An assessment of the 4.1% GDP growth rate

The International Monetary Fund (IMF) concurs with the government’s reported Gross Domestic Product (GDP) growth rate of 4.1% for 2018. The IMF notes that the growth was ‘broad-based’, but that the improvement on the 2.7% growth rate in 2017 was said to have come more from the construction and services sectors. The IMF went as far as mentioning immigration as a ‘structural reform’, which is necessary to make growth inclusive and equitable. That is a most interesting suggestion because the Article IV report did not mention the historical pro-ethnic voting that brings into de jure power communal leaders with a sprinkling of tokens from the other side.

I am not so sure why the IMF mentions equitable and inclusive in the case of Guyana when we do not have comprehensive data on income and wealth distribution in the aggregate and by ethnicity. Dr. Ramesh Gampat recently made a roundabout estimate of building and housing stock distribution by ethnicity. Beyond this recent estimate, we do not have the kind of systematic data for the IMF to make such suggestions, which made the Article IV statement read more like a political manifesto.

Anyhow, the IMF’s statement kept true to old themes such as its recommendation of flexible exchange rate for Guyana. I agree with the IMF that the labour market could be made flexible by providing variable time options for women to work. I have serious doubts, however, that an economy like Guyana should have a flexible exchange rate.

Let us now take a look at the headline 4.1% GDP growth rate. We are aware of the shortcomings of GDP as a useful measure of wellbeing and equity. As a result, this aggregate measure is often supplemented by numerous other measures of social, capability, equity, environmental and happiness outcomes. The problem is we don’t have these supplemental data in Guyana. Nevertheless, aggregate economic growth is still important since we need a record of what is being legally produced over a given year. Furthermore, try sharing a dwindling roti to a growing family and tell me how that turns out.

As the IMF noted, major contributors to this 4.1% growth are the construction and services sectors. We should therefore look at the composition of GDP in Guyana. These compositions are structural and do not change dramatically from year to year. However, there have been a few notable changes in sectoral shares of GDP since 2009. For example, agriculture, forestry and fishing – three sectors which are grouped together by the official statistics – accounted for 21% of GDP in 2009. The same three sectors saw their combined share decline to 16% in 2018. Mining and quarrying increased four percentage points from 2009 to 2018 to now account for 14% of GDP. For the same period, manufacturing saw its share fall slightly from 7% to 6% of GDP by 2018. The production of electricity and water accounted for 2% in both 2009 and 2018.

The largest sector is now the services sector. It accounted for 50% of GDP in both 2009 and 2018. This sector includes wholesale and retail trade, transportation and storage, information and communication, real estate services, healthcare, education, legal and business services, etc. Within the services subsector, wholesale and retail trade accounted for 13.4% and 12.8% in 2009 and 2018, respectively. The second largest component of the services subsector is transportation and storage, which amounted to 7.5% and 10.8%, respectively, in 2009 and 2018. Combined finance, insurance, information and communication provided 11% of GDP in 2009 and 11.6% in 2018.

These numbers suggest that the private sector in Guyana is not just about ‘buying and selling’ as APNU + AFC political leaders and supporters have often stated. There is a gradual long-term structural change towards a service-based economy. There is still much debate among academic economists whether long-term growth can be sustained by leapfrogging manufacturing. The verdict is still out on this one. My personal view is a movement to a service-based economy is one in the right direction. 

Overall, then, in spite of the decline of agriculture, the economy has not changed its structure fundamentally in the past decade. The GDP growth is therefore being generated by these sectors. In 2018, the construction sector grew by 11% from 2017. No doubt this reflects preparations for the looming oil and gas sector. The services sector – which accounts for 50% of GDP – grew by 4.5%. All the other sectors, except, mining and quarrying, grew by less than 2%. Mining and Quarrying expanded by 2.9% in 2018, while the manufacturing sector clocked a tepid growth rate of 1%. I guess this is what the IMF meant by broad-based growth since no sector contracted.

I have so far added up growth rates of the components of GDP. However, this does not explain what caused the growth rate. We cannot fully get into the causal factors in this essay. Therefore, I want to explore some of the potential accompanying factors so that we can better assess the credibility of the 4.1% headline number.

One such accompanying factor is the amount of credit the private sector demanded over the review period. Businesses and consumers face a financial constraint. A business can use internal finance out of profit, but this is not likely to be enough – particularly when it comes to financing working capital. Commercial banks extended G$218.6 billion in loans in 2017 and G$229.2 billion in 2018 to the private sector – thus representing a credit growth of 4.8%.

Total business loans in 2017 and 2018 amounted to G$103.5billion and G$108.4billion, respectively – thus indicating a 4.7% growth in business loans.  Total mortgage loans was G$77.9 billion in 2017 and G$81.8 billion in 2018 – showing a growth rate of 5%.

Let us also observe the extension of (and demand for) commercial bank loans to the various subsectors discussed above. If these sectors are growing we should also see an expansion of their respective demand for bank loans. Firstly, the services sector received a total of G$65.9 billion in 2017 and G$69.8 billion in 2018. This amounts to a demand growth of around 5.9%. As noted earlier, the services sector recorded a GDP growth rate of 4.5% in 2018.

Surprisingly, and secondly, loan demand by the mining and quarrying sector decreased from G$5.4 billion in 2017 to G$5.1 billion in 2018, representing a decline of 4.1%. This sector’s GDP supposedly expanded by 2.9% in 2018. There might be a plausible explanation here, however. The sector is now represented by substantial foreign capital inflows, which might have offset the locals’ decreased demand for credit. Therefore, the foreign-owned production in the sub-sector might have accounted for the positive growth rate in aggregate output as domestically-owned production contracted.

Thirdly, total bank loans to the manufacturing sector amounted to G$24.522billion and G$24.457billion in 2017 and 2018, respectively. This represented a 0.27% decline in the manufacturing sector’s demand for loans, even as this sector was reported to have expanded by exactly 1%. We would not know what accounted for this anomaly. Is it a case of data massaging on the margin? Or is it a case where bank credit supply is much more elastic given the likely higher risk and lower margins associated with manufacturing in Guyana? Fourthly, we do not have the data at this time on loan demand by the construction sector beyond the total mortgage loans mentioned earlier.

In this column, I have deliberately stayed away from the monetary aggregates and focused instead on the loan demand as a corroborating factor for the sectoral growth rates. There are good theoretical reasons for why credit instead of money is the better variable. One other corroborating variable is the supply of electricity, which only grew by 1.8% in 2018. However, this might be less important in an economy that is 50% service-based. Other corroborating variables, such as the import of fuel and lubricants, intermediate goods and capital goods, all point to a growth rate consistent with what the government reported for 2018.