Review and Analysis of the Mid-Year 2022 Economic Performance: Is the paradoxical Dutch disease present?

By Joel Bhagwandin

Executive Summary
Key Message Supporting Statement (s)
According to the Mid-Year 2022 economic report, the economy recorded real GDP growth of an estimated 36.4 per cent, driven by petroleum, other crops, and services sectors. Moreover, despite the setbacks that affected the other sectors, the non-oil economy recorded positive growth for the half- year period of an estimated 8.3 per cent The non-oil economy has shown positive signs of recovery on account of the government’s accommodative fiscal policy stance and allocation of resources aimed to repair the non-oil sectors – having suffered deteriorated performances in 2020 and 2021, and arguably, during the period 2015–2020. Notwithstanding the contracted growth in a few subsectors, the wholesale, retail and trade, and entertainment subsectors recorded higher growth compared to the previous corresponding period. This is evidence of the positive impact of government’s intervention in the economy to cushion the impact of the rising cost of living, such as the various cash grants and other measures.

Credit to the private sector increased by 15 per cent in the first half of FY 2022 relative to the corresponding period in FY 2021 This increase was driven by increased credit to the agricultural sector by 20 per cent; mining and quarrying sector by one per cent; manufacturing sector by 39 per cent; services sector by 20 per cent; households by 12 per cent and real estate mortgages by seven per cent. This outturn is indicative of the broad-based growth attained through private-sector investment across all the major non-oil sectors.

The revised inflation forecast for the end of 2022 is 5.8 per cent, which is below the global average forecast for 2022 of 8.2 per cent
Notably, the inflation rate for the half-year period January – June 2022 of 4.9 per cent is lower than the 5.6 per cent for the previous corresponding period in 2021. This is evidence of the impact of government interventions to cushion the rising inflation rate on account of inflationary pressures stemming from the global economy – that is, the effect of external shocks on the domestic economy therefrom.

The exchange rate appreciated marginally by 0.91 per cent from $208.8 for the first half year period in FY 2021 to $206.9 for the first half year period FY 2022
Despite the weakening of the FX reserves held by the Bank of Guyana to below three months import cover through 2015-2019, the exchange rate remained stable because fortunately, the net foreign assets (NFA) of the commercial banks experienced dramatic increases during the 12-year period spanning 2009 to 2021 and thus remained strong. In this respect, while the Bank of Guyana FX reserves increased by 43 per cent over this period from its 2009 position of US$569 million to US$811 million by the end of 2021; the commercial banks NFA increased by 174 per cent from US$164 million in 2009 to US$449 million by the end of 2021. The impact of the cost-of-living measures and interventions implemented by the government is almost equivalent to 100 per cent of the oil revenues in profit and royalties earned as of July 2022

The level of public debt is within sustainable levels with low to moderate default risk. The debt-to GDP ratio is an estimated 29 per cent for the first half of FY 2022 and the non-oil debt to GDP ratio is an estimated 63 per cent for the period

Using conservative estimates in an attempt to quantify the impact of the cost –of-living (COL) measures and interventions by the government on the economy, cumulatively for the period 2021 – 2022, amounted to approximately $226 billion, representing 96 per cent of the total NRF balance to date from the inception of oil production.

Both of these ratios indicate that the level of public debt is relatively low to moderate in terms of the risk of default and that the level of public debt is within sustainable levels. The government must be commended for this type of prudent public debt management by restricting the temptation to borrow excessively against future oil revenue.

Proponents of the notion that the mid-year report confirms that the Dutch disease is already here by merely citing the contracted performance of a few subsectors, namely sugar and rice, and ignoring completely the positive outturns in all the other subsectors, have failed to present any empirical evidence and context to corroborate this argument The empirical evidence, however, strongly contradicts this notion and therefore disproves the perception or argument that the Dutch disease is present. It is noteworthy to highlight that it took just over two decades to lift this economy out of bankruptcy and move it from a GDP of about US$200 million in 1992 to a GDP of US$4 billion and per capita income of less than US$200 to US$5,000 by the end of 2014. In 2015, the previous government inherited $100 billion liquid cash in the bank, foreign reserves of US$595 million representing five months’ worth of import cover and all the sectors were experiencing resilient performance.

Altogether, the cumulative loss of productive output in the sugar, forestry, fishing, bauxite, manufacturing and wholesale and retail trade subsectors, together with the cumulative loss of export earnings of a number of key commodities as shown in the analysis herein during the period 2009 – 2014 relative to the corresponding period 2015 – 2020, amounted to a whopping $238.7 billion or US$1.14 billion. Put differently, under the stewardship of the previous administration, a number of key productive sectors and export-earning commodities declined by US$1.14 billion cumulatively. This amount represents 36 per cent of the total stock of public debt, 1.5 times the Bank of Guyana FX reserves and more than one year’s equivalent of oil revenue in both profit oil and royalties.

Concluding Remarks
The analysis contained herein revealed largely the task at hand for the government of the day to rebuild the economy to where it was pre-2015. After so doing, this will then set the stage to pursue the advance level or the “next level” wave of development. With respect to the mid-year report for the first half of FY 2022, the economic performance reported therein is demonstrative of the positive outcome of the economic policies, timely interventions, the allocation of financial resources towards infrastructural development, economic diversification, and transformational development projects implemented through the national budgets of 2020, 2021 and 2022. Finally, while the Dutch disease is not present in any form on account of the government’s strong commitment to tangibly rebuild the traditional productive sectors, and the advancement of an ambitious economic diversification programme through improved national competitiveness, viz-à-viz, cheaper energy, the regional food and energy-security agenda etc.; the economic path that the economy previously came out of under the previous administration during 2015 – 2020, would have most certainly induced the Dutch disease syndrome and the natural resource curse as evidently demonstrated in the findings and analyses of this report.

BACKGROUND
The Political Opposition et.al, are of the view that the mid-year performance for 2022 confirms the presence of the Dutch disease. Commentators in Guyana often use the terms “Dutch disease” and “natural resource curse” interchangeably, however, both terminologies have distinguishing features by definition.

The parodical Dutch disease refers to the adverse effects of on manufacturing of natural resource “discoveries”. Specifically, when a country experiences a resource boom due to a tradable resource discovery and/or to an increase in a resource price, it normally undergoes a real appreciation of its exchange rate and, as a result of rising wages, a relocation of some of the labour force to the resource sector. A real appreciation reduces the international competitiveness of other tradable sectors because resource-based exports crowd out commodity exports produced by those sectors (Krugman, 1987). The country faces the risk of a de-industrialisation process.

This phenomenon, known as the “Dutch Disease”, first drew attention in the late 1950s when natural gas discoveries in the Netherlands eventually hurt the competitiveness of the Dutch manufacturing sector.

ORIGINS OF THE DUTCH DISEASE
In the late 1950s the appreciation of the Dutch currency (guilder), which followed the gas-export boom, caused inflation which in turn, brought about reductions in competitiveness and profitability of the manufacturing and service sectors. Shortly, the expansion of gas exports in the 1960s not only crowded out the other manufacturing exports, but also reduced markedly the total Dutch exports relative to GDP. This problem fortunately lasted shortly. From the late 1960s onwards, the Dutch exports of non-gas industries have increased sensibly. The fear of de-industrialisation linked to the Dutch disease did not materialise in the Netherlands.

THE NATURAL RESOURCE CURSE
Conversely, the resource curse (also known as the paradox of plenty) refers to the failure of many resource-rich countries to benefit fully from their natural resource wealth, and for governments in these countries to respond effectively to public welfare needs. While one might expect to see better development outcomes after countries discover natural resources, resource-rich countries tend to have higher rates of conflict and authoritarianism, and lower rates of economic stability and economic growth, compared to their non-resource-rich neighbours.

It is against this background; this article seeks to address these issues and conclude whether or not the paradoxical Dutch disease and natural resource curse are present, inter alia, an analysis of the mid-year economic outcome for 2022.
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https://resourcegovernance.org/sites/default/files/nrgi_Resource-Curse.pdf.