Budget 2000 : a major test for new minister Business Page Stabroek News February 20, 2000 Introduction Minister in the Office of the President with responsibility for Finance will be severely tested as he tries to craft a budget to address the economic problems facing the country. Minister Sase Kowlessar has been meeting with representatives of the private sector bearing their wish list for inclusion in the Budget. The Minister has a wonderful opportunity to depart from the past where such exercises were seen merely as photo opportunities with little or no consideration given to the proposals themselves. The consultation process offers an opportunity for stakeholders to participate in and contribute to what is still perceived as a major event in the country's calendar. Naturally the submissions taken as a whole will be more than any Government can accede to but the Minister must convince those who take the trouble to make submissions that their proposals are given real consideration and that there are good reasons why specific requests are not met. Overcoming the resources constraints The arrangements under which the Minister and the staff at his disposal operate pose some limitations on the space he has. Key Finance staff member, Mr Coby Frimpong, according to press reports has been given additional responsibilities in the Office of the President whilst Mr Edgar Heyligar, whose knowledge and experience in tax matters is without equal, is now full-time head of the Revenue Authority. This appears to leave the brunt of the responsibility for the Budget preparation on Budget Adviser Mr Winston Jordan who despite his vast experience and ability will hardly be able to do all the kinds of models and scenarios which budget preparation entails. One possible approach to overcome partly these limitations would be first of all to identify the goals and objectives for the year 2000. He must then communicate these to private sector and workers' representatives so that they understand the parameters within which the Budget is to be framed. He can then review the submissions made by interest groups over the past few years to consider the degree to which these can be accommodated within the policy objectives in 2000. He must also review the several policies and pronouncements in the Budget speeches of the past few years and put these into effect as soon as possible. One of the criticisms of recent Budgets has been the failure to execute a number of the policy measures announced. As a priority, the Minister needs to identify those areas which offer potential for growth, employment and foreign exchange generation and to pursue them vigorously with appropriate regulatory, fiscal and institutional support. 1999 performance After the decline in 1998, the economy has recovered to record positive growth in 1999 despite the costly strike in the public service which practically shut down the revenue garnering departments of the Government for almost eight weeks. Remarkably the revenue targets for the year were still met, evidence of good work on the part of those involved and a good sign for the Revenue Authority which has just and finally come into being. When all the numbers are in the growth in the GDP is expected to be close to three per cent after a decline of approximately two per cent in 1998. An examination of the sectoral performance however shows that there is clearly cause for continued concern about the economy. Agriculture which accounts for more than a quarter of the country's output and which is made up principally of rice and sugar was mainly responsible for the improved performance. Sugar, which is by any measure a major sector in the economy, was the star performer with growth of over twenty per cent. The sector is expected to overtake mining and quarrying as the predominant sector after a decline of almost eight per cent in that sector almost identically reflecting the decline in production by Omai Gold Mines Limited. Omai's production will necessarily start to decline in another year or two and we badly need some other players to make up for this. The performance of the private operators in the gold mining sector must be a major disappointment given their substantial cost to the environment and the non-renewable nature of the product. The paradox in the rice sector Rice also performed well growing by some twelve per cent against a target of 3.3 per cent. Had it not been for wet weather conditions in the second crop which delayed harvesting, the sector would have performed even better. There is a dark underside to this sector however. Much of the growth appears to have come from increased acreage under cultivation and recovery from the effects of El Nino which adversely affected production the year before. Paradoxically, many operators in the sector are experiencing serious financial difficulties and are unable to meet their obligations to their bankers and creditors. Whilst there appears to be over-capacity in the sector and a shake-out is desirable there is a need for a strategy to prevent the serious economic and social consequences of major failures in the sector which is reported to owe the local banking sector over ten billion dollars on top of external indebtedness. The manufacturing sector led by food and pharmaceuticals, financial services, transportation and telecommunication and other services all recorded improvements over the previous year. Despite continuing housing starts, the construction sector declined by approximately ten per cent, whilst distribution was down by four per cent. Inflation and unemployment Apart from the uneven growth and the continued over-dependence on traditional products, there must be serious concern about the two evils of unemployment and inflation plaguing the economy. The Consumer Price Index (CPI) which is used to measure inflation is reported to have grown by about 8.5 per cent. As usual this number is likely to be contested not because it is inaccurate but because of its composition. In any case the inflation rate is the highest for five years. As late as December 12, 1999 the Stabroek News had reported an official projected rate of inflation of between 9.5 per cent and 10.5 per cent. The economy cannot afford to return to double digit inflation and President Jagdeo's economic team needs to address this problem as a matter of urgency. Equally urgent is the need to address the unemployment situation. The press has been full of reports of job losses throughout the economy. Colgate Palmolive and Demtoco were two of the earlier companies to shed staff as they rationalised their worldwide operations, a position consistent with globalisation and good company economics. More recently, in response to the Wages Award for public sector workers the Government has announced retrenchment plans which could see a large number of low level public sector workers being voluntarily or involuntarily terminated. What the economy and the country appear unprepared for were staff terminations at some of the companies to which we were looking for success. Gafoors, GA2000 and National Printers have announced cuts in operations and employment as has DDL, generally regarded as one of Guyana's most successful companies. Another blue chip company synonymous with growth is reported to be considering staff reductions of 10 per cent. No matter the justification or spin which is put on these, increasing unemployment in the absence of unemployment benefits will add to the social pressures affecting the country. These announcements place in stark contrast the pronouncement by then Finance Minister Bharrat Jagdeo in the 1999 Budget Presentation that "job creation is of paramount importance to us this year." Politics and the economy These difficulties come on top of a political situation which is still mired in animosity and antagonism. There is a view that suggests that if you can get the economy right the politics will fall into place. This appears to be dangerously flawed thinking and ignores the effect of politics on economics. As we proceed to elections in less than one year's time with the results of the previous elections still engaging the attention of the courts, there is nothing to suggest that the pattern of a slowdown in investments will be different. The effect on the economy can be very serious but what can the Minister do about this in the short run? The answer is simply nothing. The objectives of the ERP - Economic Recovery Programme for those who forget - can hardly be faulted. It is how the sacrifices and the benefits are shared and the permanency of the results that are the subject of continuing controversy. We need to consider political fundamentals with the same evangelical fervour that we pursue strong macro-economic policies. Helping distressed businesses This year would have tested the most seasoned Finance Minister with the best team and adequate resources at his disposal. Minister Kowlessar has none of these advantages on his side and he will therefore need ingenuity, creativity and the co-operation of the private sector to achieve even modest success this year. If the private sector continues to shrink it would be a contradiction to think of it as the engine of growth. In the 1999 Budget Speech then Minister Jagdeo announced a commitment to work with the private sector to "support distressed companies in their efforts to restructure." With the fiscal tool at the Government's disposal, the interest of the banks to protect their assets base and the need to put the country's physical and human resources to good use the Government should do all it can to meet the commitment by President Jagdeo. It is generally easier to keep a business going that to begin a completely new one. Conclusion The Minister will need and indeed deserves the support and good wishes of all Guyanese. It is a daunting task but failure is not an option. As the World Bank representative said recently in Barbados, Guyana is at the crossroads. Unless we can get the economy back in a growth mode, all the good work and sacrifices of the past ten years would be put at serious risk.