Budget Review 2021: promoting economic recovery through a transformational development agenda
DEAR EDITOR,
Supporters believe that the 2021 budget failed to reach sufficient direct support for private sector businesses in light of the impact of the COVID-19 pandemic that was ravaging businesses – not only in Guyana but globally as well. Be that as it may, the budget context must be considered as well as the current state of the nation’s inherited Government funding. To put this into a quick and simple perspective (given that this author has dealt with these issues extensively in previous writings): on the one hand in 2015, the previous Ministry inherited close to $ 100 billion in liquid cash in the bank. At that time, too, there was no global pandemic and the country’s macroeconomic framework was on a firm and stable footing.
On the other hand, five years later in 2020, the new Ministry was elected to its post at the height of a devastating global pandemic that did not spare Guyana in contrast to another recent global financial crisis – along with five months of turmoil political. And in particular, the Ministry inherited close to $ 100 billion in bank deficit balances in violation of nearly $ 100 billion of liquid cash at the bank five years ago. In other words, there was virtually no surplus in the bank except for the revenue earned from profit and royalty oil sitting in the Federal Reserve in the United States.
With regard to the oil revenues earned to date that are to the tune of US $ 200 million sitting in the Federal Bank Fund, the Government explained why they have not yet used any money from that fund. The explanation given is in good order and must be commended given that this is the reason: The Government, when not in Opposition, did not agree with the current Natural Resources Fund framework and, therefore, needs to be facilitated the required amendments before any expenditure. – which will allow greater transparency and accountability for the oil resources. Furthermore, His Excellency clearly outlined the specific purpose for which the oil resources will be largely used, and is also commendable.
That said, despite the argument from opponents that the budget lacks sufficient direct support to assist business recovery – this idea cannot be explored in isolation of the economy structure and the 2021 budget caveat.
The 2021 Budget which is a continuation of the policies and programs set out in the emergency budget in 2020 – provided adequate relief packages in the specific circumstance – although indirect to the business sector, which will assist in the economic recovery of the macroeconomy and at the micro level.
For example, the $ 4.5 billion home release in the 2020 budget would find its way back into the business sector. In a simple scenario where a village has 500 households at $ 25,000 per household equivalent to a $ 12.5 million injection into that particular village economy or community level. As such, people in the community spend in the village shops or grocery stores in the village. By putting disposable income in the hands of consumers or in other words – measures that increase disposable income at the household level will in turn drive demand for consumer goods and goods. Spending power at the household level is good for the businesses.
The budget also seeks to return basic food and household necessities to zero-rating status and reducing the cost of connectivity by deducting VAT on data from residential and individual use is another measure that will contribute to lower living costs and in turn, altogether put more disposable income into Guyanese hands. In addition, the use of zero-rating status on imported stone and other building building materials aims to reduce living costs as well as make home ownership more affordable for the ordinary working-class Guyanese.
Let’s look at another example. How would the reduction in the tariff on fuel translate to the average person at the micro-economic and macroeconomic level?
The average person driving to and from work five days a week with a 2000cc engine car; it would consume an average of 217 liters of gasoline at $ 184 per liter, which is $ 40,000 for the month. So at $ 170 per liter, the average person would spend $ 36,976 instead of $ 40,000 for the month on fuel which, if annual, would translate into $ 36,516 ($ 3,024 monthly savings) in savings for the exactly one year from this one measure. These $ 36,976 savings in a year are enough to buy a one-month supply of goods for a home with two people. Here’s what this simple drop can translate to at a micro level.
Now think of this same scenario multiplied by 200,000 households nationwide assuming that each of these homes has at least one vehicle and drives to work five days a week. This exact scenario can translate into $ 7.5 billion in macro level household savings which means this is another $ 7.5 billion in additional disposable income, and if:
(1) placed in the bank as savings instead of spending in the economy, the bank will in turn lend to companies to finance private sector investments – thus, back into the economy by creating more jobs and demand drive and (2) this is $ 7.5 billion of household income available to spend in commerce – thereby finding its way back into the revenue streams of businesses that suffered losses due to the pandemic.
Now, these are just two examples of just two measures in the 2020 and 2021 budget that will give back more than $ 12 billion to the economy that will be good for indirect business recovery. Imagine the likely impact of the other measures and the near $ 200 billion allocation to fund public investments altogether
It is worth pointing out that more than 50% of the 2021 budget is committed to better serving and empowering people while at the same time advancing the Government’s transformational development agenda through infrastructure development; housing programs, new road networks, major investment in the agriculture and food security sectors and mega-scale Agro-processing. In doing so, tremendous opportunities exist for foreign and local investors to prepare so that they can take advantage of these opportunities in the various productive sectors.
Correctly,
JC Bhagwandin
Chief Financial Adviser / Analyst
JB Consultancy & Associates