The Government of Guyana financial plan 2001

The table on the next page presents a summary of the Government's projected financial plan for 2001. Some of the 2000 figures have been restated in the Estimates without attention being drawn thereto. The Plan projects a current balance of G$1.392Bn compared with a balance of G$0.846Bn in 2000, an increase of G$0.546Bn or 65% from 2000. The elements which account for this increase are explained below.

Current revenues are projected to increase to G$44.017Bn in 2001 from G$41.327Bn in 2000. The Guyana Revenue Authority projects an increase of G$1.457Bn or 3.8% over 2000 and now brings in 89% of the total current revenue. In the second year of its operations the Revenue Authority would have been expected to increase revenues well above the projected rate of inflation of 5.9%. In 2000, the Revenue Authority realised increased revenues of 19.8% over the previous year and 9.37% over budget. The increase in collections by the Internal Revenue Department was G$0.648Bn and the Customs and Trade was G$0.808Bn, or 3.4% and 4.2% respectively over the collections by the then independent departments.

Total Current expenditure is made up of interest expenditure of $9.1Bn or 21% (2000- 24.5%), personal emoluments of $15.7Bn or 37% (2000- 35.3%) and other charges of $17.8Bn or 42% (2000- 40.10%). Current expenditure is projected to increase by 9.8% from G$30.533Bn to G$33.533Bn in 2000. The main allocations of the non-interest expenditure were the Ministry of Finance 16.40%, Ministry of Education 10.02%, Ministry of Home Affairs 9.45%, Guyana Defence Force 7% and Guyana Public Hospital Corporation 4.86%.

There were several significant changes in the allocation of certain expenditure in comparison to the previous year. Major decreases include Guyana National Service (100%), Public Utilities Commission (100%), Ministry of Trade, Tourism and Industry (54.17%), Ministry of Health and Labour (54.14%) and Ministry of Local Government (53.85%).

Some of the significant increases of non-interest expenditure include the Office of the Prime Minister G$105Mn, Ministry of Local and Regional Development G$56Mn, Ministry of Tourism, Commerce and Industry G$112Mn, Ministry of Health G$960Mn, Ministry of Labour, Human Services and Social Security G$629Mn, Public Service Ministry G$75Mn, Ministry of Culture, Youth and Sports G$471Mn and Ministry of Legal Affairs G$154Mn.

Total interest expenditure is projected to decrease by 8% from G$9.927Bn in 2000 to G$9.091Bn in 2001 or approximately 20.6% of current revenue compared with 24% in 2000. Interest on domestic debt is projected to increase by 0.16% and that on external debt is projected to decrease by 17.3%.

Capital revenue is projected at G$7.483Bn (2000 - G$6.745Bn) and capital expenditure at G$18.683Bn (2000 - G$17.025Bn). The revenue figure is made up principally of Balance of Payments support and commodity assistance loans mainly from the IDB and the IDA.

Capital expenditure of G$ 18.684Bn represents a 9.73% increase over 2000. This follows an increase of 37.9% in 2000 and a decrease of 5.28% in 1999. The proposed allocation of the capital expenditure includes Ministry of Public Works and Communications 22.87%, Ministry of Education 16.01%, Ministry of Finance 11.91%, Ministry of Housing and Water 10.44% and Ministry of Agriculture 8.82%.

Debt repayment is projected at G$3.311Bn (2000 - G$6.025Bn) made up of domestic debt repayments of G$102.9Mn and external debt repayments of G$3.208Bn and representing decreases of 95.2% and 11.5% respectively over the previous year. There is an overall deficit of G$13.119Bn compared with a deficit of G$15.459Bn in 2000. It is projected that the deficit will be financed from external sources amounting to G$15.145Bn. The overall balance of deficit before grants is projected at G$20.60Bn which is G$1.602Bn less than the deficit of G$22.204Bn in 2000.

During 2001, Domestic and External Debt Repayment as a percentage of current revenue is projected at 7.52% compared with a revised percentage of 14.58% in 2000 and a budget of 15.58% for the preceding year.

Comments

Comparisons with previous year may not be entirely reliable since certain 2000 figures may have been changed without explanation. There have also been a number of changes in Ministries and Departments with consequential changes in the allocations. The Plan is very much in line with 2000 figures and reflects the Minister's prior comment that the budget was a half-year budget. While the collection by the Revenue Authority may look very impressive, a main source was in personal income taxes, a large proportion of which would have arisen from the public sector wage increase. The decrease in the interest on the external debt of 17.3% compares favourably with an increase of 6.4% in 2000 and a decrease of 31% in 1999.

Budgeted Tax Revenue for 2001

Source: 2001 Estimates of the Public Sector

FINANCIAL OPERATION

OF CENTRAL GOVERNMENT

(ACCOUNTING CLASSIFICATION)

G$ Million

Source: 2001 Estimates of the Public Sector

WHO GETS WHAT IN 2001

Current Non-Interest Expenditure

In this section we consider how the budgeted expenditure is allocated among competing ministries, departments, programmes and projects.

Central Government's non-interest current expenditure (employment costs and other charges) for the year is budgeted at G$32.6Bn which is 12% above the revised 2000 amount. The Ministries/ Departments with the most significant allocations are:

* Percentage of total current expenditure

Not unlike last year, the Ministry of Finance, the Ministry of Education, the Ministry of Home Affairs and the Guyana Defence Force received the most significant allocations. The Public Utilities Commission and the Guyana National Service received no allocations for the year 2001. Five new ministries received allocations in the 2001 Budget.

The regions with the most significant allocations are:

* Represents % of regional allocation.

Significant changes from the previous year's latest estimates occurred in the following Ministries / Departments:

The reductions in the allocations for the Ministry of Local Government, the Ministry of Trade, Tourism and Industry, the Ministry of Health and Labour, and the Ministry of Human Service & Social Security were because of the creation of the new ministries - The Ministry of Local Government and Regional Development ($56Mn), the Ministry of Tourism, Commerce and Industry ($112Mn), the Ministry of Health ($960Mn) and the Ministry of Labour, Human Services and Social Security ($629Mn).

Capital Expenditure

Central Government's capital expenditure for the year is budgeted at G$18.7Bn which is 28% above revised 2000 and 36% of total 2001 expenditure. The Ministries / Departments with the most significant capital expenditure allocations are:

The Public Utilities Commission and the Guyana National Service receive no allocations while allocations for the Ministry of Local Government, the Ministry of Trade, Tourism and Industry, the Ministry of Health and Labour, and the Ministry of Human Service & Social Security were significantly cut. The Georgetown Public Hospital Corporation ($64Mn), the Office of the Auditor General ($9Mn) and the Guyana Defence Force ($283Mn) had the most significant increases in allocations by 256%, 200% and 142% respectively.

Comments

Once again Region 6 (East Berbice/Corentyne) whose share of the country's population is about 20%, receives approximately 20% of the total current expenditure amount allocated to the regions. The situation regarding the total expenditure allocation is similar. Region 6 gets 20% while the even smaller Region 3 (Essequibo Islands/West Demerara), with a population share of 12.5% gets 15% of the amount of the regional expenditure, up from 14.2% in 2000. On the other hand, Region 4, with 42% of the country's population receives only 15% of the sum the total expenditure allocated to the regions.

Source: Population - Guyana Statistical Year Book - 1994

Budget Allocations - 2001 Estimates of the Public Sector

While taxes contributed to the national coffers are not the only measure of a region's contribution it would be helpful if information on tax collections by region were available. Apart from their statistical significance, they could be useful in the Revenue Authority's drive to collect taxes across the country.

COMMENTARY AND ANALYSIS

This budget, similar to the last budget, bore no surprises - no new taxes, very few new measures and again no mention of tax reform. There were some promising developments however in the turnaround of the balance of payments deficit and the commitment to infrastructural development, particularly as incentives for investment.

Economic Affairs

The IMF continues to exert a dominant influence over the country's economic affairs. The country looks hopefully for any kind of an exit strategy from what is believed to be the longest running IMF programme in the world. In return for more and more debt relief, key agreements and commitments affecting fundamental issues involving the country, to which Guyanese are not privy, are made to the IMF.

While the IMF sometimes expresses concerns about certain specific policies and the slow pace with which action is taken by the administration, it seems satisfied with the overall direction and management of the economy. It has been critical of the U-turns on taxation, the pace of the privatisation and the inadequate systems and information, so critical for decision-making purposes. Yet the Decision Point Document signed between the government and the IMF in November 2000, suggests that the IMF is not sufficiently thorough in its review of the action taken on agreed matters. This is particularly serious since there appears to be no parliamentary oversight of these agreements.

Despite comments about globalisation and the global economy, there was regrettably no mention of any of the regional (Caricom), hemispheric (Summit of the Americas in Qubec) and international (Everything But Arms Initiative) developments, all of which could seriously affect Guyana's economic prospects in the near and medium term.

These issues are perhaps even more significant following the announcement of the resignation by the Caribbean's chief negotiator, Sir Shridath Ramphal. We offer the following comments on the Free Trade Area of the Americas (FTAA) decided on at the Summit and the EBA Initiative:

Free Trade Area of the Americas (FTAA)

Within the next five years, the FTAA will remove practically all barriers to trade and services in a market close to 800 million people accounting for over 11 trillion dollars in GDP. This trading bloc including the USA, Canada, Latin America and the Caribbean (but excluding Cuba) accounts for a significant proportion of Guyana's output and apart from the trade implications there will also be other serious implications which would mean that international trade will bring in less revenue from tariffs. Guyana would have to rely on increasing the quality and quantity of its output along with minimising its importation costs in order to sustain a balance of trade surplus.

The countries of the Caribbean can still benefit from special trading arrangements as it does with the European market, but these considerations must form part of all negotiations. Sugar and rice are currently vital for Guyana's survival and how these are treated in the medium term under any new arrangements can determine the economic future of the country.

Everything But Arms

Guyana, along with several other African, Caribbean and Pacific states, currently benefit from trade with European countries under the fourth ACP-EC Convention. These benefits stem from the European Union only allowing exports from ACP states to access the European markets for specified commodities.

In a well-intentioned decision to assist least developed countries, the European Commission adopted a proposal on September 20, 2000 that would provide full access for the world's poorest countries to European markets. This simply means more competition for products from countries such as Guyana. Following an impact assessment report published on February 8, 2001, the EU adopted the Everything But Arms Initiative on February 26, 2001.

The Initiative extends duty and quota free access to all products except arms and ammunition originating from the least developed economies. Three products - sugar, rice and bananas - will be allowed access to the EU markets over a phasing-in period expected to end during the year 2009 as follows:

Fresh bananas by January 1, 2006; Rice by September 1, 2009; and Sugar by July 1, 2009.

The impact on Guyana, which enjoys a substantial premium on its sugar and rice exports to the EU, could be catastrophic. Revenues in these sectors will fall as higher levels of imports from other sources enter the EU market.

Over 2001/2002, there will be no changes in the tariff on sugar and rice but a decline in revenues should be expected as the current duty-free quota of 74,185 and 2,517 tonnes of sugar and rice respectively will be increased by 15% every year.



Tax Reform

For decades, Guyana has been one of the highest taxed countries in the world. Even allowing for the inadequacy of national statistics, the size of the unofficial economy and the high level of tax evasion, this situation is unacceptable on legal, equity and economic grounds. The tax contributed by the self-employed persons (professionals, unincorporated businesses, farmers, artisans, etc.) is a disgraceful 1.44% of taxes paid in 2000. While income taxes collected by the Revenue Authority increased by 17.8% in 2000 the share contributed by the self-employed increased only by 14%.

Last year Minister Kowlessar announced the completion of a study by the IMF of Guyana's tax system. That study identified a number of findings on the tax system including:

* A relatively high current revenue to GDP ratio to compensate for the higher ratio of Government expenditure to GDP;

* A narrow revenue base which fosters economic inefficiency, inequity and tax evasion;

* Weak revenue administration hampered by lack of training, inadequate resources, low wages and poor morale;

* A threatened overall tax base represented by the overall prospective consequences of the growing economic and financial integration in the international economy; and

* More efficient taxation of domestic activities through taxes on consumption and income and introduction of a broad-based VAT.

The study had a number of deficiencies while making a case for the introduction of VAT at a single rate of 15% with minimum exemptions.

TOTAL TAX BURDEN

Source: IDB Report on Economic & Social Progress in Latin America

(Average 1991-1995, percent of GDP)

There are conflicting reports of the commitment made by Guyana to the IMF in relation to VAT. While possessed of the most draconian powers, our tax authorities are finding it extremely difficult to collect taxes from the so-called "hard to tax" group. On grounds of administrative convenience, the IMF study recommends that the group be excluded from VAT which will mean the burden of taxes will continue to be carried by a very narrow base.

Participants and presenters at the June 13, 2001 public consultation on VAT referred to in the Budget Speech were in agreement that considerably more work needs to be done before a commitment to VAT is made. These include:

* Expenditure reform

* Tax reform

* Administration reform

* Conduct of an Impact Study

Tax Holidays

In some pre-budget comments, President Bharrat Jagdeo, who has continued to pay close attention to the Ministry of Finance, had announced his Government's intention to encourage investment by a "liberal use of the tax system". This included generous concessions and tax holidays.

Tax holidays it is worth remembering, do not rate as high in the investment decision as do political stability, a sound macro-economic environment and a stable tax system. The PPP/C has been very uncertain with regard to tax holidays having abolished them in 1994 and re-introduced them in 1998. The IMF, which often uses Guyana as its model of success was forced to comment as follows:

" ....it is indeed regrettable that in Guyana the Government has chosen to re-introduce tax holidays in 1998 after having correctly abolished them in 1994. One can only hope that the occasion is taken to review the operational mechanisms as well as the subsequent activities of enterprises currently in exemption status. New exemptions, if really deemed unavoidable, should be granted on a limited and strictly monitored basis."1

Exemptions, remissions and tax holidays narrow the tax base and necessitate high rates of tax to compensate for the taxes forgone. In addition, they are open to abuse, have a distortionary effect on resource allocation and investment decisions and often lead to concern about lack of transparency. Most importantly they take from Parliament the important function of taxation and place it in the hands of the politician.

Lean Government

One of the commitments under the various ERPs, and a necessary pre-requisite for good, effective government and governance is the streamlining of the Ministries and Departments of the Government. Yet if we consider the call of the late President, Dr. Cheddi Jagan, for "lean and clean" government we notice a substantial increase in the number of Ministries from 1992 when there were 13 Ministries, to twenty-two currently.

The changes in the Ministries of the Government create logistical difficulties, budgetary problems and render comparison quite challenging, not to mention the managerial problems of co-ordinating such a large number of persons.

A country with as small a population and limited human resources available to the public sector cannot afford this mushrooming of Ministries. We need to limit the number of our Ministries and Departments, if necessary by way of Constitutional amendment, flatten the pyramid and urgently engage in meaningful public service reform.

Public Sector Wage Increase

The Minister was carefully ambiguous about public sector wages. The Government has in some earlier years been criticised for pre-empting wages negotiations by imposing settlement through the Budget and in other years for not making any provision in the Budget.

The approximate 10% increase in "employment costs" shown in Table 7 of the National Estimates masks a wide variation in increases in various Ministries/ Departments which are probably attributable both to changes in the establishment as well as rates.

As a consequence of the deliberate ambiguity over wage increases, pensioners will most likely have to await the conclusion of the negotiations between the Government and Unions representing the public workers before they receive any increases for this year.



Privatisation

For several years, Focus has been expressing reservations and concerns about the lack of commitment to the Privatisation Policy Framework Paper, tabled in Parliament by the then Finance Minister Asgar Ally, which was supposed to guide the privatisation process.

Many of the entities we have privatised appeared under-prepared for privatisation and were treated more as "forced sale" with consequences for the price obtainable. No attempt was made to make the shares generally available which would have encouraged economic democracy and helped in creating a viable stock exchange. The privatisation of the national airline GA 2000 failed less than two years after the sale of 52% of the shares to a group led by ace businessman Yesu Persaud. This may suggest that those involved in the transaction may not have had the requisite experience or expertise.

Personal Allowances

Employed persons who contribute some 44% of the total income tax revenues of the country must be particularly disappointed that for the fourth straight year, no adjustment has been made to the modest personal allowance or free pay which has seen a depreciation of 23% since 1997. Inflation has had a double whammy effect on employment income by taxing nominal rather than real increases in pay and reducing purchasing power of the after tax income.

Even as the government considers and announces its willingness to make liberal use of the tax system to encourage businesses, it ought to remember the sitting ducks of the tax system - the employed persons.