The Economic Recovery Program
The Hoyte government signaled its commitment to reform in 1988 when it announced a far-reaching Economic Recovery Program (ERP). The plan had four interrelated objectives: to restore economic growth, to incorporate the parallel economy into the official economy, to eliminate external and internal payments imbalances, and to normalize Guyana's financial relations with its foreign creditors.
Restoring Economic Growth
To create a climate favorable for growth, the government removed many of the most onerous limitations on economic activity that had been put in place during the period following independence. First, the government liberalized foreign exchange regulations. For the first time in many years, the government allowed exporters to retain a portion of their foreign currency earnings for future use. Previously, only the government-owned Bank of Guyana had had the legal right to hold foreign currency. Second, the government lifted price controls for many items, although key goods such as petroleum, sugar, and rice remained controlled. Third, the government lifted import prohibitions for almost all items other than food and allowed individuals to import goods directly without government intervention. Fourth, private investment was encouraged by offering streamlined approval of projects and incentives such as tax holidays. To reassure potential foreign investors that Guyana's policy had indeed changed, the government announced in 1988 that "It is no part of Government's policy to nationalize property . . . . The era of nationalizations is therefore to be considered at an end."
Absorbing the Parallel Market
The second major objective of the ERP was to absorb the parallel market into the legal economy. The parallel market was seen as denying tax revenues to the government, adding to inflationary pressures through uncontrolled currency trading, and generally encouraging illegal activity in Guyana. By liberalizing foreign exchange and other regulations, the government began to make inroads into the illegal economy. The 1989 Foreign Currency Act allowed licensed dealers to exchange Guyanese dollars for foreign currency at market-determined rates. By 1990, more than twenty licensed exchange houses operated in Georgetown, taking the place of some illegal currency traders.
A related policy focused on the exchange rates. The government began devaluing the Guyanese dollar so that the official exchange rate would eventually match the market rate. This devaluation process was an essential feature of the recovery program. It not only targeted the parallel economy but also improved the country's export competitiveness. But the devaluations were painful for consumers. In April 1989, the government changed the official exchange rate per United States dollar from G$10 to G$33, instantly tripling the domestic currency price of most imports. The unofficial exchange rate at that time was reportedly G$60 per United States dollar, so the Guyanese dollar was still overvalued at the official rate. As of mid-1990, the disparity between the two rates persisted: the official rate was G$45 but the unofficial rate (at the now legal exchange houses) was G$80 per United States dollar. An important milestone was reached in early 1991 when Guyana adopted a floating exchange, removing the distinction between the official and the market exchange rates. The Guyanese dollar stabilized at US$1=G$125 in June 1991.
Eliminating Payments Imbalances
The third major goal of the ERP was to eliminate internal and external payments imbalances. In other words, the government was seeking to eliminate the public sector deficit on the one hand and the current account deficit on the other. The public sector deficit--the gap between government revenues and overall government spending--had reached 52 percent of GDP by 1986. This level was unsustainable and was an alarming increase over earlier deficits: an average of 12 percent of GDP during 1975-80 and an average of 2 percent of GDP during 1971-75.
The government attacked the public sector deficit in a straightforward manner: it cut spending and sought to enhance revenues. The government halted all monetary transfers to troubled state-owned enterprises (with the exception of the Guyana Electricity Corporation). As a longer-term measure, the government began studying the public enterprises--the heart of the statist economy--to determine which ones should be privatized (wholly or partially) and which ones should be closed. By 1990 the government had plans to allow significant privatization of the sugar and bauxite industries. In addition, the central government planned to limit expenditures by delaying salary increases and eliminating unnecessary civil service positions. Such fiscal austerity was useful to the economy. Still, the need to service the foreign debt limited the extent to which the government could cut back on spending; the government slated half of 1989 expenditures for interest payments.
The government attempted to raise revenues by absorbing the parallel economy to broaden the tax base, by improving the collection of the consumption tax, and by reducing import duty exemptions. Starting in 1988, the government required companies to pay taxes on earnings from the current year, rather than the previous year. This set of expenditure and revenue policies produced measurable results but failed to eliminate the serious financial difficulties facing the government.
Normalizing International Financial Relations
Even more pressing than the public sector deficit was Guyana's balance of payments shortfall. The extent of the problem was indicated by the overall balance of payments, which was a record of the flow of goods, services, and capital between Guyana and the rest of the world. The deficit in the current account had increased during the early 1980s, reaching almost 50 percent of GDP in 1986. In effect, this meant that Guyana was receiving more goods and services from the rest of the world than it was providing and was having to pay for the difference. The government paid part of this deficit by using reserves such as stocks of gold. But part of the deficit went unpaid when reserves became depleted. This unpaid portion was critical. Referred to as "external payment arrears," it marked Guyana as a bad credit risk, threatening to completely undermine Guyana's ability to obtain even short-term trade credits from abroad. Accumulated external payment arrears had expanded to almost three times Guyana's official GDP by 1988.
The Hoyte government attempted to decrease the balance of payments deficit by increasing exports and limiting imports; Guyana's trade was close to balanced in 1988, but a sizable trade deficit again appeared in 1990. Low productivity meant that exports did not expand significantly, and the government lacked the resources needed to eliminate the external payments arrears. Therefore, an agreement with the country's foreign creditors was crucial.
The IMF and the World Bank played a vital role in devising Guyana's economic reform program. The two institutions also helped ensure that the government implemented the planned reforms.
The IMF had curtailed all further lending to Guyana beginning in 1983, because payments on previous loans were overdue. In 1988 the IMF worked with government representatives to draft a reform plan, with the understanding that economic reform within Guyana would lead to renewed international financial support for the country. IMF support was important not only for the resources the institution could provide but also because many other lenders, such as commercial banks and foreign governments, waited for IMF approval before making loans.
In 1989, after Guyana's government had shown a commitment to restructuring the economy, the IMF and the World Bank helped eliminate the external payments arrears. A so-called Donor Support Group led by Canada and the Bank for International Settlements paid US$180 million to enable Guyana to repay arrears. The IMF, the World Bank, and the Caribbean Development Bank then refinanced this amount, essentially replacing Guyana's overdue payments with a new long-term loan. The elimination of the longstanding external payments arrears cleared the way for Guyana to borrow abroad if necessary and allowed it to reschedule other external debts on more favorable terms.
Results of the Economic Recovery Program
The reforms introduced by President Hoyte resulted in no immediate progress. A policy framework paper prepared by the government in cooperation with the World Bank and the IMF had predicted that real GDP would grow by 5 percent in 1989. But instead, real GDP fell by 3.3 percent. Economic performance continued to decline in early 1990, according to the United States Embassy. Changes in government policy could not erase the profound difficulties facing the economy: massive foreign debt, emigration of skilled persons, and lack of infrastructure.
But in early 1991, there were signs of improvement: Guyana had rescheduled its debt, making the country eligible for international loans and assistance, and foreign investment surged in the country. These changes, preconditions but not guarantees of economic recovery, would not have occurred without the Economic Recovery Program.
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