Underground economy undermining Guyana
-- IMF study
By Richard Cox
Guyana Chronicle
February 9, 2003

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WIDESPREAD tax evasion associated with a pervasive underground economy has increased Guyana's fiscal deficit and has contributed to the current unsustainable debt levels in the republic, a new study by the International Monetary Fund (IMF) says.

"The existence of a sizeable underground economy of unrecorded domestic and international economic transactions suggests that the existing national accounts series are not adequate for meaningful economic analysis or for policy formulation," the report maintains.

At the end of the second quarter of 2002, Guyana had an external debt exposure of US$1.217 billion, while the domestic debt was US$27.6 million. And the deficit on the current account was US$48.7 million in this same period.

Guyana is currently involved in the HIPC (heavily-indebted poor countries) programme that saw US$256 million being allocated to the country by the Paris Club group of creditors that include Trinidad and Tobago.

Multilateral creditors supply 61 per cent of the debt relief amount while bilateral creditors account for the remainder.

The HIPC initiative is an effort to coordinate action by the international financial community in order to reduce the debt of affected countries to sustainable levels.

It is estimated that in the financial year 2000, for example, the underground economy was generating some G$32.3 billion or 35 per cent of the gross domestic product (GDP).

Furthermore, there was an approximate G$5.096 billion in illegal currency in circulation compared to G$14.85 billion in legal currency, while the maximum tax collection was G$11.38 billion or 12 per cent of the GDP.

"Though the total elimination of the underground economy is impossible, it is imperative that the government considers implementing policies to reduce its size.

"The relative decline in the size and growth rate of the underground economy during the 1990s, when compared with the preceding two decades, has shown that a long-run strategy based on market reforms...along with improved governance and stronger institutions are effective in meeting these goals," notes the author of the report, economist Ebrima Faal of the Western Hemisphere department.

There have been significant technological and financial reforms to the Guyana financial system during the period 1994 to 2000.

Yet, the IMF calls for comprehensive reform of the current tax system and its administration as well as deregulation and an improved provision of government services, such as land titling, domestic security and judicial services.

While it acknowledges the liberalisation of the Guyana economy partially eroded profits and incentives to participate in the underground economy, the IMF analysis says that extra-legal economic activity still remained in a substantial way because of inefficient institutions, the existence of a distortionary tax system and weak collection and enforcement methods.

This underground economy captures a wide spectrum of players including vendors, craftsmen, traders as well as professionals such as doctors and lawyers.

"Their participation in the underground economy usually reflects a desire to evade high corporate and personal tax payments," the IMF report says.

At the moment, Guyana's workers pay 20 per cent of annual income exceeding G$216,000 but below $350,000 in taxes; income exceeding $350,000 attracts a rate of a thirty-three and a third per cent, while the corporate tax rate is set at 45 per cent.

The IMF report suggests that efforts be made - even in the face of a new Revenue Authority that seeks to strengthen tax administration and collection - by the national authorities to establish credible estimates of the key components of the underground economy with a view to incorporating them in compiling official statistics.

Estimates in the 1980s by some economists, including those in Guyana, put the size of the underground economy between 26 and 99 per cent of the GDP.

In their report, the IMF economists insist that the underground economy undermines government revenue collection and increases the cost of providing public services.

This occurs through tax evasion arising out of the illegal activities in the underground economy such as drug dealing and manufacturing; gambling and racketeering; prostitution; money laundering and fraud.

Part of the underground economy also involves the smuggling of gold and oil across the border, as well as the inevitable foreign exchange dealings by non-registered operators exploiting the depreciating Guyana currency against the U.S. dollar, which currently stands at G$189 to US$1.

Legal activities in the underground economy revolve on tax avoidance through employee discounts and fringe benefits.

There are possibly three reasons why the Guyana underground economy flourishes as it does.

First, the weak functioning of the economy; second there was the resulting opportunity for entrepreneurs to participate who would otherwise not have been provided with the opening and third the import substitution policies implemented between 1975 and 1987 as part of Guyana's development strategy.

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