Bi-partisan solution may be needed for urgent economic problems
Stabroek News
August 29, 2001

Dear Editor,

If the news items (your editorial: 'Refloating the rice industry;' 'The rice debt plan meeting likely later this week;' and 'Rice industry proposal: There will be no bail out of banks -- President') appearing in Stabroek News on August 23 and 24 are correct, then the rash, irrational and inaccurate government policy responses, once again, following the Globe Trust incident, underline the importance for the establishment of a bi-partisan group drawn from the government, the opposition political parties, the private sector including the commercial banks, the development banks, the trade unions, and other relevant civil society organizations (eg, the associations of bankers and of accountants and the economics and business departments of the University of Guyana) to urgently consider and make recommendations on what has now definitely become a crisis in the country's banking system and economy.

It is totally inaccurate and misleading for the government to state that "the way governments around the world reacted to bail-out demands was... to start with small debtors." While there should be deep concern for the interests of small debtors and lenders, experience in the CARICOM region (in Jamaica a few years ago) and more recently in such emerging economies like Indonesia, Turkey and Argentina, and in Germany, a developed economy, has been to tackle similar banking problems on a national and macro-economic/financial basis which included the establishment of independent institutions (eg, FINSAC in Jamaica) outside the control of the central banks. Moreover, in several cases the governments have seen it fit to intervene with capital injection schemes to rescue the banks and restore confidence and trust in their banking systems.

In Guyana, similar considered and objective policy approaches are needed. What the country needs are prompt solutions to problems and not rash and inaccurate responses which exhibit a lack of understanding of the problems and a dearth of relevant policy solutions, with the consequences of a prolonged crisis or worsening situation.

Let's examine the implications of some of the statements said to be made by government officials (see SN, August 24). First, to say that the banking sector would not be adversely affected if it were to write off the debt of G$12 billion owed by the rice industry is a most callous and inaccurate statement to come from a "senior government official." The write off of loans is usually made as a charge against the bank's earnings and this can seriously deplete the bank's capital and its obligations and responsibilities under the Financial Institutions Act as well as to its depositors and shareholders. Moreover, where the debt/capital ratio is very high particularly for a small bank then this can lead to its bankruptcy as seen in the case of Globe Trust. Here, the shareholders and depositors need to know how much of the rice industry's debt is held by each commercial bank and lending institution, and what is the debt/capital ratio for each institution.

Second, for the government to have first encouraged the banks to extend credit to the agricultural sector and even to have waived certain provisions of the Financial Institutions Act specifically for the rice industry (See Stabroek News of 28th.Feb.2001), and then blame the banks now for " imprudent" lending, is also a callous and unfair statement. Indeed, the banks should have been prudent and safeguarded the deposits of their customers. However, one needs to ask the questions as to what extent the banks did not follow proper lending procedures because of their desire to assist in the government's agricultural policies, and why the central Bank of Guyana failed to put a halt to such imprudent lending the consequences of which were clearly evidenced in the banks' balance sheets and other financial statements which were being monitored by it.

Third, for the government to take the position of suggesting that the larger rice producers and borrowers should be phased out of the market is also short-sighted and lacks a sensible and effective policy approach. The economic history of the industry in Guyana has shown that most of the country's production and export of rice come from the large producers. The first focus should therefore be on improving the production and productivity of these producers with the hope of a quick reversal of the fortunes of the industry. The rice industry now faces several problems, including credit and capital. The government suggestion of replacing the " larger players" by "emerging entrepreneurs or even foreign players" is a highly theoretical and limited policy response and assumes that small producers and foreign investors can per se be more efficient.

The fundamental problems of the rice industry like almost all of Guyana's industries are the high cost of production, low productivity and poor marketing and sales techniques, with the consequences of high and uncompetitive export prices, few reliable export markets, poor export earnings, and inadequate private foreign capital inflows. Inefficiencies in production affect not only the viability of manufacturers and other producers, but also the viability of the banking system and the national economy. The government therefore needs to get down to the fundamentals in tackling the problems associated with the rice industry's debt to the banking system. Debt problems associated with other industries (e.g, the timber industry and the bankrupt Guyana Airways 2000) are also affecting the banking system. Of course, the government will have concerns about its obligations to IMF targets and increases in its public debt charges and possibly its overall budget balance if it were to issue and/or guarantee bonds to underwrite a portion (given as G$9 billion ) of the rice industry's total debt of about G$17 billion to the banking system. However, the government must face the nation with these issues and get the necessary understanding and support.

In conclusion, the magnitude and complexity of this problem deserve a national bi?partisan approach with outside technical assistance, particularly since the problems which now threaten the banking system are new and policy makers may not have appropriate responses and solutions. Rash and inconsiderate pronouncements can only prolong the crisis and undermine confidence, both at home and abroad, in our banking system and the government's ability to come up with prompt and appropriate policy solutions.

Yours faithfully,

Don Augustin,A.A

Financial Consultant and former Secretary to the Treasury