Guyana - Parallel Economy

Parallel economy

A growing share of economic activity in Guyana took place outside of the official economy in the 1980s. The rise of the socalled parallel market was alarming for several reasons. In general terms, the parallel economy, or black market, was harmful because it indicated that the official economy was not providing enough goods and services, and that a "norm of illegality" existed in Guyana. More specifically, the illegal economy drained talent and initiative from the official economy, deprived the government of tax revenues, and led to inefficient use of resources. In addition, the parallel market was considered a major source of inflation and currency instability.

The size of Guyana's parallel economy was difficult to estimate because illegal traders and businessmen kept a low profile to avoid both foreign currency regulations and taxation. The Financial Times and the Economist both estimated in 1989 that the parallel market carried out between US$50 million and US$100 million worth of business annually. By the higher estimate, the parallel economy was about one-third the size of the official economy. Economist Clive Thomas argued in various studies that the parallel economy ranged from one-half to roughly the same size as the official economy.

The key feature of the illegal economy was foreign currency trading, an activity that arose when the government began restricting legal access to foreign exchange. When it introduced foreign exchange controls in the late 1970s, the government was trying to keep Guyana's balance of payments from worsening by controlling the flow of money and goods to and from the country. The government also had to restrict access to foreign currency in order to maintain an overvalued exchange rate. If Guyanese citizens had had unlimited access to foreign currency, many of them would have bought United States dollars, depleting Guyana's foreign exchange reserves, because of their anticipation of devaluations of the Guyanese dollar.

The restriction on foreign exchange helped maintain the fixed exchange rate but it also created a shortage of foreign currency, making it nearly impossible for individuals and businesses to import essential items (foreign merchants would not accept Guyanese dollars). Street traders filled the gap by supplying much-needed foreign currency; they made a profit by selling foreign currencies at a high price. Thus, the black market exchange rate per United States dollar was about G$60 in early 1989, compared with the official rate of G$33. The Economist reported in mid-1990 that brick-sized stacks of G$100 bills were trading for US$1,000 on Georgetown's America Street, dubbed "Wall Street."

The largest currency traders in the country, known as the Big Six, set the parallel exchange rate on a weekly or daily basis by tracking supply and demand, according to Thomas. There were several sources of the foreign currency supply: illegal exports of gold, diamonds, rice, sugar, shrimp, and furniture; cash remittances from abroad; unrecorded expenditures by tourists and visitors; overinvoicing of imports; and sales of illegal drugs. Demand for foreign currency came primarily from three groups: local producers or retailers needing to import foreign materials or merchandise, investors and savers seeking a safe haven against devaluation of the local currency, and people exchanging local currency because they planned to leave Guyana temporarily or permanently. There was a close relationship between foreign currency trading and other illegal activities such as smuggling, tax evasion, and narcotics sales.

The government responded ambivalently to the parallel market. Official policy restricted illegal economic activity, but in practice, the government often turned a blind eye to the welldeveloped parallel economy. Government attempts to repress the illegal market, as in the early 1980s, were unsuccessful. Guyana's borders were long and unpatrolled, making smuggling relatively easy. In addition, cash remittances from abroad were common, meaning that many people in Guyana had frequent access to foreign currency and could easily trade on the parallel market. Many observers also noted that the government tolerated the parallel market because it provided goods that were restricted but essential. In fact, even state-owned companies traded on the parallel market.

A fundamental shift in policy toward the parallel economy occurred in the late 1980s, when the Hoyte government began stressing the need for a revitalized private sector. To many people in Guyana, as well as in the international financial community, the existing parallel market was the epitome of private sector initiative under difficult conditions. The Hoyte government signaled a measure of agreement with this view in 1989 when it legalized and regulated the parallel foreign currency market. The government's aim was to eliminate the illegal economy by absorbing it into the legal economy.

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