Avoid excessive wage increases
- IMF stresses to Guyana
June 13, 1999
IN A Public Information Notice (PIN) last month, after concluding scheduled consultations with Guyana, the International Monetary Fund (IMF) stressed the need for the country to avoid "excessive wage increases."
This followed a similar warning from the World Bank to the Guyana Government after the two institutions formally approved Guyana's eligibility for the Heavily Indebted Poor Countries (HIPC) Initiative.
Here is an edited version of the IMF PIN of last month:
"On May 12, 1999, the IMF Executive Board concluded the Article IV consultation with Guyana and at the same time completed the midterm review under the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), and approved a new disbursement of SDR 8.96 million (US$12.1 million) of the SDR 53.76 million originally committed.
On that occasion, the Executive Board of the IMF jointly with the World Bank decided that the conditions for reaching the completion point under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) had been satisfied.
The amount of assistance to Guyana from its external creditors provided under the HIPC Initiative is estimated at about US$410 million in nominal terms. In terms of net present value, assistance under the Initiative will be about US$256 million, of which the IMF will contribute about US$34.5 million.
After two decades of declining economic activity and financial
imbalances, Guyana's economy improved substantially in the period
1991-97. However, beginning in late 1997, Guyana's economic performance was adversely affected by major external shocks and policy slippages.
In 1998 real GDP declined by 11/2 per cent and the rate of inflation increased to 41/2 per cent. The overall public sector deficit (after grants) increased from 3 per cent of GDP in 1997 to 31/2 per cent of GDP in 1998 (compared with 1/2 per cent of GDP in the programme).
Guyana did not observe several of the quantitative performance criteria under the programme supported by the ESAF for end-December 1998.
The authorities have formulated a programme designed to return the economy to a sustainable growth path. The programme assumes a real GDP growth of 2 per cent in 1999, rising to 4 per cent by 2003, and aims at containing inflation and strengthening the balance of payments.
The overall public sector deficit (after grants) would decline to 3 per cent of GDP in 1999 and to 11/2 per cent of GDP by 2002.
In 1999, the exchange rate used for valuing imports for customs purposes is being brought more in line with the market rate, tax administration is being improved through the establishment of a new Revenue Authority, the national airline has been privatised, several other enterprises have been earmarked for privatisation, and the growth of the public sector wage bill is being contained.
Monetary policy has been tightened through the intensified use of open-market operations whose effectiveness has increased following the liberalisation of interest rates on government securities.
In addition to the envisaged privatisation, structural measures in the programme include a revision of the civil service remuneration structure to help retain qualified key personnel, other civil service reforms, steps to strengthen the operations of the financial sector (including restructuring the state-owned commercial bank), and a reduction in the maximum external tariff to 20 per cent.
The Fund also has been requested to provide technical assistance to reform the tax system and improve bank supervision.
As required under the HIPC Initiative, the programme provides for increased budgetary resources to be used efficiently for education, health, and poverty alleviation programmes.
While the programme is appropriate to achieve the objectives specified, there are risks.
Despite easing of tensions, Guyana continues to face political challenges (a constitutional reform in 1999 and a general election in 2000).
In addition, the government faces a major challenge to implement the agreed wage policy. The programme, however, provides for compensating measures to offset any wage overrun.
Executive Board Assessment
Directors observed that, notwithstanding the unfavourable exogenous and political developments that affected the economy in 1998, Guyana had made some progress in reducing fiscal imbalances and in implementing structural reforms.
They noted, however, that there had been a number of policy slippages, particularly the unprogrammed increase in civil service salaries, which had contributed to the deviations from the programme path.
Directors emphasised the importance of fiscal adjustment to help stabilise the economy and set the stage for medium-term fiscal sustainability.
They noted that the adjustment envisaged in the 1999 budget was much less than expected in the original programme. Directors welcomed the government's efforts to bring the programme back on track, including by adjusting the customs valuation exchange rate, privatising the loss-making public airline company, and enhancing the efficiency of the sugar company.
They also welcomed the ongoing initiative to further reduce the size of the civil service and to introduce a new remuneration structure for the skilled and professional staff.
Directors, however, stressed the paramount importance of avoiding excessive increases in the wage bill in 1999, and took note of the authorities' commitment to take any necessary additional measures to achieve the programme's fiscal objectives.
Several Directors considered that the limited scope for such measures further underlined the need to avoid excessive wage increases.
Directors emphasised the importance of early establishment of the Revenue Authority, without further delay, and supported the authorities' recent request for technical assistance from the Fund to improve the efficiency of the tax system.
While noting the recent change in the customs valuation exchange rate, some Directors suggested that valuations should be carried out at current market exchange rates.
Directors welcomed the increase in the 1999 budget allocation for expenditure on the social sectors, which they generally saw as consistent with the objectives of the HIPC Initiative. They urged the authorities to take the necessary measures to ensure the achievement of the spending targets for education, health, and poverty alleviation, and to improve the quality and effectiveness of social sector expenditure.
A few Directors emphasised that it was essential to prevent HIPC Initiative resources from being diverted to other purposes.
Directors agreed with the authorities' restrictive monetary stance to help contain inflation and strengthen the external position. They recognised the positive steps taken to recapitalise, reorganise, and enhance the autonomy of the central bank; and to liberalise interest rates by removal of bid limits in treasury bill auctions.
The need to offset the effects of a reduction in reserve requirements by tightening other policies was noted. Directors supported the authorities' efforts to restructure the operations of the large state-owned Guyana National Cooperative Bank, and emphasised the importance of other actions being taken to improve bank supervision and tighten prudential regulations.
Directors encouraged the authorities to press ahead with their privatisation programme and, in particular, to redouble their efforts to privatise those enterprises that have been brought to the point of sale.
They stressed in particular the need to proceed toward the sale of the electricity company.
Directors observed that the delivery of assistance under the HIPC Initiative would lessen the heavy fiscal burden of Guyana's external debt and free resources for social purposes, including for improving the provision of services to the poor through civil service reform. However, they also observed that, partly reflecting adverse recent developments, the fiscal sustainability of Guyana's debt was not yet assured.
While HIPC Initiative assistance would lower the NPV of debt-to-exports ratio to within the target range established at the decision point, it would not achieve the fiscal target for the NPV of debt-to-central government revenue of 280 per cent. Directors saw this as underscoring the vital need for continued pursuit of prudent debt management policies, strong fiscal adjustment, and structural reforms. Only with such measures would it be possible for Guyana to further improve its debt service profile and achieve external sustainability in the longer run.
They commended the authorities on their efforts to develop Guyana's debt management capacity.
Many Directors considered that, following any agreed revisions to the framework of the HIPC Initiative, Guyana's eligibility for additional assistance could be considered subject to its meeting the relevant requirements, although some Directors expressed reservations concerning such an approach.
Some Directors noted that other means could also be used to alleviate Guyana's heavy debt burden, including augmented access to ESAF resources in support of appropriately strong policies.
Directors looked forward to a review by the staff and the authorities of the macroeconomic framework at the time of the discussion of the programme to be supported by the second annual ESAF arrangement."
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