Tag: Inflation

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Numbers are what you want them to be

Introduction
Mark Twain said, “there are three kinds of lies: Lies, damned lies, and statistics.” I won’t be allowed to say that in these hallowed columns, particularly in relation to the National Accounts announced by Senior Minister of Finance Dr Ashni Singh in Budget Speech 2010. But I do draw attention to that speech and specifically paragraph 4.146 in which the Minister announced that the Bureau of Statistics had completed the technical work required “towards the rebasing of our National Accounts framework as well as updating the basket of goods and services underlying computation of our Consumer Price Index (CPI).” As if to lend some authority to that work, the Minister announced that this was done “with external assistance and support.” The National Accounts presented by the Minister are now “rebased to 2006 prices” and are introduced from January 2010, along with the new CPI.

Of course, the Bureau of Statistics has not distinguished itself for its independence, nor has its professional image been helped by the government and this Minister in particular. Business Page of February 7, 2010, under the caption ‘Budget 2010 – Looking back,’ noted that the Minister would be ahead of the bureau if, soon after he announced his statistics on GDP and CPI, the bureau gave those numbers its blessing. There is no prize for guessing that what was feared, actually happened. The official website of the Stats Bureau has now endorsed the Minister’s numbers. Perhaps the bureau would also explain how VAT collections declined by 3 % while the sector to which it most applies – distribution – is reported to have grown by 6%. And why all the hard-to-measure sectors, like transportation and rental, reflected growth. Are we so dumb as to take these at face value?

Singular control
It is fortunate for Dr Singh, but less so for the country, that directly or indirectly, he either influences or controls the spending (as keeper of the Consolidated and Contingencies Funds), the record-keeping (the Accountant General Department) and the measurer (the Stats Bureau). In addition, he has the potential to influence the auditor (the Audit Office). Each of these entities is headed by an employee on contract, which is not an arrangement conducive to demonstrations of independence.

This column supports rebasing which is recommended by the UN and is done routinely across continents. But it would have been useful if we had used the expertise of the University of Guyana in the exercise and done it with some form of consultation, explanation and information. With so much of the information on consumer spending empirical, anecdotal and incapable of precise measurement, it would have been helpful to have the widest possible engagement on its construction, but this is simply not this Minister’s style.

The justification for rebasing is simple enough. As the Minister explained, up till 2009, the base year for Guyana’s National Accounts was 1988. He further explained that as the years progressed, there was increased likelihood of errors in measuring the level of growth and other components of the National Accounts.

This is because the prevailing price and cost structures in the base year become progressively less relevant for calculating volumes of output and for estimating value added. Also of relevance, is what is called the industry cycle as new products, technologies, and industries take the place of, or add to, those prevailing in the base year.

Never was so good
The Minister announced that the results have been predictable and that as a result of the rebasing to year 2006, the estimated weight of agriculture, fishing and forestry and of government has declined, while the weight of mining and quarrying, manufacturing, and services has increased. The rebasing has resulted in an upward revision in the estimates of nominal GDP. (See table and chart extracted from the Minister’s data.) Prior to the rebasing being brought into effect, Guyana’s GDP at market or purchaser prices for 2010 would have been estimated at $268.5 billion, but with rebasing, this has increased by 69% to $448.1 billion.

Adjusted for the rebasing, this is how the economy’s performance appears for the years 2006 to 2010 projected.

But rebasing has other consequences. In addition to the economy being larger, it means that other figures, like the amount of debt to the size of the economy, are better, while tax to GDP or government spending as a fraction of the economy, are lower. Based on his rebased numbers, Guyana is now one of the least taxed countries in the region, despite having the highest corporate tax rates and the most punitive system of personal taxation. It is true that many major sectors – like sugar, bauxite and forestry – make only a small contribution to the tax revenues of the country. Rusal and BOSAI enjoy generous tax concessions in bauxite while Barama’s capacity to make losses and still survive goes down in the business folklore of Guyana, and perhaps the world.

The private sector’s understanding
The concept of transfer pricing, one of the most common forms of exploitation by multinationals, clearly does not apply to Guyana. And what seems not to be understood by our captains of industry – who are also the beneficiaries of tax concessions and a liberal interpretation of the tax laws – is the difference between the nominal rate of tax and its effective rate.

Take our commercial banks for example. The nominal rate of corporation tax that applies to banks is 45%. Yet, according to their most recent reports, these banks paid an average of 26%, within the range of 14% and 39%. And the shareholders pay no tax on the dividends. Quite what the President of the Georgetown Chamber of Commerce therefore means when he suggested that his Chamber was not too concerned about Budget 2010 since tax reform is on the horizon, is anyone’s wild guess.

But let us for one moment accept the Minister’s new numbers. It means that tax evasion by the business community is taking place on a scale previously unimaginable and/or the incidence of loss-making and tax exempt operations is much bigger than we think. The Auditor General (ag) simply ignores the law that requires him to do an annual audit of concessions under the Tax Holidays Act. But there is no ambiguity or uncertainty that the workers are taxed at close to 50%, taking income tax, VAT and NIS into account. On the other hand, the business community as a whole probably bears tax at less than 10%! Yet, the Minister of a government that claims working-class roots could not see it fit to reduce the personal tax rate of 33⅓%, or increase the measly US$175 per month personal allowance.

Know only mistrust
While I know a little about taxation, I confess that economics is not my field, and I therefore called several entities to help me understand the re-basing. The Minister of Finance Dr Ashni Singh, as usual, did not take my call; the head of the Stats Bureau, also as usual, was out of the office and at the Ministry of Finance, while relevant academics at the University of Guyana claimed no participation in the exercise by the Stats Bureau.

With mistrust everywhere it is sad, but not unexpected, that official statistics and reports of transactions are not well regarded by Guyanese. Think of the ‘now you see them now you don’t’ state-owned properties that are sold off; or of the conflicts of interest among important state institutions; or of the violations of the constitution and the Fiscal Management and Accountability Act; or of the incestuous relationships between the politicians and some members of the business community; or of the government’s unwillingness to entertain MP Raphael Trotman’s Freedom of Information Bill. It would be hard not to be cynical and distrustful.

And those who care only about the bread and butter or rice and curry issues, are hardly likely to be impressed by the announcement that her/his personal GDP has jumped to US$2,308.50 but s/he still cannot find a job, or is in receipt of a pension of $6,600 per month. And even for those who have jobs, their food basket costs easily exceed their income. These issues do not seem to matter to the Minister of Finance or his Bureau of Statistics.

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Staggering increase in external debt

Bad news
The country’s stock of external public and publicly guaranteed debt rose by 20.3 per cent to US$804 million from the end of September 2007 to the end of September 2008. This dramatic increase has been reported in a quarterly report by the Bank of Guyana for the nine months ended September 30, 2008. As a consequence, external debt service costs increased by 10.5 per cent to US$11.5 million, reflecting new debt payment schedules primarily for multilateral creditors. These were among a number of interesting issues raised in a most commendable effort by the central bank, and the Governor, Mr Lawrence Williams and his team deserve kudos for what appears to be a first for the bank.

Otherwise the report makes for a most depressing report on the management of the economy by President Bharrat Jagdeo and his Finance Minister Dr Ashni Singh, of whom so much was expected when he first was appointed a minister after the 2006 elections. By almost every measure the economy in the three months July to September 2008 performed worse than it did in the same quarter in 2007.

There was lower output in all the country’s major commodities during the third quarter of 2008 compared with the same period in 2007. Sugar fell by 3.6%, rice by 1.6% and poultry by 12%, while in forestry products, diamond and fishing the story was the same. Someone counted the eggs and came up with a 64% increase in the country’s production of eggs while there was modest growth in the mining sector, including the foreign owned bauxite companies blessed with generous concessions which the government has refused to disclose.

More bad news
If the overall performance of the manufacturing sector is depressing, the non-performance of segments of the sector must be a cause for serious concern. The production of paints and alcoholic beverages increased by 1.7 per cent and 6.3 per cent, respectively, whereas there were declines in the production of pharmaceuticals by 2.5 per cent and non-alcoholic beverages by 33 per cent. Our pharmaceutical company is another beneficiary of concessions and valuable contracts to supply Indian manufactured drugs to the government.

And if non-alcoholic beverages include Coke, Pepsi and I-cee, is it an error or did we in the third quarter produce only two bottles when three months earlier we were producing three? Where are we going and what does it say that a senior official of one of those beverage companies is a top member of the increasingly useless National Competitiveness Council?

Inflation
The Bank of Guyana, sourcing its information from the Bureau of Statistics reported that the inflation rate “during the third quarter of 2008 grew by 7.8 percent compared with 13.9 percent for the corresponding period in 2007.” There must be some error here, however, since the inflation during the quarter could not be 7.8% and was probably the rate for the nine months. The food basket maintained by Ram & McRae for the quarter reflected an increase of 8.2% over the three months but for the year the firm’s basket of food showed an increase of 33%, similar to the increase in Trinidad and Tobago. Conveniently, the Bank of Guyana concludes, without offering the kind of analysis and evidence expected from such a body, that the level of inflation in Guyana was driven by higher international fuel and commodity prices.

What is troubling is that the report indicates that price data for the third quarter were not available. Yet we will be expected to accept without question inflation figures pronounced by Dr Singh when he presents another of his big budgets that would not only include all of the third quarter but the entire year! It is hardly surprising therefore that leading economists and the public have ceased to give any credence to the numbers provided by the government, particularly on inflation and GDP, two politically sensitive variables.

Wages and employment
The Bank of Guyana clearly forgot that these are key issues in the economy since they give them a complete pass, meaning no mention. Expectedly, it did devote much attention to the financial sector reporting that the foreign exchange market continued to grow during the review period. The bank seems to forget as well the role and scale of the underground and parallel economy, and as our newspapers show, the role of drug money in the economy. It has decided, again without solid information, that sales of foreign currency “were related to higher import costs.”

Almost half of the transactions by value in the foreign exchange market were accounted for by the cambios with the bank itself purchasing some US$376 million, comprising mainly purchases of US$212 million from GuySuCo and the Guyana Gold Board. Despite the perceived strong links between the non-bank cambios and the underground economy the report does not reflect any cause for concern on the part of the bank in its supervisory role over these entities, most of which are unincorporated businesses not requiring independent audit of their books.

The drugs trade
At least as readers of the daily newspapers, the bank must be aware of the drug trade with its own oligarchy. And so too must be the one-man Financial Intelligence Unit, located within the Ministry of Finance, that is supposed to prevent money-laundering. The report indicates that sales by the non-bank cambios represented 8% of total currency sales. Even Lewis Carroll would have hesitated before writing this figure. This column has criticised the law regulating the non-bank cambios, noting that they have outlived their initial purpose and called for their abolition. In a remarkable sign of impotence and or lack of will, the response has been that it will drive the business back onto the streets. This seems to suggest that instead of running the country on the basis of laws, we are at best closing our eyes and ears to reality, operating on fear of stepping on the toes of the powerful.

Despite the bank’s poor record of supervision of the cambio sub-sector the report devotes several pages on the remittance business, advising of the steps being taken to bring it under its control. The report notes the significant increase in the inflow of remittances during the past six years, increasing from US$3.4 million in 2002 to US$224.4 million in 2007. In the first half of 2008, net flows of remittances increased by 6.3 per cent, or US$6.6 million to US$111.8 million compared to half year 2007. Interestingly, Caricom countries now rank only behind the United States of America as the dominant countries from which Guyanese receive remittances.

Tax, borrow and spend
The report emphasises that the overall surplus of the public sector contracted during the review period, resulting from relatively higher expenditure by the central government since receipts from corporations and tax revenues increased slightly. The tax and spend approach that has characterised President Jagdeo’s style of financial management seems to have been taken to new levels by Dr Singh. With him at the helm of the Finance Ministry, it is now tax, borrow and spend. Since moneys borrowed have to be repaid later, no government, elected or otherwise, should be allowed to borrow away the future of a country. There should be a cap on how much a government is permitted to borrow, even if it is to stabilise excess liquidity in the financial system as the report indicates.

The report which was created in PDF format on December 29, 2008 for publication on the bank’s website “predicted” that in the fourth quarter, the economy would continue its growth path, particularly in the mining, construction and services sectors, and that the agriculture sector which had faced “minor setbacks in the third quarter” would register modest growth. Clearly it could not be referring to sugar where the drama became even more surreal. In a cleverly worded disclaimer for the (mis)management of the economy, the report notes that the efficacy of the bank’s policies will depend on the stance of central government fiscal policy. And we all are aware of the history of that policy.

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Facing the threat of rising oil and food prices

Introduction
Oil seems to have a talismanic role in the world’s psyche. More than gold its price causes predictions of apocalyptic proportions, paralysis in the modern world and fears of wheels grinding to a halt. Those of us of an earlier generation will recall how the four-fold rise in the oil price in the seventies sent shockwaves across the world and caused a tectonic shift in global resources as more money poured into the oil-producing economies than they could handle. The dramatic increases in oil prices in 1973-74, 1978-80 and 1989-90 were all followed by worldwide recession. Yet with unerring regularity and often defying the predictions of doom, the economies would return to the historical pattern of periods of unprecedented growth, low interest and inflation, consumer confidence and spending.

In the decade of the eighties, the economies of Asia grew (real GNP) astronomically ranging from 120% growth in the Republic of Korea, Taiwan 90%, Hong Kong 65% and Singapore 80%. Even the Asian crisis went almost as soon as it had arrived, leading the region and the world’s economic managers to take the credit for having fixed the system – once and for all. The more hubristic were even prepared to say that inflation had been bottled up, the economic cycle of periods of recovery and prosperity characterised by relatively rapid growth followed by contraction and recession or the more extreme form ‘depression,’ had been neutralised and the central bankers and the IMF were in complete control.

Storm clouds
Even Bush could not mismanage the US economy given the magical powers of Alan Greenspan of the Federal Reserve Bank, while Gordon Brown, the ambitious Chancellor of the Exchequer was credited with all the economic achievements of Tony Blair. The only threats that the revered gurus could see was the bin Laden-inspired terrorism, and more mundanely, the impact of washing drug money in the pure financial stream overseen by the ever more confident central bankers. But then suddenly storm clouds began to gather on the horizon and the respected Economist publication, ‘The World in 2006’ cautioned that the global growth rate of close to 5% for two consecutive years was too good to be true and that things could not remain so rosy for ever.

Real oil prices had already begun to climb, a housing boom or rather bubble financed by sub-prime loans, extravagant consumer spending with the gas-guzzling Hummer and SUVs being the vehicles of choice and negative personal and national savings rates were facilitated and masked by cheap money. History is replete with examples that such a party could not last, that the night would come to an end and the hangover would be long and painful. That unfortunately has now happened, and almost quarterly we see leading institutions like the IMF and the European central banks revising their economic outlook, shaving a few decimal points with each revision. The decline started with the sub-prime mortgage crisis in the US, which now affects the global financial system with fears that the system can collapse and that Bear Stearns in the US and Northern Rock in the UK were only the early casualties.

A matter of opinion
How the crisis will play out, however, is a matter of dispute, and there are conflicting projections by influential players in the system. The influential Bank for International Settlements – the central banks’ central bank – considers that the world economy is probably facing a deeper and more prolonged slowdown than many assume, and that even though the worst of the credit crisis may be over that did not indicate an all-clear for the world economy.

Barclays Capital and the Royal Bank of Scotland seem to have a more pessimistic view of the state of the world’s major economies, and in mid-June the latter advised its clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

The UK right of centre newspaper the Daily Telegraph quotes the bank as warning that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with the contagion spreading across Europe and emerging markets.

Global inflation has jumped from 3.2% to 5% over the last year. Tim Bond, chief equity strategist of Barclays Capital, believes that the “emerging world is now on the cusp of a serious crisis; that inflation is out of control in Asia,” and that the need to slam on the brakes will cause “a deep global recession over the next three years as policy-makers try to get inflation back in the box.”

One of the less discussed implications of globalisation is that it spreads both its virtues and its vices, and whether it is a matter of inflation, interest rates or a credit crunch, the dangers will move across borders. Of course it also means that every economy becomes its brothers’ keeper with a real and direct stake, and as is evident with the EU countries complaints of loss of independence is not infrequent. Now with oil and food costs soaring, inflation has returned with a vengeance; economic managers, investment managers are nervous; the genie of inflation has re-appeared; and the dangers of inflation are now so great that those managers would readily sacrifice growth to control inflation. But even that is a major challenge and many are now saying that what has in fact changed is that the long-term growth trend is under threat. And again oil is a major factor, with active wars less so with stability gradually returning to Iraq so that even presidential hopeful Barack Obama is now shifting his position on the drawdown of US troops.

The jury is out
So far it is hard to say which of the two scenarios predicted by BIS and RBS is correct. It is true that the wage-price spiral has been avoided but jobs are disappearing whether in the closure of 600 Starbucks coffee houses or among major car manufacturers, and during this week the stock market actually reacted positively as one of America’s major car manufacturers reported only an 18% decline in sales – it was expected to be higher! Let it not be forgotten that America is still by miles the world’s largest economy and it is the spending habits of the American consumer that have driven the meteoric rise of China and India. The reverse may not be entirely proportional because demand in the numerically significant China and India has increased, but not even America’s worst critic would wish for the collapse of the US economy.

The double edge of the twin
It is one of the ironies that these two economies are partly responsible for the sustained oil and food price increases. While past oil shocks have been caused by supply constraints, the current increases have a significant element of being demand-driven as China’s industries and their growing middle class along with their Indian counterparts find that they can afford cars that are still dependent on oil. The search for alternative energy sources which accompanied pervious oil shocks waned as things returned to relative normalcy with the significant exception of electricity companies which started to move away from oil. The current one will have some similar effect as car manufacturers accelerate their efforts to produce hybrid cars. The airline industry has cut back its flights with immediate effects on the region’s tourism industry that is so pivotal to its survival. And as tourism falls, so too will remittances from the rich countries as migrants struggle to stave off the foreclosure of their homes. Just getting over the next five years without a major catastrophe will be a major achievement.

But while oil has stolen the limelight, food is an equally grave and direct concern, and for the first time in decades countries are suddenly talking of food security. Heads of governments of the region and the world are holding conferences to address the dramatic increases in the price of basic food items, some of which it has to be said are related to the search for alternative energy sources with corn being the most popular cited example. In fact at the World Food Summit (WFS) some NGOs called for a moratorium on ethanol production arguing this would cut wheat prices by 20%.

With oil there may be several alternatives that would be both technically feasible and economically attractive, but food is a different story. The escape of hundreds of millions in the developing world from hunger and poverty means that there are far many more mouths to feed with a growing demand for meat, which itself demands more feed. Like oil, agriculture is not susceptible to dramatic short-term fixes, but that does not mean that more cannot be done, and as we witnessed recently the placing of an export ban on one type of rice by India had an immediate adverse effect on the international price. Countries and their politicians are particularly vulnerable to fears of hunger among their populace and countries are reluctant to co-ordinate national strategies for the global good. For example, while Japan has agreed to release its government-controlled stockpile, Egypt has extended its ban on the rice trade for another year. To compound all of this, the interest of the private operator/producer/exporter and that of the government seldom converge and short of government control regional and international agreements are hard to make and even harder to enforce.

The problem with agriculture is also structural – in both the developed and developing world there is a reducing appetite for participation in the sector with weather and price fluctuations making it like a night at the casino. Added to the challenges of global warming, the reduction of water supplies, declining investment funds, reduced land for agriculture and a long-term trend of falling prices for agricultural produce, we see an industry that can only grow if there is a significant increase in agricultural productivity.

Alas, giving seeds to the populace may appear politically attractive, but it is no more than a very limited short term measure with some impact at the level of the poor household.

Note: I have delayed the column on taxation as I have been promised some additional information.