economic decline during 1985-1991
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Hoyte's change in direction
When President Desmond Hoyte took power in August 1985 after the death of Forbes Burnham, he declared his intention to speed up "the pursuit of socialist construction" in Guyana. He re-emphasised this assertion after he reinforced his power at grossly rigged elections four months later. However, within less that a year he began to find this pursuit untenable as Guyana continued to experience a serious economic crisis, a spill-over from the Burnham administration.
Faced with a steady decline in production levels and an acute shortfall in balance of payments, Hoyte ordered a cut in public spending and made attempts to encourage foreign investment. He also curtailed all policies geared towards "cooperative socialism" in the attempt to attract investment from North America and Western Europe and also to win financial support from the multilateral financial institutions. The International Monetary Fund (IMF) since 1983 had curtailed all further lending to Guyana because payments on previous loans were long overdue and, in 1985, declared the country ineligible for further credit and loans.
No doubt, these IMF decisions caused Hoyte to declare during his address to the PNC's sixth biennial congress on 19 August 1985 that "we have concluded that the standard IMF prescription is not only palpably irrelevant and useless, but also positively dangerous and counter productive in our particular situation. We must resist with all our might the pressures that might be exerted to force us on to the IMF's procrustean bed."
Real GDP had declined by an average 10 percent in 1982-83 as a result of sharp contractions in the bauxite sector and decline and stagnation in most other productive sectors. Economic decline eased up in 1984, but the economy remained stagnant through 1987. With a per capita gross domestic product of only US$500, Guyana was one of the poorest countries in the Western Hemisphere.
Confronted with these stark economic realities, Hoyte was forced to depart from Burnham's economic policy because he realised that "cooperative socialism" had failed. At the same time, the country was burdened with a stifling foreign debt and a large payment of arrears which the PNC regime had accumulated. The arrears by 1988 were more than US$885 million (about four times the Guyana's annual exports), and Hoyte feared that all credit to the country would be completely cut off by international donors. In this situation, he was propelled to carry out negotiations in 1988 with the IMF which quickly arranged with the World Bank an Economic Recovery Programme (ERP) aimed at re-introducing a pro-capitalist market economy in place of the failed "cooperative socialist" programme of the past eighteen years.
The ERP was introduced by the PNC government with a great deal of publicity. Its specific objectives for the 1989-1991 were: (a) achieving real GDP growth of 4 percent annually; (b) reducing the rate of inflation from 50 percent to 10 percent; (c) reducing the public sector deficit to 20 percent of GDP; (d) eliminating the external and internal payments arrears on the debt; (d) building a net international reserve; (e) incorporating the parallel economy into the official economy; and (f) normalising Guyana's financial relations with its foreign creditors.
The ERP was to be carried out in three phases: The "stabilisation" phase was planned for March to November 1989, the "rehabilitation" phase for 1990-1991, and "recovery and growth" for 1992 and beyond.
During the stabilisation period, the government with the support of an IMF-monitored programme undertook the following measures: (a) an initial 70 percent devaluation of the currency; (b) price increases resulting from the devaluation; (c) a 20 percent ceiling on public sector wage increase; (d) an increase of the prime interest from 14 percent to 35 percent; and (e) the reduction of all foreign exchange retention accounts to 10 percent of export proceeds with the exception of bauxite.
Efforts to restore economic growth
As part of the ERP programme to encourage economic growth, the government freed up the foreign exchange regulations. This allowed exporters, for the first time in many years, to retain part of their foreign currency earnings for future use. Before this change, only the Bank of Guyana could hold foreign currency. Soon after, price controls were removed on many consumer items, but they were retained for petroleum, sugar and rice. The removal of price controls was followed by the lifting of import restrictions on almost all items other than food. Individuals were also allowed to import goods without government intervention.
And to encourage private investment, the government promised a rapid approval of projects and offered incentives including tax holidays. The laws affecting mining and oil exploration were improved and tax reforms designed to promote exports and agricultural production in the private sector were enacted. The government also announced an end to its policy of nationalisation, not doubt to provide a solid assurance to foreign investors.
The parallel market
With regard to the absorption of parallel market into the legal economy, this was necessary since the parallel market was causing the government to lose tax revenues. It also boosted inflation through uncontrolled currency trading, while encouraging illegal activities.
By freeing up foreign exchange, the government began to restrict some aspects of the illegal economy. In 1989 it introduced the Foreign Currency Act which allowed licensed dealers to exchange Guyanese dollars for foreign currency at market-determined rates. A number of foreign currency exchange operations were licensed, but illegal currency traders continued their operation.
But at the same time, the government began a steady devaluation of the Guyanese dollar in order for the official exchange rate to match the market rate. Since the beginning of the ERP to 1991, exchange slid at the rate of 250 percent annually. The Guyana dollar was also systematically devalued; the exchange rate of $US1 in 1986 was G$4.37; in 1987 - G$10; 1989 - G$33; and 1990 - G$45. This process of devaluation was an essential feature of the ERP on the belief that it would destroy the parallel economy and also improve the country's export competitiveness.
However, as the central tool of economic management, the exchange rate policy was negatively affected by all forms of exchange management over a relative short period. These included a fixed exchange rate, "crawling peg", "currency basket" mechanism, "managed float" and "secondary foreign exchange window" (during 1985-1987) and "free floating" or "cambio" (in 1990). These proved to have little success.
Then in early 1991, the government adopted a floating exchange which removing the distinction between the official and the market exchange rates and by mid-year the exchange rate stabilised at G$125. All of these devaluations and an accompanying wage restraint policy proved to be very harsh of the general population.
The payments arrears
Public finances worsened throughout most of the 1980s. The overall budget deficit - the difference between actual expenditures and the revenues - widened from 17 percent of recorded GDP in 1980 to 59 percent in 1985. After experiencing a short-level reduction during 1987-1988, the deficit jumped back to an estimated 55 percent of GDP in 1989. This deficit was rooted in increases in central government expenditure, increased domestic interest payments and decreased revenues due to economic decline and the shifting of many activities into the parallel economy.
The deterioration of the state enterprises also contributed to the budget deficits. Up to 1980, their combined current account surplus had partially financed the deficit. But this surplus turned into a deficit from 1981-1987 as a result of devaluations and a steady drop in production of export commodities.
The ERP sought to get rid of the internal and external payments arrears. To bridge the gap, half of the expenditures for 1989 were put aside for interest payments. In addition, the government cut public spending which included delaying salary increases and eliminating some civil service positions and ceasing funding to the state corporations, except the Guyana Electricity Corporation. Since many of these corporations were a burden on the economy, it became clear that the IMF, through the ERP, wanted the government to privatise them.
The government eventually sold 15 of the 41 government-owned (para-statal) businesses. The telephone company and assets in the timber, rice, and fishing industries also were privatised. International corporations were hired to manage the huge state sugar company, Guysuco, and the largest state bauxite mine, Linmine. An American company was allowed to open a bauxite mine, and two Canadian companies were permitted to develop the largest open-pit gold mine on the South American continent.
With the new privatisation policy, the PNC regime departed significantly from its previous hard-line position on nationalisation. Only four years before, Hoyte in his address to the PNC's sixth biennial congress had emphasised very firmly:
"We have seen, within recent times, a document being circulated which alleged that every conceivable problem we are facing, economic or otherwise, has stemmed from nationalisation. The inference was that we should denationalise. And it not without significance that this document surfaced at a time when a campaign was mounted externally to coerce us into accepting a policy of denationalisation - or privatisation, as it is called. . . . But let me make our position clear on this issue. While the People's National Congress remains in office, the bauxite industry, the sugar industry and the other strategic industries which we have nationalised in this country will never, never, never be denationalised. For one thing, to do this would be an admission that we are abandoning the socialist ideal, and we have no intention of doing that."
Both the IMF and the World Bank were also worried about the deficit in Guyana's balance of payments. By 1986, the country was importing more goods and services from the rest of the world than it was exporting, and was experiencing serious problems in making payments to international creditors. Part of the payments was made from the reserves, including stocks of gold, but when these reserves dried up, the government found itself in no position to continue paying. Guyana thus became a bad credit risk and faced problems in acquiring even short term credits from international lenders. By 1988, the external payment arrears amounted to almost three times Guyana's GDP.
To help solve this problem, the government tried to increase exports and reduce imports. But this did not help much since production of rice, sugar and bauxite seriously declined. Exports suffered a setback in 1988-1989 and the arrears further increased in the wake of a deepening crisis in the sugar industry during that period. By the end of 1989, the economy had plummeted to such an extent that the real levels of GDP and export earnings were respectively 23 percent and 50 percent lower than in 1980.
The debt crisis
To finance the budget and the overall deficit, the Hoyte administration resorted to heavy borrowing. There was a sharp increase in commercial arrears (US$1.2 billion in mid-1989) and the total public sector external debt reached almost US$1.9 billion by 1989 or more than twice its level at the beginning of the 1980s. Measured by the usual indicators of debt to GDP and debt to exports, Guyana became one of the most heavily indebted developing countries in the world.
Apparently by 1989, the IMF and the World Bank were convinced that the government was committed to rebuilding the economy. As a result, these multilateral institutions organised an eight-member "Donor Support Group", led by Canada and the Bank for International Settlements, which subscribed US$180 million to enable Guyana to repay arrears. This sum was refinanced by the World Bank and the Caribbean Development Bank and thus became another loan. However, this "bridging finance" - borrowing money not for development but to pay debts - re-established Guyana's international credit-worthiness and allowed the government to negotiate new international loans and reschedule other external debts.
As part of the ERP stipulations, taxation was steeply increased - almost doubling yearly for income and consumption tax. This resulted in increased current revenue from $3.3 billion in 1989 to $5.3 billion in 1990 and $11.27 billion in 1991. On the other hand, the series of devaluations also led to a massive increase in debt payments, from G$1 billion in 1989 to G$4.9 billion in 1990 and G$12.67 billion in 1991, which was more than the total current revenue collected.
In 1990, debt service payments and interest amounted to 140 percent and 53 percent respectively of export earnings. Guyana's foreign debt by the end of 1991 amounted to US$2.1 billion with debt service payments amounting to 105 percent of current revenue.
Further, as a result of the PNC regime's incompetence and mismanagement, the Current Account Consolidated Fund showed a huge deficit, increasing from G$6 billion in 1989 to nearly G$18 billion in 1991.
Earlier, the October 1989 report of the Commonwealth Advisory Group (the McIntyre Report) on Guyana's economic and social situation had emphasised that this state of affairs was "clearly unsustainable".
Results of the ERP
With this bruising crisis affecting the country, the opposition PPP constant criticised the ERP and noted that the "recovery programme" failed to give consideration to social development. The Party further declared that the refusal of the PNC regime to embrace democracy was the main detrimental factor since the majority of the people had no confidence and trust in the government.
Actually, up to 1991 the ERP reforms showed little progress. Instead of stabilisation and progress, there was retrogression - a negative instead of a positive growth rate. For 1988, the GDP fell by 3 percent. 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; instead, real GDP fell by 5 percent. Economic performance continued to decline in early 1990, and changes in government policy failed to alleviate the difficulties facing the economy: a massive foreign debt, emigration of skilled persons, and the lack of infrastructure. In that year the GDP fell by a further 3.5 percent.
However, there were some signs of improvement. Guyana had rescheduled its debt, making the country eligible for international loans and assistance, and foreign investment was becoming more visible. And as a result of both foreign investment and the sale of a number of government enterprises, Guyana's GDP showed an increase of 6.1 percent in 1991, the first increase after 15 years of decline.
Nevertheless, by 1991, the economy had not shown much success. There was a drastic decline in the production levels of the key exports - bauxite, sugar and rice. Sugar production declined from 220,995 tons in 1987 to 129,900 tons in 1990. Rice production was 131,700 tons in 1987 but dropped to 94,000 tons in 1990. Bauxite dropped from 1,486,000 tons in 1987 to 1,321,000 tons in 1990. As a result of the decreased production Guyana could not supply sufficient bauxite to Venezuela for the existing bauxite/fuel deal.
Sugar and rice, accounting nearly 16 percent of the GDP, contributed almost half of Guyana's foreign exchange earnings while employing 40 percent of the labour force. But through mismanagement, these two industries, which were net foreign exchange earners, were experiencing a serious production crisis.
Sugar production since 1988 had fallen to such an extent that the government was forced to import supplies from Guatemala for domestic consumption. Because of this drop in production, Guyana failed to meet its export quotas for markets in the European Economic Community and the United States.
In 1990, rice production was the lowest in 14 years. The general shortfall led to loss of the lucrative markets in the Caribbean, and the country actually received a gift of rice from Italy that year to supplement the local market.
In addition, the country's underdeveloped and decaying infrastructure seriously handicapped economic development. Many of the basic facilities and services deteriorated badly during the 1980s. And no reform of Guyana's productive sectors was possible without a significant level of investment in electricity, transportation, communications, the water system, and sea defences. The entire country was also plagued with an unreliable supply of electricity and blackouts of sixteen hours per day were common.
With regard to the high interest rate policy, this was intended not only to encourage savings but also to control the excess liquidity in the financial system, which contributed to inflationary and balance of payments pressures. In trying to curb inflation and the parallel market in currency trading, the high interest rate at the same time squeezed the local entrepreneurs, thus defeating one of the major ERP objectives - increased production for export and foreign earnings.
But the greatest obstacle to rehabilitation was the currency devaluation and wage restraint policy. The sharp devaluations from 1988, and particularly in 1991, impacted most adversely against consumers and producers. The accompanying rampant inflation drastically reduced the quality of life, and by 1991 more than 60 percent of the population were living below the poverty line.
Inflation, which had generally remained within the 20 percent range after 1981, rose to 40 percent in 1988 and doubled to 80 percent in 1989. In 1991, it stood at between 110 percent and 125 percent. Prices, measured by the official Consumer Price Index (CPI) constructed on a 1970 base year, increased by 13 percent annually.
Cost of living crisis
But wages and salaries lagged seriously behind inflation. Between 1981 and 1991, the Guyana currency was devalued by more than 4,333percent while the national minimum wage rose by 508 percent.
In 1991, workers were given a 50 percent increase in wages and salaries, raising the daily minimum wage from $43.03 (given in 1990) to $65.56 (or less than half a US dollar), about the lowest in Latin America and the Caribbean. This was totally inadequate to meet the cost of living and well below the $193.77 per day demanded by the TUC in 1989 and the $307.07 for 1991. On May Day 1991, the General Secretary of the TUC, Joseph Pollydore, stated that workers were in a state of near destitution and incapable of buying "even basic food"; that Government "has left children breadless and homes rice-less because of the inability of bread-winners to buy even minimum quantities for their families". And TUC President, Frank Andrews attacked the government's policy of removal of subsidies and price controls, while imposing utterly inadequate wages and salaries levels. To illustrate the effects of the harsh cost of living, workers on May Day 1991 carried placards declaring that the ERP brought them "Empty Rice Pots"!
The level of desperation of the workers' situation can be gauged by the purchasing power at the daily minimum wage of $64.56 in 1991. This amount could buy only about one and a half pounds beef, or six eggs, or two and a half pounds sugar. It definitely was insufficient to purchase a pound of chicken.
Noting the marked deterioration in economic and social conditions, the McIntyre Report had observed two years earlier: "But perhaps the even greater loss has been the deterioration in the physical quality of life of the population. Since 1980, average incomes have fallen by 50 percent, unemployment has doubled to 40 percent of the work force; health and educational services are minimal, and many of the best doctors, nurses and teachers have emigrated."
Interestingly, Carl Greenidge, who during the Hoyte administration held the post of Minister of Finance, alluded in his 1991 budget presentation to the fact that several economic indicators were in poor shape. So serious was the situation that in 1990 GDP had declined to less that US$370 per capita. However, the leaders of the PNC government adamantly refused to admit that the causes of this decline were mismanagement, bad policies, rampant corruption and the lack of confidence by the people through the absence of democracy.
01 January 2007