By Sase Singh

FOREIGN exchange reserves are now generally maintained by countries to meet their international payment obligations. Included in those obligations are the financing of imports; payment of foreign debts; and, every now and then, targeted intervention by the central bank in the currency markets when they have made the calculated conclusion that the local currency is mispriced relative to the dominant foreign currency – usually the US dollar. This intervention by the central bank is designed to boost the confidence of the market by demonstrating that the country does have the ability to meet its external financial obligations, and can absorb any unforeseen external shocks, contingencies, or unexpected capital movements.
In a nutshell, this illustrates one of the most important jobs of the Bank of Guyana.

HOW LARGE A STASH IS ENOUGH?
The net foreign reserves controlled by the Bank of Guyana on behalf of the Cooperative Republic constitutes mainly holdings of gold, foreign currency balances with foreign banks, and international reserve assets assigned to Guyana by the IMF (called SDRs). The adequacy of foreign reserves was traditionally measured by the level of such reserves in relation to months of imports. The standard rule-of-thumb measurement is that the international reserves should cover greater than four months worth of imports.

As at the end of October 2015, Guyana had foreign reserves to cover 4½ months of imports. Although over the minimum benchmark, this is the lowest coverage level since 2008, when the import cover was recorded at 2½ months. Using this benchmark, the best year over the last 10 years was 2010, when Guyana had an import cover of 6¼ months. Since 2010, import cover has been diluting mainly as a result of the material increase in the fuel prices (a primary commodity imported into Guyana) during the years 2011 to 2014.

In 2014, the situation was slightly more complex. Higher imports in 2014 were also driven by the major construction projects, such as the Marriott Hotel project, which created huge demands for imported steel and cement. This served to compound the already high cost of imported oil for most of that year.

At the same time, there was a meltdown in the sugar prices received by Guyana as a result of a change in the pricing regime by the EU. So there is a clear economic explanation for depletion of the reserves during the years 2011 to 2014.

However, there is a serious anomaly for 2015. Why, in a year of depressed oil prices and lower imports, are we seeing a decline in the import cover? Imports are expected to be some US$200 million lower in 2015 than in 2014. This can only mean one thing: the productive sectors of the economy are really not securing great prices, and remittances are down; thus, this is further causing a depletion of our foreign reserves.

In October 2015, the international reserves were logged at some US$600 million, which was the lowest level since July 2010. Let me emphasise: in October 2015, Guyana had the lowest levels of international reserves for the last five years. This is a situation that demands full and serious attention from the policy-makers at the highest level.

The slide in our foreign reserves began since September 2012, when it was recorded at US$825 million. The international reserves dwindled by some $225 million between September 2012 and October 2015. Most of this dilution happened under the Ramotar administration, but what has not changed since the Ramotar administration left office is that the decline in the international reserves did not cease; actually, it continued.

From May 2015 to October 2015 (a five-month period under the new coalition government), the international foreign reserves declined by US$15 million, and this is happening during a period when the economic growth rate has flattened; economic confidence remains lukewarm, and the private sector has not aggressively pursued its investment strategy. This is a recipe for producing a poison pill for economic growth, and it is happening in post-May 2015.

What if the private sector had chosen an aggressive risk-seeking strategy with big investments? How would this economy handle the increased demands for imports like steel and cement? This would have meant further depletion in the foreign reserves, because the income for Guyana in US dollars remained rather flat in 2015.

There is a lot of “singing and dancing” about meeting targets, but is that what really matters?  What matters is how much foreign currency the sugar, rice and gold industries have brought to the table in 2015. To expand on this statement, the seven sisters (gold, rice, sugar, bauxite, timber, seafood and cash crop/coconuts) did not earn enough foreign currency in 2015 to positively affect the foreign reserves and allow this nation to do what it ought to be doing in 2016. To support this statement on the seven sisters, the unit price of sugar is expected to decline by 15 percent compared to 2014; rice is expected to record a decline of 16 percent in its unit price over the same period; bauxite will record a decline of 5 percent, and gold a decline of 7 percent.

So where is the new foreign currency earnings coming from?

Conclusion
It is from this angle that one expects a more robust management of the economy in the post-Ramotar era. This kind of economic performance cannot be excused away; it has to be strategised upon, with a view to rolling out strategies to turn the economy around and mitigate the risk in the productive sector to boost their capacity to generate revenue.

The Bank of Guyana has, over the years, done an excellent job at managing the monetary policy of the nation; but may I humbly recommend one amendment of policy — cease any operation that sells foreign currency, to allow the foreign currency rate to depreciate at its natural rate for now. This is very important to boost our competitiveness in the global marketplace.

It is my considered view that the Guyana dollar is slightly overvalued. Such policy action will serve the valuable role of making imports more expensive and our exports more competitive. This is the boost that the cash crop farmers need to compete against the imported grapes and apples and canned pigeon peas.

This brings out an important point that is not funny at all. I watched that picture and video of His Excellency President Granger sitting at the head table at the Police Officers Christmas Breakfast with bowls and bowls of imported apples and grapes. Shame on the leadership of the police for placing the President in such an embarrassing position! Could they not buy local fruits in the land of many fruits? What really happened to our “buy local” campaign?  That is the question for next week.