THE GOVERNMENT NEEDS HELP

September 13, 2015 | By KNews | Filed Under Features / Columnists, Peeping Tom, Source

There is an economic crisis brewing. The tell-tale signs are there for all to see.

It was anticipated that following the end of the long reign of the PPP/C administration that there would have been some cautiousness on the part of the business community. This would have led to a slowdown in business activity but once the Budget had been passed the situation would have been restored to normalcy.

The Budget has been passed and there is no normalcy. Demand in the market is low. Sales are falling and many companies are being forced to reduce the number of hours of their staff. This applies even to major companies.

The situation has not been helped by the half measures that the government implemented in the Budget. The government has not been able to implement its full range of VAT reductions, or increase salaries as it ought or provide the tax relief measures that the private sector has been calling for.

Those VAT reductions, increases in salaries and tax reform are now likely to take place in the New Year, which is but a mere three months away. Businesses and investors are therefore going to be cautious and will wait on those measures because it makes no sense to commit funds unless one is sure of what the government is planning to do.

This has been one of the downsides of having a stop-gap Budget. It has created more rather than less uncertainty and therefore the business community will continue to adopt a wait and see approach.

After all, if VAT is going to be reduced next year, the business community is not going to engage in large scale ventures when they can wait on the next three months to benefit from the increased demand that will result from the reduction of VAT. The business community needs to know the plans of the government before committing to major investment. If tax reform is coming, then why invest now. Why not wait, unless the tax reform will be less favorable next year than it is at present.

These are the issues which have not been answered by the government. The Budget did not point to what was in store for the future and therefore instead of boosting confidence, it has created greater uncertainty and this is why the business community is more cautious than ever. They simply do not know what direction the Minister of Finance will lead the economy.

They are confused by this fact. They are scared when they learn that monies are going to be withdrawn from the commercial banking sector to finance the Budget deficit. This is huge gamble in monetary policy and businesses while being risk takers themselves do not need an unstable environment in which to invest.

The umbrella body for the private sector in Guyana has already expressed alarm at what is being planned. They are scared that this measure will lead to a rise in interest rates and limitations of commercial credit.  They will hope to meet with the Minister of Finance to dissuade him from going on this course. All of these things will cause the private sector to step back and hold back on investments. There needs to be a national debate on this experiment that is taking place as regards monetary policy. It is dangerous and risky. There are fears that the entire financial sector can be affected.

These fears need to be assuaged and the faster there is discussion on this new approach to liquidity in the financial system the better.

The government is conscious of the slowdown in business. Their solution was to have the Budget designed in such a way as to offer a fiscal stimulus. That stimulus however cannot materialize because the time is too limited to spend the monies that have to be spent to stimulate business activity and turnover. There is also no guarantee that increased public spending impacts on commercial businesses in the way that the government may be assuming.

Guyana cannot afford to go backwards in the same way as it did from 1975- to 1988. Guyana has never and will never recover from that period. The problems of that period resulted from economic experimentation and the decline in the economy began with a contraction of credit.

History must not repeat itself. The government needs help. They should call in some experts to assess this situation and to advise them on the best approach.