the needs of a growing economy.
Both these subsidies will likely continue indefinitely, as no future government would dare reverse them – making it all the more important to ensure that these liabilities are managed wisely. GPL’s issues cannot be solved by subsidies alone; they require substantial reform to create a stable, reliable, and modern electricity grid.
Labour Market and Incentives
President Ali referred to Guyana’s tight labour market as a “good problem,” indicating economic vitality. Yet, unemployment remains high in certain parts of the country, with many people either unwilling or unable to join the workforce. There is a risk that the combination of cash transfers and subsidies may inadvertently disincentivise employment unless measures to improve labour force participation and productivity in a timely manner.
The decision to raise the minimum wage in the public sector to $100,000 is commendable, but it should have been accompanied by an adjustment to the national minimum wage to avoid disparities between the public and private sectors. Failure to address these differences, runs the risk of public sector employment crowding out the private sector, further exacerbating the labour shortage in non-government sectors, which already face competition from the petroleum industry. To build a balanced and sustainable economy, private sector development must be a priority, with policies aimed at fostering entrepreneurship and job creation.
The National Insurance Scheme
The announcement by the President of a $10 Bn. injection is an acknowledgment and welcome attempt to resolve a recurring and longstanding problem in the NIS. That deals with the demand side. We anxiously await the details and the enabling legislation to address the myriad challenges facing the NIS, including inadequate physical and human resources, outdated legislation, and enforcement against non-compliant employers. An urgent, more holistic approach to NIS reform is needed, including updating laws, improving enforcement mechanisms, modernizing systems, and ensuring long-term actuarial sustainability.
One simple step the NIS needs to take is publish its outstanding financial reports.
Taxation
The two references to taxation were on tax holidays in which the President reinforced expanding the number of regions which can qualify on the basis of new employment generation and the introduction of the child tax credit, allowing parents to claim an additional deduction of $10,000 per month per child. This is another case of itemised deductions, from which Guyana had previously moved away from in favour of a simpler tax system.
This may be well received but it will increase the workload of the Guyana Revenue Authority and test its capacity to prevent fictitious claims by taxpayers. It would be much simpler to raise the threshold and make the personal tax system more progressive.
Targeted Social Programmes and Efficiency
While the universal cash transfer of $200,000 per household may seem straightforward to administer, it raises concerns about the efficiency of resource allocation. A one-size-fits-all approach dilutes the impact of these programmes in addressing inequality. A more targeted system – such as means-tested grants – would ensure that resources are directed toward those who need them most, maximising the effectiveness of government spending.
Funding and Long-term Considerations
President Ali is acutely aware that current high oil prices are driven by global conflicts in Europe, the Middle East, and Africa. However, these prices will inevitably fall, and production in the Stabroek Block could decline post-2030. If diversification efforts are not successful, the country could face significant fiscal challenges when oil revenues decrease. Without other sources of revenue, Guyana’s ambitious commitments could become unsustainable, leading to budget shortfalls and austerity measures.
The President’s address did not devote enough attention to how these programmes will be funded in the long term, particularly in the event of declining oil prices. Diversification is the only solution, but meaningful progress in this area seems to be absent from the current agenda.
Conclusion
The President’s vision for Guyana is bold and imaginative, centred on using the country’s newfound oil wealth to improve living standards, investing in infrastructure, and creating opportunities for all Guyanese. For this vision to succeed, however, it will require competent management, a diversified economy, and strong adherence to the principles of good governance – transparency, accountability and a commitment to reducing corruption.
The address did not explore potential “what-if” scenarios or some of the costly risks involved. While it is forward-looking, there are major concerns—inflationary pressures, exchange rate volatility, and the long-term sustainability of public spending—that must be addressed. Additionally and undesirably, the Natural Resource Fund may increasingly be used to support recurrent expenditure, raising further concerns.
Hopefully, Dr. Ashni Singh, the Minister responsible for finance, will address these in the 2025 Budget.