Making sense of the Exchange Rate Depreciation-Tarron Khemraj.

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Part 1

Guyana is not a country with rapidly adjusting or flexible financial prices, such as a main stock market index or bond yields. The closest we get to a market in which the price signals new political and economic information is the foreign exchange (FX) market. The FX market affects every aspect of economic life in Guyana. The expected rate of exchange in this market is also a reflection of the health of the economy and the state of politics.

Note, I use the term expected exchange rate because the central bank targets the actual G$/US$ rate. This means the Bank of Guyana does not allow the rate to fully adjust to expectations or sentiments that in turn influence demand and supply of foreign currencies. For a country like Guyana, and those of the Caribbean, this is a good policy stance because impulsive swings in the exchange rate can have devastating effects on households and businesses.

Nevertheless, the society and the market are these days adjusting their expectations of what they feel the rate should be, right or wrong. This caused Governor Gobind Ganga to concede that the actual rate is around G$215 to G$218 to one US$ (see SN April 13, 2017), thereby representing a depreciation of just over 5% since 2015.

Trying to understand exactly why the market’s confidence is on the decline is not going to be straightforward because many of the statistics that were previously reported are no longer made public, a situation which is quite recent. However, we could possibly use the process of elimination to tease out the primary cause of the depreciating currency, a situation that signals that something is wrong in economic and political life. In the next column, I would examine some of the main proposed causes by government and opposition. For example, I would look at factors like “drugs money”, remittances, FDIs, former President Jagdeo’s alleged destabilization, etc, to get a feel for what is going on. I would try to eliminate each factor until we get to the main variable (s) causing the rate to fall since one G$ can now purchase fewer US$.

Why is a depreciation or policy devaluation so problematic for a country like Guyana? It turns out that exchange rate depreciations do not have the simulative effect for Guyana-type economies as suggested by the textbooks. This is mainly because these books are looking at macroeconomics from the point of view of an advanced economy such as the United States, which has a sophisticated economic system and the most important global currency.

The textbooks say that policy devaluation or market depreciation should cause a correction in the trade deficit after some time has passed because the change will stimulate exports and contract imports. This is why last week President Trump announced that the US$ is too strong. Now, would it not be nice for Guyana to have a flat and “strong” exchange rate of around G$200 to one US$? It is possible. More on this later. Between 2009 to around 2015, historically low US interest rates weakened the US dollar that has helped Caterpillar, Boeing, John Deere and thousands of other businesses to sell more to the world. As a matter of fact, the weak U$ also encouraged many from Russia, China, Brazil and elsewhere to buy up assets (like real estate and businesses) on the cheap inside the US because of that country’s stable laws and property rights.

Now, when the G$ devalues very few individuals, if any, are rushing to Guyana to buy houses, land and businesses. The main reason being that the prices of Guyanese properties are set in US$ and not the national currency, so the devaluation does not benefit asset prices inside Guyana as it would for America when that country’s currency depreciates. The same principle works for Guyana’s exports of goods and services, which are priced in US$ to the overseas buyer.

However, since Guyana has a de facto peg against the US$, a weakening of the US$ in the international markets should help Guyana’s exports, right? Unfortunately, it does not stimulate production in Guyana because the traditional industries do not have the capacity (supply response or elasticity) to sell more in this circumstance. The stimulation would most likely occur if Guyana manufactured a few things like consumer appliances or components for some global production chain.

On the other hand, Guyana’s imports are invoiced in US$ and the goods are sold to consumers in G$, meaning that importers will pass on the higher cost of imports to consumers. There are some goods like oil, gas and machines that Guyana must import. Devaluation, therefore, stimulates inflation and contracts aggregate demand because people’s incomes and wealth would lose value. A depreciation or policy devaluation is a sure way to deplete the middle class and put the poor under even greater stress. It is a certain way to cause the hard-earned savings of each generation to melt overnight.

The commercial banks and retailers should also have no incentive to see the rate devalue. In the case of the banks, their assets are overwhelmingly in Guyana dollars. The devaluation and accompanying inflation will erode the real value of their assets and profits. The gains made by buying and selling foreign currencies will not compensate for the decreased real values of their portfolio of treasury securities and loans. The commercial banks should have an incentive to work with the central bank to get the rate back to the average G$206 rate that prevailed in 2015. As a matter of fact, their profits will be higher if the rate appreciates to G$200.

Given that there are so many retailers in Guyana, margins are already thin. The higher cost of imports that the devaluation brings implies a competitive retail industry has to bear some of the price increase, thereby further eroding profit margins. Retailers will only be able to pass 100% of the higher import cost to consumers if they can completely collude, something which is highly unlikely in the present competitive retail space. There will be someone who will gain market share if a few colluders decide to pass on the entire cost of devaluation to consumers. Therefore, retailers have nothing to gain from the devaluation and they should do whatever it takes to stabilize the rate.

The state-owned companies, which export different commodities, would gain on the export side if the currency devalues. They will however lose when they import fuels and other intermediate inputs for production. The devaluation would raise the cost of energy for everyone, even if that company exports most of its output. While they gain on the export side, they will lose money on the import of energy and other intermediate inputs.

The depreciation will have a devastating impact on social outcomes and will make workers less motivated and speed up the migration of skilled professionals. Businesses have nothing to gain from less motivated workers because they will lose profits from diminished worker productivity. The weakened social stability would also mean businesses and the well-off folks would need to spend more on physical security, and grille doors and windows.

In the coming essays, I will address the primary cause of the market stress and possible ways to the get the rate back to the psychologically appealing G$200 to one.

 Comments: tkhemraj@ncf.edu

Understanding the depreciation of the Guyana Dollar: The Confidence Factor – Part 2

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In this second part, I want to start addressing some of the possible causes of the depreciation of the foreign exchange rate since 2015. However, we must first take stock to see whether the economy is indeed not generating enough foreign currencies. In 2007, the BOG held US$254 million in net international reserves. This number reached its peak of US$825 million in 2012. It has subsequently declined, reaching its lowest value of US$595 million in 2015. The reserve level increased marginally in 2016, but fell to US$598 million at the end of February 2017.

Overall, these numbers exceed the three months of import cover, which is typically an international benchmark that says the central bank has enough reserves to support imports for three months.

The commercial banks also hold foreign reserves that are also known as net foreign assets (NFAs). These transactions are necessary for servicing the international transaction needs of customers.

The commercial banks by 2007 held US$189 million in NFAs and this number increased to its highest value of US$294 million in 2014. NFAs of commercial banks declined by US$20 million in 2015, but subsequently increased to US$282 million in February 2017. Therefore, while the central bank has seen its foreign reserves decline, the commercial banks have increased theirs, even as imports decline (see below).

Publicly available data on the buying and selling exchange rates of commercial banks and non-banks are not available.

Knowing these numbers would provide useful information of where are the pressure points in the market. Nevertheless, we have data on the amount of foreign currencies the banks and non-bank cambios purchased and sold in 2015 and 2016. The table presented provides a summary.

Try to understand what these numbers are measuring. The amount of foreign exchange available to the Guyanese market (ex post) comes from exports, capital inflows, grants, remittances, etc. The sales of FX are for the purposes of imports, repayment of debt, and in general, sending money overseas.

 

 

The purchase numbers imply that the Guyanese economy is increasing its earning of foreign exchange. The purchases increased from US$1.402 billion in 2015 to US$1.528 billion in 2016, thus indicating a rise of 8.98%. On the other hand, sales of foreign currencies rose by 9.05%.

This does not appear like a market that is not generating hard currencies, albeit these purchases-sales numbers are for end 2016. Perhaps things have reversed dramatically by April 2017.

One other point of note from the table: commercial banks continue to be the dominant buyers and sellers of foreign currencies, accounting for almost 97% of purchases and sales. This is important to consider as the Bank of Guyana deploys moral suasion to stabilize the exchange rate. The BOG would need to convince the price leaders in the imperfectly competitive FX market (oligopoly) that it is in their interest to maintain a stable rate, possibly taking the rate to the mentally appealing G$200 to one US$.

Since these statistics do not indicate a severe collapse of foreign currency earnings by the economy, then why is the foreign exchange rate depreciating? Why are there constant anecdotes of shortages? That is what we are trying to find out in these columns. The next piece of information to consider as we unravel this puzzle is the merchandise trade balance (the difference between exports and imports) and the current account balance. The current account encompasses the merchandise trade, remittances and net incomes (interest and profit outflows).

The result is stunning as indicated by the bar and line chart. Both balances have improved considerably in recent years. The trade deficit of US$300 mill in 2006 widened further to US$645 million by election year 2011, but subsequently improved significantly to a small deficit of US$7.2 million by 2016. The turnaround in the merchandise trade balance started in 2014.

The current account deficit, as one would expect, follows a similar time path. The deficit reached its highest absolute value of US$456 in 2014 and subsequently improved to reach a small surplus of US$13 million as at end 2016. Therefore, neither the trade nor current account deficits are consistent with a foreign exchange market that should be under severe pressure, thus making this a very interesting puzzle.

There are two main factors accounting for the significant turnaround in the current account and trade deficits: (i) the increase in gold exports and (ii) the steep decline in the fuel import bill. The increased gold production and export would indicate some domestic policy decisions allowing new large-scale miners to enter exploration during the PPP years, the environmental problems notwithstanding. On the other hand, the decline in the world oil price, hence the import cost, presents a case of good luck.

Export revenues from gold in 2016 amounted to an unprecedented US$831 million, representing a whopping 66% increase over the 2015 revenue. This increase far exceeded the joint loss of US$59 million in bauxite, sugar and rice exports for same period. Meanwhile, the import of fuels declined to US$344 million in 2016. This number was higher in 2015 at US$367 million. However, this is still significantly lower than the recent peak of US$638 million recorded in 2012. Therefore, the fuel import bill has been declining since 2012.

There are also several secondary factors – both promising and worrying – accounting for the favourable outcome in the current account and merchandise trade balances. The first, indicating a promising structural shift in the economy, is the substantial increase in shrimp and rum exports since 2011. Shrimp export increased from US$64 million in 2011 to US$83 million in 2016, thereby exceeding sugar – once the king – export of US$73 million. The second promising shift is the increase of rum export from US$6.4 million in 2011 to US$37 million in 2016. Rum, in case we forget, requires an industrial process and is a byproduct of sugarcane.

There are however a few troubling trends lurking underneath the improvement in the trade and current accounts. These statistics signal a weakening of confidence or animal spirits, thus presenting insights as to why the exchange rate is depreciating while the economy is earning sufficient foreign exchange. The first clue is the decline in the import of consumer goods since 2012, when its recorded import was US$466 million. The import of consumer goods was US$422 million in 2016.

Even more troubling is the decline in the import of capital goods (machines, spare parts, factory materials, etc), which recorded US$460 million 2012 and fell significantly to US$321 million by 2016. A similar pattern occurs with respect to the import of intermediate goods – goods used to produce other goods and services – which declined from US$424 million in 2012 to US$371 million in 2016. These patterns likely reflect the waning of economic sentiments given the tit-for-tat political tussles since the 2011 election. When confidence is weak, people will look for safe assets to preserve their hard-earned savings. They will be less likely to import things for production. Foreign exchange is a safe asset.

It appears, therefore, that people are choosing to hold on to their hard currencies. When this is the case they desire a higher price, in terms of G$, to part with them. People are hoarding because they are scared of something. We would explore in a future column what this something represents.

In the next column, we will answer the question whether the “slowdown” of “drugs money” has anything to do with the FX market pressure.

Comments: tkhemraj@ncf.edu

 

Original Post

Making sense of the depreciation of Guyana dollar: slowdown in drugs money? Part 3

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The supposed decline in the narco economy since APNU+AFC came to power in 2015 is often proposed by two very vocal members of SOCU – Mr Eric Phillips and Mr Tacuma Ogunseye – as the main factor for the depreciation of the Guyana dollar. Their basic thesis rests on the notion that trafficking of narcotics generates a lot of foreign exchange for the Guyanese economy. Indeed, supporters of the government submit this alibi as the primary reason for the slowdown in important sectors of the Guyanese economy. Notice, I wrote sectors and not economy. The aggregate economy grew at around 3% mainly because of low-quality growth in the mining sector. However, as noted in the previous column, sectors requiring intermediate inputs (primarily manufacturing and agro-industry) are doing poorly. I will explore in a later column the foreign currency implications of the situation in which the GDP is growing but the economy is suffering from structural malaise and limited foreign exchange earnings.

In this essay, I address whether the narco economy is indeed a primary determinant of the pressure in the foreign exchange market. The narco economy is one component of the underground or parallel economy, which the most recent study by Professor Clive Thomas and his co-authors has found to be approximately 40% of the official economy. Guyana’s official GDP is around US$3.4 billion.

Just like the official economy, the underground economy has both a tradable and non-tradable component. The tradable component would include primarily gold smuggling, fuel smuggling, and the illegal export of cocaine and marijuana. The non-tradable component involves any form of production, sold entirely to the domestic market, which is unreported mainly for the purpose of evading taxes. Therefore, the non-tradable parallel economy includes street vendors, farmers, professionals, taxi drivers, minibus operators, contractors, technicians and others who do not declare their incomes or production.

One aspect of the non-tradable underground economy that is very difficult to measure and therefore prosecute is the kickbacks associated with government contracts. These were no doubt pervasive, off the books, and they are easily washed into the official economy. These kickbacks are usually shared by few civil servants of different political persuasions and a handful of senior government officials.

The reason I have divided the tradable and non-tradable underground economy is to emphasize the idea that the non-tradable component, just like its legal counterpart, does not earn foreign exchange, only tradable activities do. Therefore, if the SARU officials are right, the narco economy would be a very large component of the underground economy and its decline is reducing the foreign exchange flow to the market. However, we saw in the last column that the bank and non-bank cambios have actually purchased and sold about 9% more hard currencies in 2016 compared with 2015.

Nevertheless, we still need an indicator or proxy to compare before and after 2015; to observe whether there has been a noticeable decline in underground output that some believe is mainly comprised of pushing the white and green stuff.  Underground production ultimately has to be transacted either in bank deposits or cash. They cannot be transacted in blackeye peas, whale teeth or kidney beans. Eventually the illegal production or undisclosed output results in the creation of broad money deposits as the production is washed into the official economy.  Illegal and undisclosed production can also be done in cash, thereby increasing the demand for currency notes in such a manner making their growth out of sync with official production.

It should be noted that I am not trying to measure the size of the underground economy. Instead, I am looking for signals that suggest the new government has curtailed the underground economy. First, the chart indicates that the Guyanese economy is becoming more cash-oriented, as indicated by the red line.  The 2006 percentage of cash relative to money in the bank was 25%, still quite high. This is also the year the key drug kingpin was captured. However, cash use continued to increase, reaching 35.2% in 2016. Cash use increase by about two percentage points from 2015 to 2016.

Second, on the right axis, the chart records the percent of cash relative to GDP (the blue line). The same pattern holds. This measure of cash use increased from 2006 to 2016, but the percentage is exactly the same at 14.7% for 2015 and 2016.

Perhaps the most interesting observation is the third stylized fact that shows a decline in the amount of bank money relative to GDP. In 2006, this percentage was 43.6%, increasing to 45.7% by 2012 and subsequently falling to 41.9% by 2016. This decline is inconsistent with the notion that the underground economy is responsible for the foreign exchange market pressure. As we can see, the decline started three years before 2015. It is much more consistent, however, with the notion that business activities started to slow down after 2011 General Election.  Several of the series in the previous column also show a turning point around 2012. This slowdown takes time to work its way through the foreign exchange market.  A slowdown was coming regardless who won the 2015 election.  However, APNU+AFC government spooked investors and acted as the trigger for the FX market problems, not the fundamental cause.

The relative increase in cash use is consistent with the notion that underground economic activities continue to expand in recent years, in spite of the fact that the new government has been successful in apprehending more drug traffickers and engendering a relative lull in robberies and murders relating to breaking and entering.  It is possible that the chart is showing that the underground economy is expanding in sectors outside of narco-trafficking. This is likely to occur if the population perceives that the government is taxing too much.

Moreover, these patterns suggest that several SARU officials approach policies with a dose of hearsay, anecdotes and rumormongering.  By doing so, they take the spotlight away from the more sizable aspects of the underground economy. Their approach also fits a broader trend of accusations that became prevalent by TV talkshow hosts during the disturbances from around 2000 to 2006. One wonders what exactly these individuals have in mind when a few high-level members of the WPA, which is now a part of the APNU + AFC government, saw “political usefulness in the Buxton factor.”

Finally, these trends submit that it is time the government start making a serious effort to incentivize the population to move towards electronic payments and possibly gradually phase out the $5000 bill.

In the next column, I would further explore the confidence issue and the possibility that increasing export performance is not returning a proportionate amount of foreign exchange to Guyana.

Comments: tkhemraj@ncf.edu

This jackass TK using PNC operative Clive Thomas as a trusted source for determining drug money as part of GDP, a man with political connection and recipient of PNC gravy train. Talk about conflict of interest. Can this jackass tell us how Clive Thomas came up with these figures?

The narco economy is one component of the underground or parallel economy, which the most recent study by Professor Clive Thomas and his co-authors has found to be approximately 40% of the official economy.

Drugb posted:

This jackass TK using PNC operative Clive Thomas as a trusted source for determining drug money as part of GDP, a man with political connection and recipient of PNC gravy train. Talk about conflict of interest. Can this jackass tell us how Clive Thomas came up with these figures?

The narco economy is one component of the underground or parallel economy, which the most recent study by Professor Clive Thomas and his co-authors has found to be approximately 40% of the official economy.

Jackass knows them matte Jackass,hence the braying.

Bibi Haniffa posted:

Money made in the underground economy does not end up in the central bank.  It's the amount of hard currency owned by the Bank of Guyana that determines the valuation of the Guyana currency.  This essay is worse than useless.

TK gets an F for this one. He can do a lot better than this.

cain posted:

It sounds as though some people pissed off because their drug investments heading South.

After you are through sniffing Granger's  ass, can you tell us how Clive came up with 40%? That means that the PNC grew the economy to compensate for this drastic drop after they crack down on drug money?

Drugb posted:

This jackass TK using PNC operative Clive Thomas as a trusted source for determining drug money as part of GDP, a man with political connection and recipient of PNC gravy train. Talk about conflict of interest. Can this jackass tell us how Clive Thomas came up with these figures?

The narco economy is one component of the underground or parallel economy, which the most recent study by Professor Clive Thomas and his co-authors has found to be approximately 40% of the official economy.

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. 

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

As usual, you're manufacturing "alternative facts" that do not exist. I never said that the informal economy is synonymous with drug trafficking. Proceeds from drug trafficking make up a part of the informal economy but they are not the same.

TK also wrote and I quote "The narco economy is one component of the underground or parallel economy".

Bibi Haniffa posted:

Money made in the underground economy does not end up in the central bank.  It's the amount of hard currency owned by the Bank of Guyana that determines the valuation of the Guyana currency.  This essay is worse than useless.

underground activity is eventually laundered and enters into the open economy. That is what money laundering is about. Yes those mysterious towers in G/T like the one that UG refused to utilize.

There are a number of reasons why the economy has slowed and Jagdeo's friends running terrified of Clive Thomas is one of them.  That is why Jagdeo squeals and wails "black man a kill ahbe".  He didn't give the slightest when his own PPP supporters began to flee to Barbados around 2000 because they couldn't in a living.

Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

Bhai,

Let the AFC/PNC jackass bray. The economy is now beyond recovery. We just have to sit back and watch as it slides into a massive recession while the AFC/PNC jackasses bray. They are clueless and have no economic plan.

They killed the golden goose which laid the golden egg TWICE.

The biggest mistake of this administration was their anti business message  combined with their targeting of Indos and harassment of the Goose that laid the golden egg.

One sentence:

Guyana is screwed under the AFC/PNC, they are not even worthy of running a cake shop. 

I was shocked to read a KN article which stated that Laparkan containers to Guyana has declined by 50 (Fifty) percent. This is devastating news. Guyana is in a HUGE mess.

I find it funny that they are now attempting to blame the PPP while the AFC/PNC jackasses were beating their chests during the election campaign about growing the economy. They destroyed the economy. The buck stops at Jackass Granger's desk.

The economy implodes from here thanks to the AFC/PNC jackasses.

 

The underground economy has rivaled the formal economy way back when I lived in Guyana.  The underground economy found fertile ground and sprouted deep roots when the PNC banned basic commodities and the economy went south.  Remittances and "off-book" business, contra-ban, etc became the mainstay of many in Guyana.  The artificial USD/GYD rate held by the PNC added fuel to the fire as illegal Cambios flourished.  The huckster trade was one such spin-off, and this was big!

So, in a nut-shell you PNCites, the underground was likely larger proportionally than what we see under the PPP!

Bibi Haniffa posted:

Money made in the underground economy does not end up in the central bank.  It's the amount of hard currency owned by the Bank of Guyana that determines the valuation of the Guyana currency.  This essay is worse than useless.

What ends up in the central bank and how?

Mars posted:
Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

As usual, you're manufacturing "alternative facts" that do not exist. I never said that the informal economy is synonymous with drug trafficking. Proceeds from drug trafficking make up a part of the informal economy but they are not the same.

TK also wrote and I quote "The narco economy is one component of the underground or parallel economy".

The narco-economy is still active during this PNC admin. Who do you think is swallowing cocaine pellets and shitting them out in the hotels and immigration rooms?

skeldon_man posted:
Mars posted:
Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

As usual, you're manufacturing "alternative facts" that do not exist. I never said that the informal economy is synonymous with drug trafficking. Proceeds from drug trafficking make up a part of the informal economy but they are not the same.

TK also wrote and I quote "The narco economy is one component of the underground or parallel economy".

The narco-economy is still active during this PNC admin. Who do you think is swallowing cocaine pellets and shitting them out in the hotels and immigration rooms?

Word on the street is that the Narco trade is actually growing under the PNC. The face of the Narco traders are now of a different colour. Just an exchange.

The AFC/PNC lame excuse about the narco trade and the economy is sheer BS. They just can't govern.

TK put his foot in his mouth with his BS essay. He deserves an F with this BS.

yuji22 posted:
skeldon_man posted:
Mars posted:
Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

As usual, you're manufacturing "alternative facts" that do not exist. I never said that the informal economy is synonymous with drug trafficking. Proceeds from drug trafficking make up a part of the informal economy but they are not the same.

TK also wrote and I quote "The narco economy is one component of the underground or parallel economy".

The narco-economy is still active during this PNC admin. Who do you think is swallowing cocaine pellets and shitting them out in the hotels and immigration rooms?

Word on the street is that the Narco trade is actually growing under the PNC. The face of the Narco traders are now of a different colour. Just an exchange.

The AFC/PNC lame excuse about the narco trade and the economy is sheer BS. They just can't govern.

TK put his foot in his mouth with his BS essay. He deserves an F with this BS.

Remember Lear Goring and Noel Blackman? Two drug dealers who were being employed by the PNC.

skeldon_man posted:
yuji22 posted:
skeldon_man posted:
Mars posted:
Drugb posted:
Mars posted:

During the Jagdeo era, the US State Department reported that the underground economy accounted for between 40 - 60% of the formal economy in their 2007 report. They are still using the 40% number in their latest reports.

Here is an excerpt from the State Department International Narcotics Control Strategy Report issued in 2007.

Page 196 - https://www.state.gov/document...ganization/81447.pdf

Guyana
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. However, the scale of money laundering is thought to be large relative to the size of the economy, with some experts estimating that the informal economy is 40 to 60 percent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as to corruption and fraud. Drug trafficking and money laundering appear to be benefiting the Guyanese economy, particularly the construction sector. Investigating and prosecuting money laundering cases is not a priority for law enforcement. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2006 due to a lack of adequate legislation and resources. 

You need to inform the jackass TK to get his facts straight. I notice that you consider the "informal economy" synonymous with 'drug trafficking".  This is quite a reach considering the definition below.  You pnc supporters take quite some liberties with your consideration of drug trafficking contributions to the economy, considering that 75% of the commerce in Guyana is under the table. 

The informal sector, informal economy, or greyeconomy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.

As usual, you're manufacturing "alternative facts" that do not exist. I never said that the informal economy is synonymous with drug trafficking. Proceeds from drug trafficking make up a part of the informal economy but they are not the same.

TK also wrote and I quote "The narco economy is one component of the underground or parallel economy".

The narco-economy is still active during this PNC admin. Who do you think is swallowing cocaine pellets and shitting them out in the hotels and immigration rooms?

Word on the street is that the Narco trade is actually growing under the PNC. The face of the Narco traders are now of a different colour. Just an exchange.

The AFC/PNC lame excuse about the narco trade and the economy is sheer BS. They just can't govern.

TK put his foot in his mouth with his BS essay. He deserves an F with this BS.

Remember Lear Goring and Noel Blackman? Two drug dealers who were being employed by the PNC.

The PNC has take over the Narco trade in Guyana. I remember those scumbags.

Oh how I love how people try to change the truth. It is not rumoured but known during PPP rule the drug trade was rampant, now we have some casting blame on the 70's and 80's and the Coalation... yall rass just can't handle truth.heheeee yall try deh.

Making sense of the depreciation of Guyana dollar: The Jagdeo shock?

May 10, 2017 Source

Mr Jagdeo has been blamed recently by government officials and supporters alike for instigating a capital strike. The argument goes that Mr Jagdeo has immense powers in the private sector such that his business associates and friends have curtailed their investment since the new government came into power in 2015. No doubt the former President has many friends among the investor class. He spent years moulding his new private sector that sometimes crowded out parts of the older one.  Indeed, these columns and my academic research have labelled his regime as an elected oligarchy.

This is not meant to diminish his economic accomplishments. There were. But these have to be seen within a broader picture of human development. I will certainly address Jagdeoian economic policy in a coming essay. As these essays have outlined numerous times, a private-public approach – such as the Jagdeoian way – has to be based on credibility and legality so as to minimize the perception of corruption in a much divided society. It is for these reasons we cannot lift the Singaporean, Taiwanese or South Korean experiences (but we can seek insights from them) and plant them right into Guyana. Guyanese industrial policies have to be underpinned by a reorganized meritocratic and independent state bureaucracy and major constitutional change, since private incentives and markets alone cannot get the job done. Otherwise, at best we will rotate elected oligarchies once there continues to be free and fair elections.

Can we find suggestive trends that rule out the possibility that the former President instigated a capital strike? We have to take a look at the trends in private investment, private consumption and government capital investment. We cannot just look at billions of Guyana dollar of these three variables since their increase over time would include inflation. Therefore, we will express everything as a percent of GDP, so as to expunge the inflationary effect.

The chart shows that private investment as a percent of GDP collapsed in 2016 to 9.2% from 22.6% in 2015. That is a precipitous decline in private investment that some may present as evidence of the capital strike (the Jagdeo shock). From 2006 to 2013, private investment was pretty flat averaging 14.3% over this period. However, it jumped in 2014 and 2015 to 22.6% owing to mining and extraction investments. Therefore, the 9.2% in 2016 falls about five percentage points below the long-term average from 2006 to 2013. Is Mr Jagdeo responsible for this five percentage point decline?

Businesses, however, respond to aggregate consumer demand (household demand).  The trend of total consumer demand in the Guyanese economy over 2006 to 2016 is illustrated by the green line, which is graphed on the right axis and labeled Pri_Con/GDP. Over the said period, household consumption reached a peak of 103.7% of GDP in 2011. This represents consumption of both imported and Guyanese made goods and services. Consumption fell marginally to 103.1% in 2012, but subsequently declined significantly to reach 70.8% of GDP in 2016.We can see once more that the years 2011 and 2012 come into play as in the last two columns. Households started to curtail consumption since during the PPP time. Therefore, it should be no surprise that by 2015 and 2016 businesses would start cutting investments. A series of political shocks after the 2011 General election most likely accounted for this precipitous decline in household consumption. The political situation prompted severe pessimism throughout the economy, affecting both consumers and investors.

The consumption decline should not be seen as a minor economic event. It is the main force behind the pessimism pervading the society these days. Let us look at another country for context. At present consumption as a percent of GDP in the United States stands at around 66%. If consumption in America fell as dramatic as it did in Guyana, that country would be in an economic depression (not recession). However, the mechanics of the Guyanese economy are different since Guyana imports most of what it consumes, so we can still have tepid GDP growth in spite of the consumption collapse.

On top of the dramatic decline of consumption, government started to curtail its capital spending from 2011. Government investment (the red line; left axis) on capital projects was 15.2% in 2010, but declined almost monotonically from 2011 until 2015. In 2015, government investment or capital spending was only 4.4% of GDP. This decline largely reflected the parliamentary fights over budget spending, hence the political shock. The APNU + AFC government boosted capital spending to a projected 25.4% in 2016, a quite dramatic turnaround. Therefore, we can expect money to start circulating again over the next 18 months, barring a major unforeseen negative event.

These trends suggest that political uncertainty (or several political shocks) is the primary determinant of the pessimism driving private investment and household consumption. Political conflict over the budget accounts for the steep decline in capital spending. The malaise in the economy and the foreign exchange market has nothing to do with a Jagdeoian capital strike, even if he might have said the wrong thing at some point. The entire political class has to be blamed for the sufferings of simple people who have to bear the higher price from devaluation.  The political class continues to put off fundamental reforms, preferring instead the preservation of party interests.

But why should there be a foreign exchange problem? The contraction of government and private spending should improve the current account of the balance of payments, which in turn should put less pressure on the Guyana dollar. Indeed, we saw in part 2 of this series that the current account improved significantly from 2012.

Therefore, why should there be pressure on the Guyana dollar? When investors and consumers are pessimistic they will look for safe assets instead of investing long-term and consuming beyond basic requirements. Foreign exchange is an apt safe asset. If an exporter is earning foreign currencies he might choose to park them overseas and wait and see how the politics play out. If a family gets some cash remittances they could sell to a cambio or their well-off neighbour who prefers to hold on to the hard currency. The owners of hard currencies will be persuaded to release them into the market only if someone pays a much higher curb rate.

In the next column, I will look at the capital account of the balance of payments to get more insights into what is going on. Up until this point, I would say the political karmas are playing out in 2016 and 2017. It has nothing to do with a Jagdeo-specific shock or the curtailment of drugs money.

Comments: tkhemraj@ncf.edu

Making sense of the weak FX market: Caribbean nationals and FDIs

By Tarron Khemraj.

 

  Part 5

Last week the Bank of Guyana announced via one of the local daily newspapers that the foreign exchange market situation is stabilizing. I do not doubt this announcement from the central bank given the statistics we have analyzed in the past four essays on the exchange rate. There should not be serious exchange rate problems given the fact that the current account has improved and domestic consumption has declined significantly since 2011-12. A large percentage of consumption goes towards imported goods. Therefore, the dramatic decline in household consumption, which we observed in the previous essay, should put less pressure on the demand for foreign exchange. But this has not been the case as various newspapers reported over the past few weeks. Several importers were unable to obtain hard currencies in a timely manner. As a result, the rate has depreciated after several years of relative stability.

It is still useful to continue the discussion about developments in the FX market, mainly because this market signals and aggregates the general economic and political feelings in the society. One of the reasons proposed by government officials and the central bank for causing the depreciation is the purchase of hard currencies by Caribbean nationals from local cambios.

I do not find this to be a plausible or fundamental cause for various reasons. First, we have seen that 2011/2012 is an important turning point in the macroeconomic data, suggesting that the present weaknesses are caused by events over the past five years. I argued these are mainly political uncertainties generated by the conflict between the two main factions inside and outside of Parliament. These uncertainties will eventually dampen business and consumer optimism. They also dissuade foreign investors as the data below clearly show.

Second, when we think about trading of foreign exchange, we do not mean trading a fist full of US dollars, euros or Canadian dollars. Most foreign exchange transactions involve the exchange of one country’s bank deposits for another. They are essentially electronic transactions. Therefore, if Caribbean nationals were indeed putting pressure on the exchange rate, it had to be done via large scale exchange of Barbadian, Trinidadian, and Suriname currency bank accounts for US dollar accounts drawn on banks locating in Guyana. This would most likely be led by the multinational Caribbean banks that are based in several territories of the Region. It is not particularly difficult to control these bank arbitrage exchanges via moral suasion or a stick.

Furthermore, it is unlikely that cash transactions from people coming in jet planes and the ferry at the Guyana-Suriname border could have a dramatic impact on the foreign exchange rate. These cash-to-cash transactions carry enormous transaction costs and security risk relating to the physical transport of cash. It is also illegal to carry more than US$10,000, hence introducing another layer of risk. Therefore, the people who did this would have done it in small amounts, which are unlikely to destabilize the market. A large part of these trades would have been done via non-bank cambios. Therefore, this explanation is at best more likely to be a trigger for the recent short-term pressure than a fundamental cause.

Third, and relating to the previous point, the quantities purchased and sold continue to be dominated by the six commercial banks. In both 2015 and 2016 non-bank cambios accounted for just over 3% of purchases and the commercial banks accounted for the rest. The same pattern holds with respect to sales: non-bank cambios sold around 3.4% of hard currencies for both 2015 and 2016, while the banks account for the dominant share.

This is important because since the six commercial banks account for close to 97% of foreign exchange transactions, the BOG has a much more centralized oligopolistic market to persuade in the direction of policies meant for stabilizing the rate (Mr Sukrishnalall Pasha and I published a paper on this exact issue in 2012). A decentralized competitive market would make targeting or managing the exchange rate much more difficult. It is clear that Guyana does not possess a decentralized competitive FX market.

Finally, the underlying weakness in the economy is also showing up the capital account of the balance of payments, which records Guyana’s transactions with the rest of the world. In column 2 we examined the trend of the current account balance, which improved from 2012. We attributed the improvement to lower oil price and weakness in the production economy that diminished the demand for import of machines and other capital goods.

The chart presents the trend of the capital account balance over the 2006 to 2016 period. While the current account records things like exports, imports, remittances, etc, the capital account records new debt disbursements, official aid to government, foreign direct investments, short-term money flows and a few more.

The chart indicates that over the review period, the capital account recorded a surplus for each year, except in 2016 when a deficit of US$13 million was recorded. The highest surplus of US$454 million occurred in 2009. It subsequently declined but increased to US$418 million in 2012. Thereafter the capital account surplus fell to US$71 million in 2015 and turned negative US$13 million in 2016 (the bars).

The major contributor to the decline is the dwindling foreign direct investments (FDIs) since 2012 when the recorded amount was US$363 million (see line chart). It rose somewhat in 2014, but declined significantly in subsequent years. By 2015 foreign investments dropped to US$125 million and further plunged precipitously to negative US$1.8 million in 2016. This is the only negative foreign private investment over the review period 2006 to 2016. I have been tracking these numbers since my employment at BOG from 1996 to 2000. This is the first time I have seen a negative net FDI.

The data presented in this column and previous ones clearly suggest that private investor sentiments are weak. This is reflected in the decrease of FDI and domestic private investment since 2011.

As I implied in a previous essay, the APNU + AFC government triggered the foreign exchange pressure because of several anti-business measures since May 2015. I will explain this in greater detail in the next essay.

Comments: tkhemraj@ncf.edu

"The major contributor to the decline is the dwindling foreign direct investments (FDIs) since 2012 when the recorded amount was US$363 million (see line chart). It rose somewhat in 2014, but declined significantly in subsequent years. By 2015 foreign investments dropped to US$125 million and further plunged precipitously to negative US$1.8 million in 2016. This is the only negative foreign private investment over the review period 2006 to 2016. I have been tracking these numbers since my employment at BOG from 1996 to 2000. This is the first time I have seen a negative net FDI.

The data presented in this column and previous ones clearly suggest that private investor sentiments are weak. This is reflected in the decrease of FDI and domestic private investment since 2011.

As I implied in a previous essay, the APNU + AFC government triggered the foreign exchange pressure because of several anti-business measures since May 2015. I will explain this in greater detail in the next essay."

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