THE mid-year review indeed suggests that the macroeconomy finally has some breathing room especially after six long years of negative economic performance, worsened by the pandemic.
However, while encouraging, our real GDP performance is still not better than pre 2020 levels.
Our fiscal space has now deepened given the dramatic increase in global hydrocarbon commodity prices, bringing a surplus of $1.98 billion at the end of April 2022.
This is encouraging news especially since the economy’s Real GDP would have declined by over 11% from 2016 to 2021, with a total deficit of $63.9 billion in that period. With such a deficit, we naturally didn’t save, and therefore had to borrow to meet our fiscal spending responsibilities, bringing the debt burden to over $130 billion at the end of 2021.
Using the IMF’s projections, the economy’s Real GDP is projected to grow by 5.47% in 2022, with a value of $149 billion. This however is still lower than 2019’s value of $154.6 billion but higher than the Real GDP for 2020 and 2021.
It is also very encouraging that the Debt to GDP ratio has fallen to a value of 72%. This will certainly, be looked upon favourably by the credit rating agencies, together with the increase in revenues.
However, the key reason that the Debt to GDP value has fallen by such a substantial amount is not due to a meaningful fall in the public debt, but because of the denominator – Nominal GDP, which according to the MoF increased to $180 billion.
This value has increased primarily due to price increases, more so than production increases – recall that prices as a whole have increased as the prices of all raw materials used in the production process and imported goods have risen sharply due to global supply chain complications together with the cost of shipping and, most of all, energy prices. This means that nominal GDP, which is the total value of goods and services produced at current prices, will naturally be much higher, therefore causing the debt to GDP value to fall.
It would be more meaningful to explore the revenues to debt ratio, as state revenues are needed to service the national debt.
In fiscal 2016, the revenues to debt ratio was 50.9% suggesting that 50.9% of our debt could have been covered by fiscal revenues. This value fell to 28.3% in fiscal 2020 but is projected to increase to 37% in this fiscal period given the MoF’s estimates of revenues.
If we are careful, the surge in revenues from the energy sector can help with better debt repayment capabilities, but these additional revenues must be invested to build our productive capacity and generate attractive returns to not just pay off the debt but also re-invest in national development.
Regarding the property tax, it is unlikely to be implemented this year, as inland revenue has not met the deadline of March 31 to send out the notice of assessments to the public.
The additional supplementary funds to be paid as arrears to contractors and contract workers, wages to WASA employees and grants such as the senior citizens’ grants will certainly help the recipients to cope with the increased cost of living brought on by the higher prices of consumables and fuel costs.
It is imperative that the state accelerate any plans to increase wages for public servants as the purchasing power for many households has been cut, which is mushrooming poverty levels locally.
The $1.6 billion increase in VAT refunds is a timely relief to the private sector, but some of the competitiveness that this could have provided, especially for SMEs, will be offset by the increase in fuel costs, prices of raw materials and goods imported for resale.
Further, many will not reap the true benefits from the refunds if they cannot convert these funds to foreign exchange to adequately meet their import payments obligations.
It is also essential that an increased allocation from the energy revenues be provided to the EXIM bank to allow manufacturers to continue to meet the high costs of raw materials and shipping so that they keep up their production momentum and take further advantage of the surge in global spending through increased production and exports.
Given the increase in energy revenues, it would be prudent for the state to temporarily adjust the cost, insurance and freight (CIF) value for importers, as duties and subsequently, VAT is computed from this.
They can apply the former freight rates before the increase in shipping costs much like Guyana and Barbados, thereby reducing the overall CIF value, which in turn will reduce the duties and VAT to be paid by importers.
This will help to alleviate the cost of doing business and control the extent of price increases across the board.
(Vaalmikki Arjoon B.Sc. UWI, M.Sc., Ph.D. University of Nottingham, U.K is a lecturer in Finance at the Department of Management Studies, The University of the West Indies, St Augustine Campus.)
Economy Not Back to Pre-Covid Levels
THE mid-year review indeed suggests that the macroeconomy finally has some breathing room especially after six long years of negative economic performance, worsened by the pandemic.
However, while encouraging, our real GDP performance is still not better than pre 2020 levels.
Our fiscal space has now deepened given the dramatic increase in global hydrocarbon commodity prices, bringing a surplus of $1.98 billion at the end of April 2022.
This is encouraging news especially since the economy’s Real GDP would have declined by over 11% from 2016 to 2021, with a total deficit of $63.9 billion in that period. With such a deficit, we naturally didn’t save, and therefore had to borrow to meet our fiscal spending responsibilities, bringing the debt burden to over $130 billion at the end of 2021.
Using the IMF’s projections, the economy’s Real GDP is projected to grow by 5.47% in 2022, with a value of $149 billion. This however is still lower than 2019’s value of $154.6 billion but higher than the Real GDP for 2020 and 2021.
It is also very encouraging that the Debt to GDP ratio has fallen to a value of 72%. This will certainly, be looked upon favourably by the credit rating agencies, together with the increase in revenues.
However, the key reason that the Debt to GDP value has fallen by such a substantial amount is not due to a meaningful fall in the public debt, but because of the denominator – Nominal GDP, which according to the MoF increased to $180 billion.
This value has increased primarily due to price increases, more so than production increases – recall that prices as a whole have increased as the prices of all raw materials used in the production process and imported goods have risen sharply due to global supply chain complications together with the cost of shipping and, most of all, energy prices. This means that nominal GDP, which is the total value of goods and services produced at current prices, will naturally be much higher, therefore causing the debt to GDP value to fall.
It would be more meaningful to explore the revenues to debt ratio, as state revenues are needed to service the national debt.
In fiscal 2016, the revenues to debt ratio was 50.9% suggesting that 50.9% of our debt could have been covered by fiscal revenues. This value fell to 28.3% in fiscal 2020 but is projected to increase to 37% in this fiscal period given the MoF’s estimates of revenues.
If we are careful, the surge in revenues from the energy sector can help with better debt repayment capabilities, but these additional revenues must be invested to build our productive capacity and generate attractive returns to not just pay off the debt but also re-invest in national development.
Regarding the property tax, it is unlikely to be implemented this year, as inland revenue has not met the deadline of March 31 to send out the notice of assessments to the public.
The additional supplementary funds to be paid as arrears to contractors and contract workers, wages to WASA employees and grants such as the senior citizens’ grants will certainly help the recipients to cope with the increased cost of living brought on by the higher prices of consumables and fuel costs.
It is imperative that the state accelerate any plans to increase wages for public servants as the purchasing power for many households has been cut, which is mushrooming poverty levels locally.
The $1.6 billion increase in VAT refunds is a timely relief to the private sector, but some of the competitiveness that this could have provided, especially for SMEs, will be offset by the increase in fuel costs, prices of raw materials and goods imported for resale.
Further, many will not reap the true benefits from the refunds if they cannot convert these funds to foreign exchange to adequately meet their import payments obligations.
It is also essential that an increased allocation from the energy revenues be provided to the EXIM bank to allow manufacturers to continue to meet the high costs of raw materials and shipping so that they keep up their production momentum and take further advantage of the surge in global spending through increased production and exports.
Given the increase in energy revenues, it would be prudent for the state to temporarily adjust the cost, insurance and freight (CIF) value for importers, as duties and subsequently, VAT is computed from this.
They can apply the former freight rates before the increase in shipping costs much like Guyana and Barbados, thereby reducing the overall CIF value, which in turn will reduce the duties and VAT to be paid by importers.
This will help to alleviate the cost of doing business and control the extent of price increases across the board.
(Vaalmikki Arjoon B.Sc. UWI, M.Sc., Ph.D. University of Nottingham, U.K is a lecturer in Finance at the Department of Management Studies, The University of the West Indies, St Augustine Campus.)