Report No. 25640-GU Report No. 25640-GUA Guyana Development Policy Review The Challenges of Governance and Growth
uaaDevelopment Policy Review Guyana A
November 6, 2003
Caribbean Country Management Unit Poverty Reduction and Economic Management Unit Latin America and the Caribbean Region
Document of the World Bank CURRENCY EQUIVALENTS Currency Unit: Guyana Dollar (G$) US$l.OO = G$179.53 (as of October 20,2003)
FISCAL YEAR January 1 to December 3 1
ABBREVIATIONS AND ACRONYMS
ADR Alternative Dispute Resolution IDB Inter-American Development Bank AVB Automated Vote Book IMF International Monetary Fund BNTF Basic Needs Trust Fund LAC Latin America and the Caribbean CARICOM Caribbean Community MDG Millennium Development Goals CAS Country Assistance Strategy MOE Ministry of Education CDC Commonwealth Development MOF Ministry of Finance Corporation MOH Ministry of Health CET Common External Tariff NDC Neighborhood Democratic Council CIDA Canadian International NDS National Development Strategy Development Agency NGO Non-Governmental Organization DFID Department for International NPV Net Present Value Development (UK) OAG Office of the Auditor General EFA-FTI Education For All Fast Track ODA Official Development Assistance Initiative OECD Organization for Economic Co- ERP Economic Recovery Program operation and Development ESC Economic Services Commission PAC Public Accounts Committee EU European Union PNC/R People’s National Congress/Reform FIAS Foreign Investment Advisory PPP/C People’s Progressive PartyKivic Service PRGF Poverty Reduction and Growth GDP Gross Domestic Product Facility GEM Gender Empowerment PRSC Poverty Reduction Strategy Credit GEMP Guyana Economic Management PRSP Poverty Reduction Strategy Paper Project PSC Private Sector Commission GGMC Guyana Geology and Mines RDC Regional Democratic Council Commission SAA Semi-autonomous Agency GNCB Guyana National Commercial Bank SIMAP Social Impact Amelioration Program Go-Invest Investment Promotion Agency of STD Sexually Transmitted Disease Guyana STEP Skills Training and Employment GPL Guyana Power Limited Program GRA Guyana Revenue Authority UNDP United Nations Development GUYSUCO Guyana Sugar Corporation Program GUYWA Guyana Water Authority USAID United States Agency for HIPC Highly Indebted Poor Country International Development HMC Health Management Committee VAT Value Added Tax I-PRSP Interim Poverty Reduction Strategy WPA Working People’s Alliance Paper WTO World Trade Organization
Vice President David de Ferranti Country Director Caroline D. Anstey Sector Director Ernest0 May Task Team Leader Mustapha Rouis GUYANA DEVELOPMENT POLICY REPORT The Challenges of Governance and Growth
TABLE OF CONTENTS
PREFACE...... i EXECUTIVESUMMARY ...... 11 1. POLITICAL ECONOMY- A CRISIS OF GOVERNANCE...... 1 HISTORICALSE~NG ...... 1 DEADLOCKAND THE CRISIS OF GOVERNANCE...... 1 SHARED GOVERNANCEvs . INCLUSIONARYGOVERNANCE...... 3 BREAKINGTHE DEADLOCK-THEMAY 2003 COMMUNIQUE ...... 3 CRIME AND GOVERNANCEIN GUYANA...... 6 PERCEIVED ROLE OF DONORS...... 7 CONCLUSIONS...... 7 2 . ECONOMICTRANSITION-AN OVERVIEW OF DEVELOPMENTOUTCOMES ...... 9 POLICY AND INSTITUTIONAL REFORM ...... 9 ECONOMICPERFORMANCE-MIXED RESULTS...... 11 FISCALPOLICY AND DEBTSUSTAINABILITY ...... 13 POVERTY REDUCTION AND SOCIAL PERFORMANCE ...... 15 AID EFFECTIVENESSAND AID COORDINATION ...... 17 THE CHALLENGE AHEAD...... 19 3 . IMPROVING PUBLIC SECTOR PERFORMANCE AND GOVERNANCE...... 20 IMPROVINGPUBLIC FINANCIALMANAGEMENT ...... 20 REFORMING THE PUBLIC SERVICE ...... 22 ACCELERATINGJUDICIAL REFORM...... 24 CONCLUSIONS...... 25 4 . INVESTMENT CLIMATE AND GOVERNANCE...... 27 PRIVATE SECTOR PROFILE...... 27 ELIMINATING STATE DISCRETION...... 29 IMPROVINGFINANCIALINTERMEDIATION ...... 31 STRENGTHENING INSTITUTIONALCAPACITY ...... 32 IMPROVINGINFRASTRUCTURE...... 33 5 . INVESTINGIN HUMANDEVELOPMENT ...... 3j SOCIAL WELFAREPERFORMANCE-MIXED RESULTS...... 3j CROSS-SECTORIALCHALLENGES ...... 37 SECTOR-SPECIFIC CHALLENGES ...... 41 CONCLUSIONS...... 44 6 . MEDIUMTERM OUTLOOK-PRODUCTIVITY GAIN AND EXPORTDIVERSIFICATION ...... 46 REVITALIZING AGRICULTURE-SHIFTING TOWARDSMORE COMPETITIVE ACTIVITIES ...... 46 SUSTAINABLE MINING DEVELOPMENT...... 49 IMPROVINGNATURALRESOURCES MANAGEMENT ...... j0 DIVERSIFICATIONFOR FUTUREGROWTH ...... 51 PROSPECTS AND RISKS ...... 52 REFERENCES...... 62 BOXES Box 1.1: REVISING THE 1980 CONSTITUTION...... 4 BOX 1.2: CRIME INCREASE IN GUYANA...... 7 BOX 2.1 : A PROFILE OF POVERTY IN GUYANA...... 16 Box 2.2: AN OVERVIEW ASSESSMENTOF THE PRSP ...... 17 BOX 2.3: EXTERNALFINANCIAL ASSISTANCETO GUYANA,2000-2002 ...... 18 BOX 5.1: HUMANCAPITAL FLIGHTFROM GUYANA...... 39 Box 5.2: INDIGENOUS PEOPLE IN GUYANA...... 42 Box 5.3: POVERTY-REDUCTION AND SAFETY NETPROGRAMS ...... 44
TABLES TABLE 2.1: ECONOMICINDICATORS ...... 11 TABLE 5.1: SELECTED SOCIAL INDICATORS: GUYANAAND COMPARATORS, 2000 ...... 35 TABLE 5.2: SOCIAL SECTOR EXPENDITURES:GUYANA AND REGION, 2000...... 37 TABLE5.3: GUYANA:SELECTED EDUCATIONAND HEALTHINDICATORS, 1999-2003 ...... 37 TABLE 6.1: GUYANA,MEDIUM TERM PROSPECTS...... 54
FIGURES FIGURE2.1: GUYANA:REAL GDP GROWTH(% CHANGE)...... 11 FIGURE2.2: GUYANA:GROSS DOMESTIC INVESTMENT (YO OF GDP) ...... 12 FIGURE 2.3: GUYANA.INFLATION ...... 13 FIGURE2.4: GUYANA,EXTERNAL TRADE ...... 13 FIGURE2.5: GUYANA,REVENUE & EXPENDITURES(% OF GDP) ...... 14 FIGURE 2.6: DONORS’SHARE OF DISBURSEMENTSTO GUYANA, FY2000-2002 ...... 17 FIGURE2.7: DONOR’SSHARE OF DISBURSEMENTSTO GUYANA, FY2000-2002 ...... 18 FIGURE 4.1 : REGULATORY QUALITY ...... 28 FIGURE4.2: RULE OF LAW...... 28 FIGURE 5.1: PRO-POOR GROWTH SPENDING ...... 36 FIGURE6.1: SUGAR CANE: AVERAGEYIELD 1999-2001 ...... 46 FIGURE6.2: RICE, PADDY: AVERAGEYIELD 1999-2001 ...... 48
ANNEXES TABLE1: KEYECONOMIC INDICATORS ...... 66 TABLE2: NATIONALACCOUNTS ...... 68 TABLE3: EXPORTSAND IMPORTS ...... 72 TABLE4: BALANCEOF PAYMENTS ...... 73 TABLE 5: EXTERNALDEBT STOCKS AND FLOWS...... 74 TABLE 6: PUBLIC FINANCE...... 75 TABLE 7: INVESTMENTCLIMATE ...... 76 TABLE 8: VULNERABILITYINDICATORS ...... 76 PREFACE
The main objective of this report-Development Policy Review-is to provide an up-to-date, integrated assessment of Guyana’s development policy agenda, with the main focus on governance, growth and poverty alleviation. The report consists of three parts: assessment of development outcomes (chapter 2), discussion of the development policy agenda (chapters 3-5), and assessment of the medium-term outlook (chapter 6). Chapter 1 discusses some of the key political economy issues that are critical to this review+thnic and political tensions, as well as the surge in crime and violence. The report draws on the extensive wealth of existing analysis (published and unpublished-see bibliography and extensive footnotes), within and outside the World Bank, and highlights the critical areas where further research is needed. The analysis was supplemented by extensive interviews with a wide range of representatives from government ministries and agencies, private sector, research institutions, civil society, the donor community and some MPs of the opposition and ruling parties.
The Bank team consisted of Mustapha Rouis (Team Leader), John Blomquist and Homa Z. Fotouhi (Bank staff); and Ashok Khanna, Hendrik Koppen, Selwyn Ryan and Steven R. Tabor (consultants). The Peer Reviewers were: Edgardo M. Favaro and Auguste Kouame. Others who provided contributions and comments included: Antonella Bassani, Gabriel Castillo, Joelle Dehasse, Lucia Hanmer, Norman Hicks, John Nelmes, Rossana Polastri, Adrienne Pratt, Jyoti Shukla, Loretta Sprissler, and Daniel Wallace. The report was prepared under the overall supervision of Caroline Anstey, Mauricio Carrizosa, and Orsalia Kalantzopoulos.
The Bank team is grateful to all government and non-government officials and others who cooperated with the team during its field work in Georgetown in March 2003. The report was discussed in draft form with government officials in August 2003. Subsequently, additional written comments were received from the government. The draft report found its way to the media and generated extensive coverage. Although the present version of the report reflects, to the extent feasible, most government comments, it does not necessarily represent the official views of the government, particularly with respect to the political economy analysis (Chapter 1).
i EXECUTIVESUMMARY
Guyana is at a crossroads. It could either place. Devolution of centralized government bounce back into high growth, last seen during decision-making is underway, and plans to most of the 1990s, or continue to slide back with address the constraints to human development the risk that too many people would be trapped have been devised. in abject poverty and that the ethnic divide could give way to violent conflict, undermining the The pressing issue now is the implementation of very gains that a decade of economic reform has the remaining reform agenda, which is still brought. The choices depend on whether Guyana large. The PRSP needs to be updated as the would be able to pursue effectively policies of economic situation has since deteriorated, with social cohesiveness and political inclusiveness economic growth rate and government revenue and to improve the investment climate. In the collection much lower than anticipated. Radical long-run, renewed growth will have to come improvement in the business climate, namely from exports, given the small size of the through macroeconomic stability, better domestic market, with private sector leading the governance, and improved social capital and effort. physical infrastructure; diversification of the economic base into high-value, competitive Despite the significant challenges to improved activities; and the restructuring of the traditional governance and economic growth, there has sectors-mining and sugar-are necessary been good implementation progress in several conditions for a better economic outlook. policy areas. In recent months, the Parliamentary deadlock has been resolved, the security Under these conditions, Guyana could achieve a situation in the country improved and the reform growth rate of 3-4 percent per annum during the program-macroeconomic as well as latter part of this decade and could reduce the structural-is back on track. The slippages, poverty incidence to around 30 percent. These which occurred on the macroeconomic front in would be no small achievements, considering 2002/2003, are now being addressed under the that the economy is bound to experience only a recently-approved Poverty Reduction and modest recovery over the next 2-3 years, given, Growth Facility by the IMF. Among the key for instance, the immediate impact of the structural measures adopted in recent months are restructuring of the mining sector and the the amendment of the tax law and of the closure of the Omai gold mine. procurement law and the start of implementation of the sugar restructuring program. Guyana-A Crisis of Governance
These achievements come on top of progress Guyana is a multiracial society, with people of made in other reform areas since the adoption by Indian, African, Chinese and Portuguese descent the Government of the Poverty Reduction and its indigenous peoples. Over 80 percent of Strategy Paper (PRSP) in 2001. This includes its population of some 770,000 persons are of reforms in the social sectors, in the water sector, African (33 percent) and Indian (48 percent) and in the monitoring and evaluation system provenience. The two dominant ethnic (with pro-poor growth spending on the rise and a communities have been jostling for economic, poverty expenditure tracking system put in social, and political power and status for over place). Privatization of utility companies-at half a century. The focus on ethnic security and least at the management level-has a more survival by political parties that count their mixed record with good progress in the water constituency as primarily peoples of African sector but set-backs in the electricity sector, descent (PNC/R) or Indian descent (PPP/C) has which has recently been taken back into consumed a great deal of political, government ownership. Plans to improve the administrative, and judicial time and energy, management of the public sector are also in with the result that little was left to undertake the
11 many policies necessary to facilitate growth and sustained, and that the parties use the new development, or to fight corruption and crime measures as platforms for confidence building. which have now become deeply embedded. This is vital. Guyana’s ethnically polarized political system constrains governance reform in three key Economic Outcomes and Prospects dimensions: it gridlocks the mechanics of parliamentary decision-making; it undermines At Independence in 1966, Guyana had the respect for the rule of law by allowing potential to be transformed from a low-income considerations of ethnicity and party affiliation commodity exporter into a prosperous gateway to take precedence over impartial treatment by linking North America, South America and the the state; and it erodes social capital. Caribbean. But this was not to be. Cooperative socialism was introduced from 1966 to the late Nowhere is the crisis of governance more 1980s. While initially, in the 1960s and 1970s, evident than in the area of security. In the last growth and development advanced, by the late two years, Guyana’s crime problem has 1980s the policies had a devastating impact on worsened significantly, to the point where some the economy and social welfare: output Guyanese claim that the rule of law and the plummeted (-3.5 percent per annum during the security and judicial systems have almost 1980s), living standards collapsed, the quality of completely collapsed. While it is difficult to social services eroded and infrastructure determine the root cause of the escalation of deteriorated. By 1988, Guyana could no longer crime in Guyana, it is certain that the service its external debts. deterioration in the security situation has discouraged investment, severely compromised The 1989 Economic Recovery Program (EFW) good governance, and fueled migration. The marked the beginning of Guyana’s transition crisis of governance is also evident in the from a socialist regime to a market economy and continuing disagreement as to what political a democratic system. Substantial progress on model (the “winner takes all” vs. consensual the reform agenda has been made since then: paradigm) is most suitable for Guyana’s price controls were eliminated, import demographic circumstances and historical prohibitions abolished, exchange rates unified experiences. and floated, the tariff structure simplified and rates reduced, market-based interest rates Agreements reached between the Government established, and some 38 state-owned and the major party of the Opposition (PNC/R) enterprises were privatized or placed under as a result of efforts to resolve the crisis private management. This resulted in higher brokered by the Heads of State of the Caribbean growth (averaging 7.1 percent per annum during Community in the late 1990s, have been slow to 1991-97) and lower poverty headcount (falling deliver concrete results. However, in May 2003, from 43 percent in 1992 to 35 percent in 1999). the Government and the PNC/R issued a Communique‘ whereby both parties agreed to Since 1998, the policy reform momentum has accelerate the implementation of the slowed down because of a host of factors. constitutional and parliamentary reforms that Unlike the first-generation of transition reforms, had been previously agreed upon. transforming public institutions and practices is a more difficult and contentious process. Since May 2003 the Government and the Moreover, adverse movement in the terms of Opposition have been working together to trade, the El Niiio drought, elections, civil implement the Communique’ and as of disturbances, criminality and labor unrest September significant progress had been made, weakened the authorities’ resolve to reform. In which suggests that both parties have taken their some areas, such as privatization and fiscal responsibilities with respect to improved discipline, previous reforms have started to governance seriously. This augurs well for the unravel. As a result, the economy has been future providing, of course, that the trust is moving side-ways, with economic growth
... 111 averaging only 0.7 percent per annum between Revitalizing agriculture. Agriculture employs 1998 and 2002. 70 percent of the population and accounts for one-third of GDP and nearly half of merchandise Fiscal and debt sustainability. In-spite of the exports. Weak support services, deterioration of substantial fiscal achievements under the ERP, the drainage and irrigation facilities, high cost fiscal sustainability remains a concern. Since farm-to-market infrastructure and insecure land the late 1990s, there has been a serious fiscal tenure are amongst the key impediments to erosion, with public sector spending agricultural growth. The sugar sector-a major expenditures rising by 10 percentage points of activity which has seen recently some GDP, after having fallen by twice as much improvement in terms of yields and during the 1990s. Much of the rise can be production-faces tremendous challenges: the explained by a fifty percent increase in the wage uncertain access to preferential European bill and a four-fold increase in subsidies (for the markets, low and declining world prices, and bauxite and sugar sectors). The Government antiquated factories. The state-owned sugar acknowledges that public spending must be company’s plan for the restructuring of the sugar substantially reduced if macroeconomic stability industry is a step in the right direction. In the is to be maintained and scope is to be created for long-run, assuming that the sector becomes private initiative. The Poverty Reduction competitive-which is a big challenge-cane Strategy Paper (PRSP) calls for a reduction of producers will need to share in both production ten percentage points to about 36 percent of risks and returns, if the sugar sector is to be an GDP by the year 2010. engine of rural development and poverty reduction. This has been done in Thailand and In-spite of substantial debt relief under the Malaysia, for instance, where state-owned Highly Indebted Poor Country (HIPC) initiative, plantations were transformed into smallholder- Guyana’s external debt position remains cooperatives and smallholder-owned limited vulnerable to external shocks because of liability companies. volatility in export commodity prices and uncertainties about access to preferential export Similar to sugar, Guyana has had recourse to markets for sugar and rice. preferential market access for rice in the European Union, where prices have ranged from It is estimated that at the end of 2003, after debt two to three times the world market level. relief under the enhanced HIPC assistance and Given that rice production is highly labor after completion point, NPV of debt to revenue intensive and wages in Guyana are four to five would stand at 215 percent (compared to the E- times that in the low-cost Asian states, the long- HIPC benchmark of 250 percent) and NPV of term competitiveness of this activity is debt to exports at 75 percent (compared E-HIPC questionable. The main immediate challenges benchmark of 150 percent). Both ratios are facing the rice sub-sector include the need to below the projected figures at the decision point. strengthen research and extension services, At present, progress towards the E-HIPC rehabilitate drainage and irrigation completion point is far advanced. infrastructure, resolve mounting credit arrears and improve the quality of exports. With an end Debt management remains a concern, with to preferential market access approaching, domestic and foreign debt managed diversification into crops that can be produced independently. Domestic debt, in the form of more competitively for export is warranted. treasury bills and debentures, stood at 7 1 percent Guyana produces a wide variety of fruits, of GDP at the end of 2002. Guyana’s domestic vegetable and other crops, many of which, if debt could become an important source of grown with modern technology, have better vulnerability, unless addressed by the global market prospects than rice and sugar. Government. The prospect in forestry is encouraging, provided that appropriate environmental measures are put in place.
iv Restructuring the mining sector. Guyana has a Promoting the Investment Climate substantial mining potential. At present, mining activities are concentrated on bauxite, gold and Good progress has been made in recent years in diamonds. Guyana’s bauxite deposits yield high- improving Guyana’s economic policy regime. quality bauxite used for the refractory, abrasive The Government has recently taken important and chemical markets. In the 1960s, Guyana steps to improve the business climate. It supplied nearly three-quarters of global demand introduced a series of fiscal reforms, submitted a for these products and alumina. Since then, revised investment law to Parliament and Guyana has lost market share as new adopted a new public sector procurement law. competitors (Brazil and China) entered the refractory market with a lower priced and But, there are still important issues-policy as superior quality product. Efforts to restructure well as implementation-which are not and privatize the distressed bauxite mines are conducive to private sector development and underway. With restructuring and identification impede Guyana’s competitiveness within and of alternative markets, Guyana’s total outside the region. The fiscal incentives are production of metallurgic and non-metallurgic often discretionary, and there is no level playing bauxite could increase by 25 percent over the field. Many licenses are required to start up and next five years. The largest existing gold mine is operate a business, and they are difficult to expected to be exhausted by 2005. In the case of obtain and renew. Impediments to clearing diamonds, most of what is now produced are goods through customs and irregularities in alluvial, industrial grade diamonds. Increasing public procurement continue. The legal and output will require either chemical treatment to judicial systems are cumbersome and subject to raise recovery rates (which poses environmental a large degree of discretion. Infrastructure is a risks) or new investment in larger-scale mines. serious bottleneck: Guyana lacks a deep-water If the Government introduces reforms that port, its road system is deficient, electric power encourage greater private investment in is unreliable and expensive, and sustainable mining, gold production could climb telecommunications services are limited. back to its current level by 2010 and diamond Qualified workers and managers are scarce production could rise by at least 30 percent over because of emigration. The main problem for the next five years. business investors is the perception of physical risk resulting from riots in Georgetown. Environmental Framework Improving Public Sector Management and Given Guyana’s natural resources’ endowments Governance (agriculture, forestry, mining and water) and the central role of their exploitation for the country’s Widespread dissatisfaction with the provision of economic development, any sustainable public services have focused attention on the development strategy will require a broader quality of governance, in particular on three key environmental framework that combines aspects: financial management, public service environmental, economic, and social concerns. reform, and judicial reform. Given the large Such a framework should include policies and share of public spending in GDP, successful institutions regulating user rights and obligations development depends greatly on how well in exploiting the country’s natural resources and public funds are used, as well as on a better protecting areas for conservation. The balance between public and private Government is committed to addressing expenditures. The expenditure management environmental issues, as spelled out in its recent process is in need of major improvement. National Environmental Action Plan, but there is Considerable technical assistance has been, and a need for a more focused and consistent continues to be, provided, but capacity approach to these issues. constraints and poor govemance limit its impact. While progress is being made in strengthening external audit and procurement, reform of the
V budget and accounting systems is expected to Investing in Human Development take time to implement. Improvements that could be made in the near future include timely The long-term goal of reducing poverty in approval of the budget; greater fiscal Guyana depends on the success of its human transparency on the part of a growing number of capital development. This recognition is at the semi-autonomous agencies; reduction in the core of both the National Development Strategy discretionary power of Government officials; (NDS) and the PRSP. Guyana’s key social and adoption of the audit act and the indicators have improved since the launching of procurement regulations. the Economic Reform Program in the late 1980s. Yet basic indicators remain significantly below Despite large court-enforced civil service wage those of most other countries in Latin America increases in 1999 and 2000, which led to sharp and the Caribbean. Many of the challenges to rises in the wage bill-nearly doubling as a human development and service provision have share of GDP-and a hiring freeze, pay levels long been recognized by Government and and differentiation in the public sector are stakeholders. They are largely inter-related and insufficient to retain skilled staff. The pensions include the following: the retention of qualified database has been improved, a payroll audit has staff at all levels; the strengthening of planning, been completed, and a series of institutional and budgeting and monitoring processes at the organizational capacity assessments are central line ministries; the formalization of underway to assist in the design of a public functional roles of local government and service sector modemization program. However, to agencies; and the clarification of the role of civil attract qualified staff, the overall size and society, private sector, and NGOs in the delivery structure of the public sector, and the and monitoring of social services within a compensation system, will have to be examined devolved policy environment. The burden on within the constraints imposed by the budget and public social programs is likely to grow with the what is considered an affordable wage bill. An restructuring of traditional industries, effective working relationship with the unions necessitating greater reliance on short-term will be crucial for this to be achieved. social protection interventions.
Decision-making is highly centralized, with In addition to these cross-sectoral challenges, most decisions, which could be expected to be there are a number of sector-specific challenges made at lower levels (individual ministers or which need to be addressed. In health, a major departments), being instead made by the priority is the consolidation of management and Presidency. Responsibility and accountability service delivery reforms. In education, priorities for decisions need to be devolved to appropriate include teacher training and retention, levels of Government. The justice system availability of books and school supplies, and suffers from long delays and a serious backlog accessibility and affordability of school of cases, and there is concern about the quality attendance. In social protection, the system of judicial decisions. There are not enough would benefit from consolidation of programs, judges, those who are there are poorly trained better integration and coordination of programs and equipped, and judicial procedures are often across ministries, and improved benefits. cumbersome. Addressing all these issues is a Priorities in the water and sanitation sectors matter of urgency, so as to improve the social should be first infrastructure rehabilitation and and economic environment. Recent steps in maintenance, and rationalization of existing reviewing the criminal justice system and facilities; and second expansion of water and exploring the use of Alternative Dispute sanitation access to rural communities. The Resolution methods are steps in the right housing difficulties can be largely attributed to direction. outmoded laws and procedures which need to be addressed.
vi The Amerindians, who make up about 8 percent The attached matrix presents an agenda of key of the population, are especially vulnerable, with policy reforms that can help to propel Guyana 80 percent falling below the poverty line. back onto a pathway of higher economic growth Although Amerindian communities are and poverty reduction. The agenda is neither integrated to some degree into the cash complete nor comprehensive. Progress on the economy, the majority still engage largely in items listed will require: subsistence activities and thus depend on the First and foremost, resolution of the political natural resources of their immediate and ethnic divide that fosters lawlessness, environment (agriculture, forestry, mining) instability and uncertainty. The agreements which are under environmental threat. The reached between the Government and Government has implemented some programs Opposition party in May this year are aimed at reducing poverty among the important steps in improving governance, Amerindian communities through improving and progress in their implementation needs access to employment opportunities and to be deepened and sustained; enhancing the delivery of basic services. It has An in-depth analysis of the causes and also undertaken a program of institutional impact of the crime situation in Guyana, reforms to address the issues of economic and though the security situation has improved social development among the Amerindians, including the establishment of the Ministry of in recent months. The study should lead to an action to enhance the capacity of the Amerindian Affairs. However, the Government plan security services with the aim of improving has yet to elaborate a comprehensive strategy for the security environment in the country; and fully addressing Amerindian concerns, notably access to land, environmental degradation, and National courage and conviction to ensure economic empowerment. that difficult reforms are implemented effectively and in a timely manner. High on Development Policy Agenda the agenda are reforms to improve public sector management, the investment climate Guyana is a country heavily studied and most and human development, and to foster issues are well known. What is urgently needed, economic diversification. Notwithstanding however, is the full and speedy implementation the need to restructure the traditional of the recommendations of the various studies sectors, Guyana needs to move urgently into such as the country financial accountability a new strategic direction-one that assessment, country procurement assessment, emphasizes private sector development and taxation study, sugar sector study, and public economic diversification. sector modernization work. In-spite of the extensive economic and sector work on Guyana, The proposed reform agenda is pro-poor growth, there is still a knowledge gap in some critical which is consistent with the thrust of both the areas such as in the role of central and local PRSP and the HIPC Initiative. It consists governments in the delivery of social services, largely of policy actions which have proven to the functioning and performance of semi- be effective (based on a wide body of cross- autonomous agencies, the impact of emigration countries’ empirical research) in promoting on the economy, audit of the judicial system, growth and reducing poverty, namely and the causes and impacts of the crime situation macroeconomic stability, investment in human in the country. In addition, project feasibility capital, institutional reform, and governance. studies need to be undertaken to shed light on Given the current challenges in the political and the merit of strategic investment in security climate in the country, it is also infrastructure: such as a deep-sea port, a road to expected that improvements in these two areas Brazil, and an export processing zone. will have major impact on growth and poverty.
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Y 1. POLITICAL ECONOMY- A CRISIS OF GOVERNANCE
Historical Setting
1.1 Guyana is located on the northern coast of South America, and is the only English speaking country on that continent. It is bounded on the north by the Atlantic Ocean, on the east by Suriname, on the south and south west by Brazil, and on the north and west by Venezuela. Ethnically, Guyana is a multiracial society, with people of Indian, African, Portuguese and Chinese descent and its indigenous peoples. Over eighty percent of its population of some 770,000 persons is of African and Indian provenience. The Indo-Guyanese, who are in the majority, constitute some 48 percent of the population, live largely in the rural areas, and are associated with the sugar and the rice sectors. The Afro-Guyanese account for some 33 percent, live largely in the urban areas and are associated with the civil service and the mining sector. The indigenous Amerindian population is estimated to be 8 per cent while the mixed, white, and “other” groups together account for the remaining 11 per cent. In the absence of up to date census data (a census is currently being processed), and given very substantial migration, these figures are at best guesstimates.
1.2 Guyana achieved self-government in 1953 and won its independence in 1966 under the leadership of the People’s National Congress (PNC), one of Guyana’s two major political parties. The other major political party, the People’s Progressive Party/Civic (PPP/C), from its very beginning, sought to unite the two major racial groups in the society. Its success in achieving this goal was short lived. A traumatic and painful split along ethnic and ideological lines occurred in 1955. The failure of that experiment in political unity continues to cast its shadows on politics in contemporary Guyana.’
1.3 Prior to and following upon Independence, the two largest ethnic communities jostled for economic, social, and political power. Each group wanted to be “on top” and to gain advantage and maintain paramountcy. Ethnic security was deemed an imperative, seemingly even more important than economic well being. The strategies used over the succeeding 50 years to achieve ethnic dominance included, inter alia, constitutional engineering, executive aggrandizement, parliamentary marginalization, boycotts of parliament, patrimonial resource allocation, ideological posturing, and politicization of bureaucratic appointments. The focus on ethnic security, survival, and competitive prestige consumed a great deal of political, administrative, and judicial time and energy, with the result that little was left to undertake the many policies that were necessary to facilitate growth and development, or to discourage corruption and crime which have now become deeply embedded.’
Deadlock and the Crisis of Governance
1.4 The PPP/C came to power in 1992 in what were generally regarded as free and fair elections. Despite the fact that the ruling party enjoys majority control of the legislative and executive branches, the political system has been characterized by deadlock. This is in part due to the fact that the Afro- Guyanese, who are the main supporters of the opposition PNC, are dominant in the public sector generally, and in the police and defense forces in particular. By virtue of its control of the capital city Georgetown, the Opposition also frequently paralyses the city to further its political agenda. The ruling party has often complained that it lacks effective political space and that many critical decisions which it makes are routinely perceived as being driven by racial or party considerations, and not by concern for the national interest. Policy decisions are thus routinely delayed or deferred, and the Government is regarded by supporters and detractors alike as being irre~olute.~The main opposition party, the PNC/R is also politically risk averse and fearful of taking decisions which might alienate either its militants or its middle class supporters. Decision avoidance has thus become both a strategy and a tactic. In sum, both parties
1 find it difficult at crucial times to accept the political costs of doing what is right or necessary in the national interest.
1.5 National surveys indicate that most of Guyana’s political and state institutions lack cross ethnic legitima~y.~Civil society groups are also ethnically typed and accused of being politically partisan. The suspicion as to motive and bona-fides serves to disempower and inhibit their involvement in social action. Civil society groups also show reluctance to become involved in the political process. Efforts to reform state bodies, whether by constitutional restructuring, or by administrative or judicial improvement have had their effectiveness undermined. Efforts have been frustrated in part because each group looks at what is proposed in terms of zero sum outcomes, rather than in terms of “win-win” alternatives.
1.6 The political environment and the political culture are deeply rooted in the past. The PPP often complains about its past marginalization, especially the years 1964-92, during which it was forced to languish in opposition in spite of the fact that it represented the largest group in the society. The PNC is seen by Indo-Guyanese and even some Afro-Guyanese who support the Working Peoples Alliance (WPA) as a symbolic enemy, and deemed to be an inappropriate party with which government cannot be shared. The PNC, for its part, often seeks to delegitimise the PPP and questions its capacity for good governance as stated repeatedly in its press releases. It has endorsed the “shared governance” concept, but has made it clear that it believes the formula would only work if the PNC was the hegemonic party. In the view of its leaders, power must be re-won. Groups in civil society and small parties such as the WPA that seek to follow a “third way”, complain that both major parties use strategies and modes of communication that polarize the society. Both are charged with playing the “race card” when ne~essary.~
1.7 At the local level there are several issues that need to be addressed in order for the local government system to be more responsive to the needs of local communities. Most importantly, local government elections have not been held since 1994. The Local Government Reform Task Force, a bi- partisan body established by the leaders of the PNC-R and PPP/C to make recommendations for a revised local government electoral and administrative systems consistent with the 200 1 Constitutional Reform, has not yet presented its recommendations to the leaders of the two parties. The submission and acceptance of the recommendations of the task force by the two leaders are required before the new electoral legislation is drafted and approved.
1.8 The Guyana Poverty Reduction Strategy Paper (PRSP, 2001) recognized poor governance as one of the key constraints to the achievement of poverty reduction, and it listed five main indices of poor governance. These were: (i)poor performance of the Regional Democratic Councils (RDC) and Neighborhood Democratic Councils (NDC); (ii)insecurity and inadequate access to justice; (iii)corruption and lack of accountability; (iv) discrimination; and (v) insufficient attention to decentralization. The National Development Strategy (200 1-20 10) also makes the point that ”there can be little lasting and sustainable social and economic development in the absence of good governance. This is true for all societies, [but] especially so for multi-racial societies such as Guyana in which fixations with ethnic origins often transcend policies, plans, strategies and performance.”6
1.9 Guyana’s contemporary crisis is in a profound sense, a crisis of governance. The social and economic problems facing the country, and its inability to develop its fabled resource potential, is in the final analysis, the result of political factors which are deeply embedded in, and driven by the country’s demographic realities and historical experiences. The crisis is also due to the failure of the post- independence political class to do the things necessary to transcend that historical and demographic inheritance.’
2 Shared Governance vs. Inclusionary Governance
1.10 Guyana's political system is a hybrid that combines elements of both the Westminster and the Philadelphia models.* For one thing, its current electoral system does not take a first-past-the-post form, but rather is a mixed version of proportional representation in which 40 seats are deemed national and 25 are deemed regional. A third of all the candidates nominated must be female. The introduction of geographic representation for the 2001 election was a response to complaints that in a system which regarded the whole country as one constituency with a national list, no national parliamentarian was responsible for any particular region. As a result, there was no member of parliament to whom constituents could turn if they had a problem. It should also be noted that, unlike in other Caribbean states where the Head of State is ceremonial, Guyana has an elected President who has extensive executive powers.
1.11 The crisis of governance is evident in the continuing disagreement as to what political model is most germane to Guyana's demographic circumstances and its historical experiences.' There is continuing controversy as to whether the "winner takes all'' Westminster model should be retained as the operating paradigm, or whether it should be replaced by a more consensual paradigm. The PPP/C insists strongly that the basics of the Westminster model should be retained, albeit with arrangements which would enhance the power of the National Assembly, while the PNC has argued with equal vehemence for executive power sharing which it sees as the only formula that would ensure ethnic security and genuine inclusiveness. The advocates of executive power sharing argue that the "winner-takes-all" formula is exclusionary and undemocratic, and that Guyana's chance of achieving stability and good governance will only come when all groups in the society feel that they are equitably represented in the power relations of the state. At issue here is not only symbolic representation which is deemed to be critically important, but economic and political security as well. For this group, the alternative to power sharing is persistent conflict, state failure, and political collapse.''
1.12 Those who oppose executive power sharing claim that it will divide and polarize the country even more. They also argue that it will institutionalize political horse trading which would in turn obscure transparency, inhibit accountability, and increase corruption since political power will be monopolized by an "elite cartel". The consensual system, which is currently in place in neighboring Suriname, frustrates reform minded groups in civil society as well as out parties who have no alternative but to seek to outbid those within the cartel. Executive power sharing is thus seen to be contrary to the norms of Caribbean democracy which is patterned on the British model which assumes a government and an adversarial opposition operating inside the parliament.
1.13 The PPP is opposed to power sharing because of the negative consequences said to be associated with it, including the institutionalization of ethnic rivalry and the absence of political opposition. It also argues that "no continued system of governance will succeed in a situation where trust and good faith do not exist between the political parties." Some observers argue that the PPP fears that concessions to the PNC would be regarded by its supporters as appeasement and a sign of weakness."
Breaking the Deadlock-The May 2003 Communiquk
1.14 The existence of a crisis of governance in Guyana is recognized and acknowledged by almost all political parties and civil society groups in the country. Under pressure from indigenous and international stakeholders, the leaders of the ruling PPP/C and the opposition PNC/R met during the early months of 2003 and signed off on a complex of constitutional and political arrangements which served to break the parliamentary deadlock which had characterized Guyana's political process for close to 14 months. In a Communique' dated May 6", 2003, the President and the Leader of the Opposition indicated that they had held constructive discussions in an atmosphere of seriousness born of their recognition of the need to find
3 “immediate solutions to problems which go to the heart of Guyana’s socio-economic and political development.” They also indicated that they had made firm commitments to a timetable for the expeditious implementation of the agreed solutions.’*
4 1.15 The Leaders reached agreement on the composition and terms of conditions of operation for the various parliamentary committees and commissions which had previously been agreed to in principle as part of the constitutional review exercise (see box 1.1). The Constitutional reform was the outcome of the Herdmanston Accord of 1997 and the St. Lucia Statement of July 1998, both of which had been brokered by Heads of Government of the Caribbean Community (CARICOM) in the wake of the PNC/R’s refusal to accept the results of the 1997 General Election.
1.16 Among the decisions which were formally announced in the CommuniquC were the following:
0 The creation of seven new standing committees of the National Assembly which brought to twelve the number of functional committees on the Assembly’s establishment;
0 The establishment of a Parliamentary Management Committee, the critical need for which had been agreed to by the St. Lucia Statement;
0 The establishment of four sector committees that would monitor the key policy areas of foreign relations, natural resources, economic services and social services. The committees were to consist of 7 members, of whom 4 would be members of the PPP/C and 3 of the PNC/R. The chairmanships of the committees were to be shared equally by the two major parties and were to rotate every two years;
0 Agreement on the composition and terms of appointment of the Constitution Reform Committee. This parliamentary Committee was to be mandated to keep the Constitution under on-going review and reform in order to strengthen and deepen the democratic process;
0 The undertaking of steps to provide the necessary financial, human, administrative and physical resources, within the capacity of the National Treasury, to allow for the effective functioning of the National Assembly and its various policy and managerial committees. Given the increased workload of parliamentarians, their remuneration package was to be reviewed;
0 The immediate implementation of steps to have the various Constitutional Commissions appointed, including the Judicial, Public Service, and Police Service Commissions, as well as the Public Procurement, Human Rights and Ethnic Relations Commission and its Tribunal. It was also promised that the controversial Public Procurement Act No. 6 of 2002 would be amended, and that the new Act would be reviewed by the Public Procurement Commission following its appointment;
0 The appointment of a Disciplined Forces Commission by the President after consultation with the Leader of the Opposition. The terms and conditions of the Commission would include, inter alia, an examination of the ethnic composition of the Discipline Forces, and would give priority to the operations of the Guyana Police Force. That inquiry was to be completed within 3 months of its commencement; and
0 The establishment of adequate provisions for the effective functioning of the Constitutional office of the Leader of the Opposition.
1.17 In addition to these long outstanding constitutional and political matters, the two leaders also resolved to implement those decisions that had previously been agreed to by the bi-partisan “dialogue” committees which had been appointed following the 2001 election by President Jagdeo and the late Leader of the Opposition, Desmond Hoyte. That dialogue process had collapsed in March 2002, amidst charges and counter charges of failure to implement decisions agreed upon, and had prompted the PNCR to walk out of the National Assembly and boycott its proceedings for 14 months. The committees had dealt, inter alia, with the allocation and distribution of house lots, local government reform, the needs of
5 depressed communities, the state radio monopoly, border and national security issues, the resuscitation of the bauxite industry, and the membership of state boards, commissions, and committees. Ominously, the vexed question of the politicisation of the Public Service was deferred. The President and the Leader of the Opposition also agreed that the PPP's paper, Towards Inclusive Governance in Guyana (2002) would be discussed and dealt with at a subsequent meeting.
1.18 Since May 2003 the Government and the Opposition have been working together to implement the CommuniquC and in September 2003 the high representatives of both parties reported to a stakeholders group on what had been achieved to date. As of September significant progress had been made, which suggests that both parties have taken their responsibilities in respect of improved governance seri~usly.'~This augurs well for the future providing of course that the trust is sustained, and that the parties use the new measures as platforms for confidence building. The measures should be given a chance to work before any further installments of power sharing are contemplated. It seems certain, however, that elements within the PNC will continue to make demands for power sharing at the executive level and that the PPP will continue to resist such demands. The PNC is aware that voting in Guyana is akin to a racial census and that ethnic support for the two main parties is virtually automatic. Given the numerical dominance of the Indo-population and the PPP/C, the Opposition sees itself as being likely to be permanently excluded from the comdors of power.
Crime and Governance in Guyana
1.19 Perhaps nowhere is the crisis of governance more evident than in the area of security for life and property. In the last two years, Guyana's crime problem has become worse than it ever was, to the point where many believe that the rule of law, and the security and judicial systems have almost completely collapsed. Confidence in the army (GDF), the police (GPF), and the judiciary have largely evaporated. In the past, the GPF, which traditionally drew close to 90 percent of its recruits from the Afro-Guyanese population, was feared by the Indo-Guyanese. Most of the complaints about police brutality and "extra- judicial killings" (Le., people being shot by the policy or dying while held in c~stody)'~now emanate from the Afro-Guyanese population, which accuses the Government of having created an elite Tactical Special Squad (TSS) within the GPF which is engaged in illegal activities and uses excessive force. The TSS is also accused of targeting political opponents of the ruling party.
1.20 Each group views the crime problem through ethnic or political lenses. Afro-Guyanese claim that they are the principal victims of extra-judicial killings. The Indo-Guyanese, for their part, claim that they are the ones who are robbed, beaten, kidnapped and killed.I5 Spokespersons for the Indo-Guyanese community blame a weak Government for the crisis, as well as the PNC which they accuse of protecting and glorifying petty criminals who pose as "resistance fighters." The Government denies that the TSS is either ethnically or politically partisan, and charge the PNC with seeking to demoralize the police service and to undermine public confidence in its performance and professionalism.
1.21 The problem of crime is complex and many sided, and different explanations are offered by analysts depending on their political and ethnic affiliation (see box 1.2). It is widely recognized that the crime problem is extremely critical and has served to destabilize the society and the political system in general, and the economy in particular. It generates fear and anxiety, fuels migration, discourages long gestation investment needed to reinvigorate the economy, and severely compromises good governance. Although the security situation, including in the village of Buxton,I6 has improved in recent months, an in-depth analysis of the causes and impact of the crime situation in Guyana is still needed. The study should lead to an action plan to enhance the capacity of the security services with the aim of improving the security environment in the country.
6 Perceived Role of Donors
1.22 There is an ongoing discussion as to the role currently being played by bilateral and multilateral lending and donor agencies. There is a view within opposition circles that much of the aid and concessional loans that are channeled to Guyana are not properly used and accounted for. Donor agencies were also criticized by groups in civil society for seemingly not doing enough to bring pressure to bear on Guyana's political parties to get them to end the political impasse which was contributing to the "crisis of governance" which Guyana is currently experiencing. Members of the WPA and the PNC have called upon donor countries and multilateral financial institutions: (i)to stop bankrolling the ruling party unless it takes steps to reform itself and the procedures it uses, particularly in the area of public procurement, financial management and accounting, and the use of discretionary powers exercised selectively by public officials for personal and political enhancement; and (ii)to ensure that agreements or protocols entered into with donor agencies are shared fully with the parliamentary parties, and are made available for timely debate in the National Assembly and by the public.
1.23 While many agree that the Government of Guyana has not fulfilled donors' expectations, they also recognize that sanctions involving the cessation of aid or concessionary funding under the PRSP will have a negative impact on development efforts in the country and the welfare of its people. Close to half of the funds which Guyana needs to close gaps in its budget comes from concessional funding, and great hardships would ensue if such funding were not forthcoming. Poverty reduction programs and vital humanitarian services would be sharply impaired. Also, many infrastructure projects such as building roads and bridges, or repairing sea wall defenses would have to be curtailed or abandoned.
1.24 Donors could, through increased collaboration both among themselves and with the authorities, ensure that the Government of Guyana delivers on commitments made in respect of the PRSP for which it can reasonably be held responsible. The Opposition and stakeholders in civil society have a role in the good governance process, and need to be better informed about what contractual agreements the Government of Guyana undertakes in the name of the people, as is constitutionally required by terms of Article 13 of the revised Constitution. The donors could also help the government to enhance the capability of the security services with the aim of reducing the incidence of extra-judicial, inter-ethnic, and drug related killings. Some Government programs are already underway with the help of the British government which is providing training and new equipment for the GPF and the GDF which seem to be having a positive effect on the crime situation. Conclusions
1.25 In 1992, Guyana, with the help of the regional and international community, opted for political reform. Free and fair elections were held in that year and initiatives, which were begun in the eighties under the PNC to liberalize the economy, were continued. There followed a period of dynamic economic recovery and growth. Economic growth has since slowed considerably, and the consolidation of political democracy which many expected has not materialized. Indeed, Guyana is once more at a tipping point,
7 and could either go backwards or begin anew the long-march to improved governance and economic recovery. The recent agreements between the government and the opposition are encouraging steps. However, unless they are sustainably implemented, Guyana’s political, social and economic situation could be further undermined.
1.26 The Government of Guyana may consider, inter alia, taking the initiative to:
0 ensure that the agreements entered into to resolve the parliamentary deadlock are fully implemented and that the issues which undermine ethnic trust are addressed;
0 ensure that, by the next local and general elections, the Elections Commission has the capacity and is equipped to conduct free and fair elections at the local and national levels and to count the ballots expeditiously. This will entail expeditious completion of the Local Government Task Force work so that the new electoral legislation can be approved by parliament in a timely manner;
0 ensure that members of the National Assembly and civil society in general are informed about the commitments being contemplated or negotiated with donor countries and agencies in order to allow for timely debate and discussion as is constitutionally required; and
0 while the security environment has improved, there is need to continue to enhance the capability of the security services with the aim of reducing the incidence of crime and violence.
8 2. ECONOMICTRANSITION-AN OVERVIEW OF DEVELOPMENT OUTCOMES
2.1 At Independence, Guyana's economy was dominated by a narrow range of export commodities - sugar, rice and bauxite - whose production and marketing was in the hands of a small number of foreign-managed enterprises. Natural resources were abundant, economic infrastructure well-developed, and the population enjoyed access to adequate social services. Guyana had the potential to be transformed from a low-income commodity exporter into a prosperous gateway linking North America, South America and the Caribbean.
2.2 But this was not to be. In the run-up to Independence, Guyana's two main political parties championed state socialism, ostensibly to liberate the economy from foreign influence. Under the PNC rule, cooperative socialism was introduced from 1966 to the late 1980s. Price and exchange controls were established; large enterprises, the media and the banks were nationalized; ownership of almost all land was retained by the state; financial markets were repressed; public debt piled-up; and what little private enterprise remained was subject to punitive taxation, over-regulation and vicarious treatment by the authorities. By 1988, the Government controlled over 80 percent of all external trade and accounted for more than 85 percent of all investment.
2.3 The economic reaction was predictable: output plummeted and living standards collapsed. Despite generous flows of foreign assistance, per capita income fell from US$786 in 1966 to US$350 in 1988, amongst the lowest in the Caribbean." With production incentives blunted by an over-valued exchange rate, exports tumbled from US$410 million in 1980 to US$262 million in 1985. Economic infrastructure deteriorated and the quality of social services eroded". A steadily increasing flow of well- trained Guyanese emigrated to North America, the United Kingdom and the rest of the Caribbean, depleting the human capital of both the public and the private sectors. Perhaps most telling is the fact that infant mortality rose by 17 percent between 1978 and 1988, a decade in which Latin America and the Caribbean registered double-digit improvement in infant mortality levels. By 1988, Guyana could no longer service its external debts.
Policy and Institutional Reform
2.4 Economic Recovery Program (1989). The ERP marked the beginning of Guyana's transition from a socialist to a democratic, market economy. Backed by substantial external technical and financial support, implementation of the ERP during 1989-1993 eliminated virtually all price controls, abolished import prohibitions, unified and floated the exchange rate, simplified the tariff structure, simplified and reduced external tariffs, and established market-based interest rates. In addition, Guyana joined the World Trade Organization in 1995. Between 1990 and 1998, the Government launched an ambitious privatization program. Some thirty-eight financial institutions, utilities and commercial enterprises were privatized or placed under private management during these years. Thanks to privatization and a freeze on recruitment, public sector staffing was reduced from 56,000 to nearly 3 1,000 persons and government borrowing from the domestic banking system declined.
2.5 Since 1998, the policy reform focus has shifted to building the institutional foundations of a market economy.20 In the financial sector, the Bank of Guyana was re-capitalized and made more independent, allowing it to stem its losses and improve the use of indirect monetary management instruments. Supervision of the financial system was strengthened, a Money Laundering Prevention Act was passed and the largest public bank-the Guyana National Cooperative Bank-was restructured and sold in 2003. In the area of public finance, a new Revenue Authority was made operational, and various measures were taken to strengthen tax administration and revenue collection. Cost recovery measures for
9 drinking water and health services were introduced and the first phase of the CARICOM Common Extemal Tariff (CET) was implemented by reducing the maximum import duty to 20 percent, with a top rate of 40 percent for agricultural items. Various implementing agencies were delinked from policy ministries and provided greater operational autonomy.*’ As discussed in the next chapter, some reforms have been introduced in the budgetary process and the civil service. Guyana Airways, the Guyana Electricity Company, the state-owned pharmaceutical company, and Guyana Stores were privatized in 1999-2000.
2.6 Consultative, participatory planning has served to guide post-1997 reform. A National Development Strategy (NDS), prepared by some 23 technical working groups was launched in January 1997. Within the framework established by the comprehensive NDS, Guyana’s Interim Poverty Reduction Strategy (I-PRSP) was formulated in 1999, and after intensive public consultation and refinement, a full PRSP was completed in 2002. The NDS and (1)PRSP call for a deepening and acceleration of macroeconomic and structural reforms to bolster the institutional foundations of a market economy. To combat poverty, the PRSP details a seven-pronged reform strategy aimed at fostering: (i) broad-based, job-generating economic growth; (ii)stronger institutions and better governance; (iii) investment in human capital, with emphasis on basic education and health; (iv) investment in infrastructure to support better services in water, sanitation and housing; (v) improved safety nets; (vi) investment in infrastructure to support growth, including sea defenses, road and river transport, drainage and imgation and rural electrification; and (vii) special intervention programs to address regional pockets of poverty.
2.7 Policy Reform Momentum Slows in the Lute 1990s. Compared to the ambitious reform agenda outlined in the NDS, I-PRSP and PRSP, the pace of post-1997 policy reform has been disappointing. Unlike the first-generation of transition reforms, transforming public institutions and practices is a more difficult and contentious process. Moreover, adverse movement in the terms of trade, the El NiAo drought, elections, civil disturbances, criminality and labor unrest weakened the authorities’ resolve to reform. In some areas, such as privatization and fiscal policy, previous reforms have started to unravel. Large upward adjustments in public sector wages in 1999 (about 30 percent) and 2000 (27 percent) compromised fiscal stability. Government’s reluctance to boost utility tariffs caused mounting losses in the electricity company. Privatization efforts for the loss-making state mining companies failed and large losses incurred by rice producers added to the burden of non-performing loans in the banking system. Key issues that adversely affect public sector efficiency, including skill-shortages, over-centralization of decision-making in the executive branch, a lack of transparency and dissemination of public sector information, over-staffing (particularly in state enterprises), weak financial management, and overlapping jurisdictions, were left unresolved.
2.8 Weak Economic Governance Drags the Economy Down. The institutional reforms launched during 1998-2002 represent the first, albeit tentative, steps in what by necessity will need to be a much more extensive process of economic governance reform. Despite privatization and public enterprise restructuring, the largest state-owned enterprises continue to operate with a soft budget constraint, receiving subsidies and capital injections to remain afloat. For the domestic utilities, privatization itself, without adequate regulatory safeguards to ensure competitive practice, has resulted in the creation of de- facto private monopolies.22 The Government continues to own or lease-out some 90 percent of the nation’s lands, and difficulties in obtaining access to suitable lands continues to constrain private investment, both in urban and rural areas. Private investment in medium and large-scale enterprises requires Cabinet approval and these are then provided licenses for a restricted set of activities. The court system remains clogged. Although revenue to GDP is very high, the tax base remains narrow, with high marginal rates on corporate and personal taxes, and relies heavily on cascading sales taxes, trade taxes and commodity levies.23 Tax implementation is marred by a plethora of discretionary tax holidays and exemptions. Public expenditures remain large, compared to the size of the economy. As discussed in
10 Chapter 3, public financial management remains inefficient: it is fragmented, not well integrated, and involves a large degree of discretion. By law, Parliament has the constitutional authority to oversee public spending, but it has tended not to exercise true oversight over the budget.24 The civil service is neither well motivated nor professionally managed.
Economic Performance-Mixed Results
sectors rebounded to levels last reached in the early 1960s. Faced -10 with a decline in protection, -15 Output in the imp0rt- ' 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 reliant manufacturing sector, such
Annual Average for Indicator (%) 1980s 1991-1997 1998-2002 Compound growth rate of real GDP -3.5 7.1 0.7 Poverty Incidence 26 (1980) 43.2 (1992) 35.0 (1999) Inflation (period average) 17.7 7.1 ('92- '97) 5.2 NFPS Fiscal deficitGDP (incl. grants) na. 5.1 5.2 Public debt/GDP (end of period) 429 223 205 Exchange rate (end of period) 27.2 142.4 191.3 Source: Poverty incidence-Guyana PRSP; Other estimates from World Bank and IMF.
2.10 Since 1998, Guyana's economic performance has been lackluster due to a combination of domestic and external factors. Economic growth averaged only 0.7 percent per annum between 1998 and 2002. Economic performance has been adversely affected by domestic political disturbances following the general elections of December 1997, a prolonged strike by civil servants in 1999 over wages, the uncertainties in the run-up to the 2001 elections and the social unrest thereafter, until quite recently a breakdown in the negotiations over constitutional reforms, disputes over parliamentary management, a sharp increase in organized crime, and policy slippage. External factors include adverse climatic conditions associated with El Niiio and a cyclical decline in key commodity prices (sugar, rice and gold). A 10 percent deterioration in the external terms-of-trade between 1999 and 2002 was a major contributor to the growth slowdown. Exports and imports fell in real terms from 1997 to 2002 by 10 percent and 12 percent, respectively.
11 2.11 Thanks to large foreign I assistance inflows, public figure 2.2: Guyana: Gross Domestic Investment (%of GDP) I1 investment had ranged between 12 60 and 17 percent of GDP for much of the 1990s. From 1992 to 1994, 50 private investment soared to more than 30 percent of GDP, reflecting 40 mainly the sale of state enterprises 30 to the private sector. Since 1998, private investment has declined 20 steadily from 13.4 percent of GDP in 1998 to 7.4 percent of GDP in 10 2002 (see figure 2.2). Since replacement investment would 0 ndrmally require 4 to 5 percent of I GDP, this implies that very little 1 ,+% ,e, ,e %%\e ,eb ,e 662,e ,e ,e 90%%%s* &% 1 new private capital accumulation Source: Statistical Bureau, Government of Guyana has taken place since 1998.25
2.12 Movements in financial market aggregates mirror the decline in private investment. Between December 1999 and November 2002, total loans and advances to the private sector fell from GY$52.2 billion to GY$45.8 billion, a decline of nearly 14 percent. The downward drift in commercial bank lending to the private sector is a reflection of more cautious commercial bank lending policies, heightened risk perceptions and a sharp erosion in private sector confidence.
2.13 Taking the 1990s as a whole, Guyana’s overall growth performance was quite respectable. Indeed, much of Latin America and the Caribbean witnessed a pronounced growth-slowdown in the latter half of the decade. It has been shown that this was the result of a combination of adverse external developments, of the openness and narrowness of many of the smaller economies, and of sluggish policy reform performance.26 Taking the region as a whole, good policy was able to contribute as much as 2-3 percent to annual growth4yclical factors, peace and political stability, and intemational trading conditions, explains much of the rest.
2.14 Guyana has a large underground economy, whose presence makes it difficult to obtain accurate statistics. In the 1970s and 1980s, businesses and consumers turned to the underground economy to survive the extensive state controls, regulations and rationing. In the 1990s, smuggling and drug- trafficking were added to the underground economy as state controls were rolled back.27 Faal (2003) estimates that the underground economy accounted for about 40 percent of GDP in the 1970s, before increasing sharply during 1980-89.28 From 1992-2000, the underground economy was estimated to be equivalent to 40 percent of GDP, a level comparable to that in other low-income transition ec~nomies.~’
2.15 Macroeconomic Stability. In the wake of trade and exchange rate liberalization, domestic prices rose rapidly. Price inflation peaked at 80 percent in 1991 before falling to 15 percent in 1992. From 1992 to 1997, fiscal imbalances improved significantly. This, together with prudent monetary policy, led to a fall in inflation to just over 5 percent in 1997. Between 1998 and 2000, the authorities pursued a tight monetary policy to offset the inflationary effects of supply shortages resulting from the El NiAo weather disturbances (1998), rising utility and fuel prices (1999), and a two-month civil service strike and flooding (2000). Thanks to tight monetary policy and foreign financing of the budget deficit, inflation remained low, falling from 7.5 percent in 1999 to 5.3 percent in 2002 (see Figure 2.3). Starting in mid- 2001, the monetary stance was eased and nominal T-bill interest rates fell. Commercial bank rates have yet to decline, with short-term rates remaining in the range of 17 to 18 percent between 1998 and 2002.
12 High real commercial bank interest rates reflect Figure 2.3: Guyana, Inflation the bank's perception of a high credit risk and the overhang of weak commercial bank portfolios. Although the commercial banks have been restructured several times in the 1990s, in December 2002, the share of non-performing assets in the commercial banks portfolio was quite high at 33 percent.30
2.16 Between 1992 and 1997, the real effective exchange rate appreciated by 29 percent in response to tight monetary conditions, buoyant aid receipts and transition-induced recovery in traditional exports, while the terms- of-trade deteriorated by 30 percent. The latter 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 continued deteriorating by another 11 percent between 1998 to 2002,-but rather than Figure 2.4: Guyana, External Trade (US$ millions) finance the shock, the exchange rate was I allowed to partly adjust, with the real effective exchange rate depreciating by 16 percent. The trade deficit remained in the range of US$80 million to US$115 million per annum during 1998-2002, an improvement over the earlier part of the decade, despite adverse external market conditions (see Figure 2.4). The external current account deficit (excluding official transfers) widened from 14 percent of GDP 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 in 1997 to 14.8 percent of GDP in 2002 in response to higher foreign aid inflows. While monetarypolicy was-eased in 2001 and 2002, this proved to be too little and too late, after nearly a decade of an appreciating real exchange rate, to bolster non-traditional exports.
2.17 Private Remittances. Although no reliable data exists about the number of Guyanese living abroad, the number may be as high as 500,000. As discussed in Chapter 5, remittances sent back to Guyana are substantially higher than that reported in official statistics, and are as much as net Official Development Assistance (ODA) flo~s.~'Large private remittances and aid inflows, together equivalent to more than a third of GDP, have important implications for macro-competitiveness. While the real exchange rate rises and falls depending on short-term trade flows, large unrequited transfers boosts the absolute level of the real exchange rate, increases domestic wages and augments demand for imported goods and services. A strong real exchange rate, wages out-of-line with domestic productivity and high levels of import penetration discourage domestic investment in tradable goods and services.32
Fiscal Policy and Debt Sustainability
2.18 From Fiscal Consolidation to Fiscal Erosion. Large fiscal deficits, which persisted during the 1980s, were substantially contained in the early years of the ERP. Privatization and the restructuring of the state sector substantially reduced transfers from the Treasury, debt rescheduling and relief lowered interest payments, and government expenditures were tightened. The overall public-sector deficit (after grants) fell to 3 percent of GDP by 1996, from 21 percent of GDP in 1993, notwithstanding a 2 percent of GDP increase in central government capital expenditures during that period.
13 2.19 In recent years, the fiscal deficit (after grants and debt relief) has remained high, representing 5.9 percent in 2002. Preliminary projections call for a doubling of the fiscal deficit ratio in 2003. The increase in 2003 reflects higher capital spending, largely on account of the modernization of the sugar company; the weak performance of the state-owned bauxite companies and the associated cost of their restructuring; an increase in public sector wages and shortfalls in taxes due to tax exemptions and weak economic performance.
2.20 Public Spending Rises. Non-financial public sector expenditures as a share of GDP declined from an average of 57.6 percent during 1988-1989 to 39.1 percent of GDP in 1999, with a reduction in the wage bill, transfers and debt service accounting for practically all of the fiscal consolidation. Since 1999, public expenditures have risen reaching 46.4 percent of GDP in 2002 and estimated 50 percent in 2003 (Figure 2.5).33 Much of the increase can be explained by a fifty percent increase in the wage bill and a four-fold increase in subsidies and miscellaneous expenditures between Figure 2.5: Guyana, Revenue &Expenditures (%of GDP) 1999 and 2002. The wage bill as a 60 share in GDP went from 8.5 percent of GDP in 1998 to 11.5 percent in 50 2002. Spending in social services, as discussed in chapter 5, also increased 40 substantially during the same period. Government acknowledges that 30 public spending must be substantially reduced if scope is to be created for 20 private initiative and macroeconomic stability is to be maintained. Official 10 forecasts call for a substantial 0 reduction in public expenditures, to 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 35.7 percent of GDP by the year 2010, with current spending targeted to fall So u rce : Wo rld B ank, LDB (Central Go vemme n t ,e xc 1. grants ) by 10 percent of GDP to 24percent by 2010.34
2.21 Faal (2003) estimates that as much as 7 percent of GDP in annual tax revenues was lost between 1970-2000 due to the large underground economy-contributing to persistent fiscal deficits and unsustainable public debt. While total elimination of the underground economy is impossible, the relative decline in its size in the 1990s shows that market-oriented reforms reduce incentives to operate informal business. A comprehensive reform of the tax system aimed at widening the tax base, further deregulation, and improved governance of core public services would likely help reduce the size of the underground economy.
2.22 External Debt Relief. By 1988, Guyana’s external debt had become unsustainable, reaching US$1.95 billion in long-term debt (equivalent to 470 percent of GDP) and US$76 1 million in short-term debt. The country fell behind on debt service and arrears built-up both on commercial and official borrowings. After the exchange rate was floated, the ratio of public debt to GDP peaked at 560 percent of GDP (1992) with debt service payments equivalent to 46 percent of export earnings. About half of the external debt was owed to multilateral development banks and 20 percent to neighboring Trinidad and Tobago, which until 1986 was its principal supplier of petroleum products. Between 1993 and 1997, interest payments on the public debt accounted for an average of 25 percent of public spending, crowding out much-needed social sector expenditures and hampering the process of fiscal consolidation.
14 2.23 With a good track record of economic performance under the ERP, Guyana managed to get substantial debt relief from its multilateral and bilateral creditors, first under traditional debt relief mechanisms (Paris and then under the HIPC Initiatives (original HIPC in 1997 and the enhanced HIPC in 2000).36 In 2000, it was projected that once Guyana achieves the E-HIPC completion point, the two HIPC initiatives together would have eliminated more than half of the country’s future debt service and its outstanding net present value (NPV) debt would have been reduced by 53 percent (World Bank, 2000a)37. Also, public sector debt service payments would decline from 12.8 percent of GDP in 1997 to an average of 7.5 percent of GDP during 2002-2005. Furthermore, social sector spending would increase from 8.4 percent of GDP to 14 percent of GDP during the same period.
2.24 Preliminary updates of Guyana’s debt sustainability indicators show that the NPV of external debt to GDP ratio would fall to 68 percent in 2003 after enhanced HIPC assistance and after completion point. This translates, under certain assumptions (notably economic growth of 1%-2% percent and inflation of 2-3 percent), into a NPV of debt to revenue ratio of 215 percent and a NPV of debt to exports ratio target of 75 percent at end 2003 after assistance. Compared to decision point projections (2000), both ratios are lower. At decision point, the NPV of external debt to exports was projected at 82 percent in 2003 after unconditional HIPC assistance and the NPV of debt to government revenues was projected at 218 percent. The primary balance that will stabilize the post-HPC level of debt is projected at 4 percent compared to 6 percent in 2002.
2.25 At present, progress towards the E-HIPC completion point is far advanced, with all but two triggers related to the civil service reform achieved. Progress on the civil service reform per se has been mixed. While a number of the original measures have either been implemented (computerization of the payroll system) or achieved through other reform actions taken elsewhere in the public sector (the case of the civil service downsizing), other measures have been reformulated as part of a more comprehensive civil service reform program which is being supported by the IDB.38Guyana’s external position remains vulnerable to external shocks because of volatility in export commodity prices and uncertainties about access to preferential export markets for sugar and rice. Debt management remains a concern, however, with domestic and foreign debt managed independently, the national debt committee inactive, and the role of the various government institutions in contracting new borrowing unclear.
2.26 Domestic Debt Rises Rapidly. Progress in reducing the public debt burden by HIPC relief has been partly offset by rapid growth in domestic borrowing between 1997 and 2002. Domestic public debt, in the form of treasury bills and debentures, stood at 71 percent of GDP at the end of 2002. Interest payments on domestic debt reached 3.1 percent of GDP in 2002, compared to 4.6 percent of GDP on external debt. Unless addressed by the Government, Guyana’s domestic debt could become an important source of vulnerability.
Poverty Reduction and Social Performance
2.27 Poverty Profile. Guyana has made significant improvements in reducing the depth and severity of poverty since the 1980s. In 1980, the proportion of the population classified as poor was estimated at 26 percent using income data in the absence of household survey data.39 By the early 1990s, the poverty rate had increased to 43 percent of the population. With the resumption of high rates of economic growth, poverty incidence has fallen sharply. The poverty rate dropped to 35 percent by 1999, with an elasticity of 0.8 to per capita GDP Moreover, the incidence of households classified as extremely poor fell from 28.7 percent to 21.3 percent. Income distribution remained moderate, with a Gini coefficient estimated at 0.4 for 1999, or just slightly more unequal than average OECD incomes.
2.28 Much of the improvement in living standards in the 1990s can be explained by the increase in productivity (given the high increase in per capita income) and the drop in ‘inflation that boosted real
15 wages. The improvement in living standards has not been uniform (see Box 2.1). Poverty has worsened since 1992 in the hinterland areas, reflecting a strong geographic influence. Afro-Guyanese are slightly better off on average than Indo-Guyanese although, according to the poverty statistics, both groups are wealthier than the Amerindians. In addition, poorer households typically have larger families and less formal education than the rest of the population. Groups particularly vulnerable to poverty and other social disadvantages include the unemployed, out-of-school youth, single women-headed households, the elderly and disabled, and low-wage workers in traditional industries such as sugar and mining.41
2.29 Social Performance. The PRSP envisages a reduction in poverty from the estimated 35 percent of the population to 31 percent in 2005. Twenty-seven quantitative targets are set in areas such as income poverty, access to, and quality of, education, health and basic services. These correspond to all of the seven Millennium Development Goals (MDGs) apart from gender equality?’ While the PRSP does not provide projections through 2015, an extrapolation of the targeted gains through 2005 to 2015 reveals that, of the seven MDG indicators contained in the PRSP, four would be met if progress envisaged in the PRSP was achieved and sustained up until 2015. Unless public policies and political stability improve substantially and investor confidence returns, even the targets up to 2005 are likely to prove ambitious (a more detailed discussion of social sector performance is given in Chapter 5).
2.30 The PRSP Implementation Status. Box 2.2 provides an overall assessment of the PRSP based on the joint BankRund staff assessment. Since its adoption by the Government in 2001, there has been good implementation progress in some areas, including social sectors, water sector, sugar sector, and monitoring and evaluation system (with poverty spending tracking system put in place). All these areas are discussed in detail elsewhere in the report. On the other hand, there have been slippages on the macro front. Under the recently approved PRGF, the Government is making efforts to improve macroeconomic performance. The PRSP needs to be updated as the macroeconomic situation has since deteriorated significantly, with economic growth rate and government revenue collection much lower than anticipated. It is currently estimated that GDP would grow by 1.0 percent at best per annum during the period 2002- 2005 compared to 2.7 percent according to the PRSP addendum and 4.1 according to the original PRSP. This pessimistic outlook would call for a further prioritization of an already ambitious PRSP program. The Government is expected to prepare a PRSP progress report in early 2004.
16 Aid Effectiveness and Aid Coordination
2.31 Towards Better Aid Effectiveness. Guyana is a very large recipient of external assistance, with official development assistance (ODA) amounting to US$ 133 on a per capita basis and 14.6 of GDP in 2001 (see figure 2.6). Box 2.3 and figure 2.7 present an overview of donor external assistance to Guyana over the period 2000-2002. The IDB is Guyana’s largest multilateral donor, with annual disbursements of external assistance averaging US$40-50 million. The IDB outranks the next largest donor, the EU, by a factor of four. The USA, UK and Canada are the largest bilateral sources of assistance. 2.32 Net financial transfers are even larger than these figures would suggest. Transfers are provided directly and indirectly to Guyana in five forms: as debt relief; as access to preferential export markets; as unrequited official transfers (grants); as net transfers from foreign borrowing; and as private transfers. The combination of all five was equivalent to at least one-third of GDP in 1999-2002, implying that aid and other financial transfers would have substantial macro-economic effects. The net effect on external balance is equivalent to an outward shift in the supply of foreign exchange of some 25 percent of GDP, causing the nominal exchange rate to be around 15 percent higher than the (with no aid) equilibrium exchange rate. These figures are purely indicative and need to be refined.43
I Figure 2.6a: Per Capita Official Development Assistance Figure 2.6b: Official Development AssistancelGDP 2001 (US) I
2.33 Aid has both positive and negative effects on productivity. It allows a far higher level of consumption and investment in human resources than would be possible in its absence. Large aid inflows have tended to build big government, and inadvertently, may have crowded out private initiative. Guyana’s many donors sponsor a large number of small individual projects, each of which is well- intentioned, but collectively pose a tremendous management and coordination burden on the Government.@ Project design and implementation is impeded by what donors perceive to be excessive centralization of decision-making processes; a lack of integration between public expenditures and
17 priorities identified in the PRSP and declining rates of delivery of development programs, projects and loans.45 Many projects cannot be adequately implemented because of a shortage of counterpart funding in the budget. In many cases, a dearth of technical staff, and weak institutional capacity, impedes implementation of agreed aid projects. To compensate, aid projects tend to employ a great variety of specialists, often in project implementation units, under varying terms and conditions. This, in turn, contributes to donor-driven staff shortages and inequities across the public service. In the face of poor performance, aid fatigue sets in but is overtaken by the poverty reduction imperative.
2.34 Collier and Dollar (2001) find that those developing countries that followed good policies, with the former defined in terms of sound macroeconomic, structural, public sector management and social inclusion policies, were able to attract more aid and to it more ~ Figure 2.7: Donors’ share of disbursements to Guyana effe~tively~~.Their research shows that FY2000-2002, as a % of total US$287 million there is little that foreign assistance can accomplish when policies and governance UN, 1% combine to discourage private initiative. 1 Canada,3% , Germany Dedicated leaders and a broad base of national ownership and commitment are IMF,6% A essential to fostering social cohesion, transforming governance and establishing policies conducive to sustainable development. If Guyana’s three decades of large aid inflows had been used as effectively as by those developing countries Collier and Dollar identified that nurtured USA, 13% , private-sector led growth, per capita (does not include debt relief) 1
2.35 Towards Better Aid Utilization. In keeping with its PRSP commitments, the Government has established a Poverty Reduction Strategy, Coordination, Monitoring and Evaluation Unit within the Office of the President. Thematic working groups, chaired by portfolio Ministers and provided secretariat
18 services by donors, have been established in the areas of health, education, infrastructure, water and housing, and governance and trade. New working groups are to be established on economic policy and PRSP monitoring. The working groups have provided a useful venue for information exchange between donors and government. In some instances, the working groups (i.e. health and water supply) have developed specific strategies and action programs to guide public investment. Although the PRSP was designed to serve as a framework for channeling donor spending towards agreed poverty reduction programs, it would take time for donors to shift to this new paradigm, given particularly the need to have high governance standards in place to permit external assistance to be utilized effectively as budget support.
2.36 Under the HIPC initiative, however, Guyana’s main multilateral and bilateral donors are providing deep debt forgiveness in exchange for a commitment to move the policy reform process forward. In contrast to other donors, the World Bank has shifted support from stand-alone investment operations to program assistance linked explicitly to progress made in implementing the nation’s PRSP. In addition, several donors have shifted the focus of their funding support from financing inputs to financing the achievement of particular MDG’s. The Education For All Fast Track Initiative (EFA-FTI) is an example of this, in which several donors have pledged to provide financial assistance to ensure that each child has access to a quality primary school education.47 Key ministries have instituted organizational reforms to better utilize foreign assistance. For example, in the Public Works Ministry, various project implementation units have been consolidated into a Work Services Group in order to better utilize scarce project management capacity. Reform of the public procurement legislation should also help to reduce the large backlog of un-disbursed aid commitments.
The Challenge Ahead
2.37 In light of recent political instability, and consequent delays in policy implementation, even achieving the near-term PRSP objectives may be difficult. In the long-run, renewed growth must still come largely from exports given the small size of the domestic market. But, without radical improvement in the business climate, diversification of the economic base and the restructuring of the traditional activities-mining and sugar sectors-the outlook for exports remains bleak. The structure of the economy remains similar to what it was at Independence, implying that structural change and economic diversification have yet to emerge as new sources of growth. Ultimately, the private sector must lead the process of economic growth and poverty reduction. But this will happen only if the ethnic political divide is bridged and a bipartisan political commitment to good economic governance emerges.48 The joint Government/Opposition Communique, which was issued in May 2003, represents a step in the right direction.
19 3. IMPROVING PUBLIC SECTOR PERFORMANCE AND GOVERNANCE
3.1 During the process of public consultation that was a central part of the preparation of the PRSP, widespread dissatisfaction was voiced with the provision of public services. Inadequate coverage and quality of services was associated with poorly performing, unresponsive and sometimes corrupt government agencies. While it is true that providing public services to a small population spread out over a large, and not easily accessible, area offers special challenges, there also is much evidence that public sector performance can be improved, and thereby contribute to achieving the country’s development goals. This chapter deals with three central aspects of governance: public financial management; performance of the civil service; and the functioning of the judicial system.
Improving Public Financial Management
3.2 The public sector is large, even for a small, scatterly populated country. In 2002, the expenditure to GDP ratio of the non-financial public sector was 46.4 percent. Comparable figures (for 2000) are: 20.7 percent for low-middle income countries, 21.9 percent for LAC countries, and 25.8 percent for the world as a whole. This ratio would be even higher if extra-budgetary funds were fully taken into ac~ount.~’ Apart from maintaining aggregate fiscal discipline, the success of the country’s development efforts thus depends to a large extent on how well public resources are used, both in terms of their allocation to priority areas, e.g. as set out in the PRSP, and their efficient utilization.
3.3 Current situation. Despite progress with the help of significant technical assistance since the mid-l990s, weaknesses remain in most phases of the public financial management process. Reform efforts have been hindered by the political stalemate which lasted until May 2003 and by capacity constraints in the Ministry of Finance (MOF) and other agencies suffering from a depleted and poorly qualified public service. The government budget consists of separate recurrent and capital budgets, the latter prepared by the State Planning Secretariat, which is independent of the MOF. Both budgets are presented on a line item basis, but use different account classifications. Some agencies have started to introduce a form of program budgeting and integrate the capital and recurrent budgets.50 Expenditure Management and Planning Units (EMPUs) have been established in the education and health ministries. Budget information is made available on a website.
3.4 Weaknesses in the budget preparation and approval process include notably: (i)a lack of fiscal transparency from the growing number of semi-autonomous agencies (SAA); (ii)late approval of the budget-up to three months into the fiscal year. While this practice is consistent with the Constitution, which obliges the Government to present its budget on or before March 31, it does disrupt and delay spending programs; (iii)budget preparation on a cash basis, which ignores large contingent liabilities of the State, e.g. on account of borrowing by state entities; (iv) the line item basis of the budget; and (v) weak parliamentary oversight over the budget. The budget estimates do not receive detailed scrutiny and tend to be approved without amendments by a simple majority vote. With the recent establishment of the Economic Services Committee (ESC), it is expected that parliamentary oversight would be strengthened.
3.5 Effective implementation, monitoring and control of budgetary spending are hindered by the absence of modern management systems and a lack of skilled staff. The present accounting system is entirely manual and the Accountant General’s Department suffers from poor working conditions and is under~taffed.~’Introduction in 1998 of the Automated Vote Book system (AVB), with help from CIDA, has had limited results. The systems for preparing the recurrent and capital budgets are different and are not integrated with the AVB. While delays in closing accounts have been much reduced, there are serious doubts about the accuracy of the information generated by the accounting system.
20 3.6 According to the Public Expenditure Review (2002), monthly releases of funds to agencies tend to be late, and the process of fund release is cumbersome. Agencies have limited flexibility in moving funds within their budgets, usually requiring permission from the Budget Office. Current public tendering and procurement arrangements hamper efficient budget execution, but reforms are being introduced. Existing internal and external systems of control and audit, the principal mechanisms for ensuring proper execution of the budget and the integrity of public financial management, are in need of improvement. Unreliable accounts and a lack of knowledge of operating procedures often interfere with the proper functioning of controls. Controls are often circumvented by government officials, who have discretionary powers that are strengthened by limited public and parliamentary oversight.
3.7 The Office of the Auditor General (OAG) is responsible for the external audit of all entities in the public sector. Formerly responsible to the Executive, the Auditor General now reports to the Public Accounts Committee (PAC) of Parliament following the Constitutional Amendment in 200 1. Despite limited resources, the OAG has performed well. Audit reports on agencies are currently up to date.52 While the reports have disclosed numerous financial irregularities, these have generally been ignored by the Executive-following up and imposing sanctions require a letter from MOF, which has not been done regularly in many years-and the PAC lacks authority to impose sanctions.
3.8 Ongoing reforms. Ongoing donor-supported reforms in the area of public financial management cover four main areas: modernization of the budget preparation and approval process, procurement reform, improving the accounting system, and strengthening the audit function. The principal donors are CIDA, the IDB, and the World Bank through the PRSC and PSTAC.
3.9 Modernization of budget preparation. Efforts to improve budget preparation have been going on for some time, notably through CIDA’s Guyana Economic Management Project (GEMP) since 1996, now in its third phase. A key aim of this phase is to change budget presentation from a line item to a program basis and to prepare the ground for a multi-year budget. A draft Financial Management Act has been prepared and is being reviewed by MOF. The draft Act also requires Government to submit the draft budget to Parliament for approval before the start of the fiscal year. The Economic Services Committee in Parliament, established under the 2001 Constitutional Amendment, is supposed to scrutinize budget proposals. However, the appointment of members and their confirmation by Parliament had been held up until May this year by the political stand-off. The committee will need staff and resources.
3.10 Public procurement reform. Until 2002, the public procurement process was inefficient and lacked transparency. It suffered from understaffing, low thresholds, conflicts of interest and a lack of centralized oversight that led to delays and misuse of funds. A new Procurement Act, passed by the National Assembly in May 2002, addressed some of these issues. However, it allowed Cabinet intervention in the approval process, made no mention of the role of the Public Procurement Commission (PPC) in Parliament, and centralized the decision making process. Following discussions with IDA in early 2003, the Government agreed to amend the existing Procurement Act and present a revised Law to Parliament, which would address the deficiencies in the public procurement system discussed above, for consideration by mid-2003. Subsequently, a new procurement law was approved by Parliament on June 19, 2003 and assented to by the President on July 25, 2003. For the most part, the new law addresses the concerns stated above. In one area-the timeframe for review of bidders’ protests by the independent authority-the law deviates from what was originally envisaged. As it stands, it neutralizes the important benefit of imposing a short-term deadline. But this shortcoming could be addressed in the rules and regulations that should follow the procurement act.
3.11 Accounting and audit systems. Phase I11 of the GEMP includes the replacement of the public accounting system, including the AVB system, by a modem management information system. CIDA is reviewing bids for software and preparing training programs. A functional review of the Accountant
21 General’s Department is also planned. The new draft Audit Act, prepared with help from the IDB, is under review. The Act gives the OAG greater authority to manage its resources, encourages the Executive to respond to audit reports, and introduces the possibility of sanctions. The IDB is providing assistance to complete the Policies and Procedures Manual to accompany the National Audit Act. In addition, the IDB is providing TA for institutional strengthening of the OAG and for making the OAG fully autonomous, which is conditional on the passage of the Act.
3.12 Needforfurther action. Once the ongoing reforms of budgeting and budget execution, including of the procurement, accounting and audit functions, are fully implemented, they will represent a major step towards modernizing financial management. However, expectations about the pace of reform should take into account the history of implementation delays, the lack of skilled staff and the difficulty of retaining newly trained staff, as well as the pace of political reform. Passage of the draft Financial Management, Procurement, and Audit Acts, and the effective operation of parliamentary committees, notably the ESC and PAC, which oversee public spending, should be feasible now that there is a functioning Parliament.
3.13 While the adoption of modern budgeting and accounting systems will take time, other measures to strengthen financial management are easier to implement. These include: timely presentation of the budget; wider consultation in budget preparation; increased fiscal transparency, e.g., through better information on the role and activities of SAAs (this is an area where a study is needed with possible funding from the IDB). In this regard, the draft Financial Management and Accountability Act needs to be amended to properly address the need to bring the SAAs into a broader financial management framework), access to public tender minutes and results, and to minutes of ESC and PAC meetings; clear rules and procedures regarding access to supplementary appropriations and the Contingency Fund; and streamlining procedures for the monthly release of funds. While the Government agreed to the principle of reducing discretionary powers of individual officials, processes should be developed that effectively reduce the discretionary element in decision making.
3.14 The Government should also re-establish capacity for preparing a macroeconomic framework for the budget and for formulating a budget strategy at the start of the annual budget process. Once internal control and audit have been strengthened, managing agencies might be given increased flexibility in reallocating resources within their budgets. Before procurement reform can become effective, members of the Procurement and Tender Board and of the Public Procurement Commission have to be appointed, detailed regulations for implementation of the Act and standard bidding documents need to be prepared and disseminated, and training programs developed and implemented. An early start with preparation of the Operations and Procedures Manual for the Office of the Auditor General would allow improvements in the audit process to come into force as soon as the new Audit Act has been passed.
Reforming the Public Service
3.15 Current situation. According to the payroll system, some 9,100 people are currently employed in the civil service (excluding teachers). This compares with around 17,700 workers in GUYSUCO, 250 in Linmine and some 8,000 primary and secondary school teachers. There used to be many vacancies, but all vacant positions have been abolished and, following the imposition of a hiring freeze, any new positions need approval of the Public Service Ministry. Exceptional recruitment has been on a contract basis, until the Service Commissions that should confirm appointments is fully functioning. While there is some evidence of overstaffing, there are also severe shortages of skilled personnel, e.g. trained nurses and teachers.
3.16 Since 1994, the Government has tried to make the public sector more competitive by bringing salaries in line with those in the private sector, initially through a series of selective wage supplements.
22 Following strikes, public sector salaries were raised by nearly two-thirds between 1999 and 2000. As a result, budget expenditure on wages and salaries doubled between 1994 and 2002. It went from 6 percent of GDP to 11.5 percent. Nevertheless, the level and differentiation of pay remain insufficient to attract qualified technical and managerial staff. This has led to distortions in the salary structure, as staff in newly established semi-autonomous agencies (e.g. the Guyana Revenue Authority) and in donor- supported project units are paid more. The strong Public Service Union is resisting reductions in the size of the civil service, a sensitive issue given the ethnic composition of Government and the civil service.
3.17 A survey of public officials in 1999 tested a number of assertions about the civil service. Some of the findings of the survey are: (i)public sector jobs are considered attractive despite low pay, as bad pay is balanced by job security and pension provision in the public sector;53 (ii)the incentives system does not encourage good performance or discourage bad performance; (iii)communication and participation in decision making is poor; (iv) corruption is a serious concern; (v) budget management is weak; and (vi) few opportunities exist for in-service training.
3.18 Ongoing reform. Since the late 1990s, with help from IDA and the IDB, the Govemment has taken a number of actions to improve public administration. Public service rules relating to employee discipline, severance, and annual performance evaluation have been introduced, but there is evidence that these are not being implemented. The payroll and pensions database has been improved. The IDB is assisting the Govemment with the design of a Public Sector Modernization Program. A payroll audit has been carried out, but the planned assistance with preparing job descriptions and a performance appraisal system and with the design of a compensation system was postponed in favor of undertaking institutional and organizational capacity assessments for each ministry and across ministries and agencies.54 One of the main findings of a recent study is the dysfunction of government’s “horizontal planning” and management systems.55
3.19 Need for further action. Apart from the capacity assessments of agencies, a review of the broad structure of government is needed. In the early 1990s, with British assistance, the Government simplified the ministerial structure, but in subsequent years this policy was reversed and new ministries were created. There are currently about thirty ministries/departments and over fifty statutory bodies. Simplification of the broad structure of administration and a review of the relevance of statutory bodies might help reduce the number of public service jobs.
3.20 Without adequate pay and benefits it will not be possible to attract and retain qualified staff in the public service. Given the overall budget constraint and what is considered an affordable wage bill, the overall size and structure and compensation of the public service have to be examined. As part of this, and following the ongoing functional reviews, efforts need to refocus on developing job descriptions and a performance evaluation system and on designing a compensation system. The four Service Commissions (for public service, police, teachers and the judiciary) have been recently re-instated by Parliament. Success in implementing reforms aimed at creating a slimmer, better paid, motivated and trained public service rests in large part on establishing an effective working relationship between the Government and unions.
3.21 In Guyana the decision-making process is often highly centralized, in part as a result of weak institutional development. For example, a recent review of the country’s public financial management systems and processes found that they are basic and fragmented (World Bank 2002b). In the case of central government it is several donor’s perception that the Office of the President takes decisions that would normally be delegated and overrides line ministries. Institutional governance reforms and measures to ensure that they are effectively implemented are needed to improve financial accountability and transparency in the public sector.56 Responsibility and accountability for decisions need to be devolved to appropriate levels of government. Within the central government, this means giving more responsibility
23 to line ministries, but also, over time, within line ministries to managers of programs and projects. At the local government level, efforts are being made to strengthen the financial position of local administrations. However, any decentralization of the provision of services will also have to take into account the serious human resources constraint throughout the public service, and hence the need for capacity building.
Accelerating Judicial Reform
3.22 Current situation. Good governance requires the effective establishment of the rule of law. This involves general compliance with, and enforcement of, laws and regulations. Non-compliance by individuals and the-formal and informal-business sector in Guyana is being encouraged by the lack of enforcement. The resulting weak legal and judicial environment has serious social and economic consequence^.^^ The justice system suffers from long delays and a serious backlog of cases, and there is concern about the quality of judicial decision^.^^ Almost 3,500 civil cases were pending in the High Court at the end of 2000, and a net additional 1,600 were filed in 2001. It typically takes five years for a civil case from filing to completed trial in the High Court. In 2002, the Court was hearing cases filed in 1995 and 1996. While there is a widely held belief that the judiciary lacks independence, and that the Government influences decisions, the quality of justice is also affected by the delays, both in criminal and civil cases. Defendants can spend a long time in prison awaiting trial and claims in civil cases lose value over time, the more so as enforcement of awards and court decisions often is difficult.59 There is no systematic record of court rulings. The required annual publication of court proceedings was last issued in 1974 which, for a system based on case law, is a serious drawback.
3.23 Factors contributing to this situation include: a shortage of judges; at all three levels - Magistrates, High Court and Court of Appeal - only two thirds of the positions of judges are currently filled.60 No appointments can be made until the Judicial Service Commission is re-established. a lack of support staff and equipment. There are no tape recorders and very few court reporters. Judges have to take notes personally, a time consuming practice. It is hard to attract staff for the many vacancies because of low pay and strong competition from private law firms; the fact that judges are appointed and paid by the executive; a lack of continuing professional education; judges may not know trial procedures well enough or lack experience in case management and, more particularly, in dealing with commercial disputes; and cumbersome judicial procedures as well as delaying practices by judges and lawyers. These include barriers to plea bargaining, and the practice of part-heard trials and willingness to grant continuances. The judicial system lacks features that could speed up the process. Lawyers tend to discourage clients from settling.61
3.24 Ongoing reforms. Among the judiciary, and the legal profession generally, there is broad support for action to deal with the problems of backlog and delay. The Carter Center report recommended the formation of a ‘Planning Team’ to guide the reform process, which is aimed at the use of Alternative Dispute Resolution (ADR) methods!* A group of people representing a wide range of interests from within the judiciary and legal profession convened recently and a planning team of nine members was established under the Chancellor of the Judiciary. The team is to submit a report by mid- 2003.
24 3.25 In January, 2002, the Chancellor appointed a Criminal Law Review Committee to review the criminal justice system and make recommendations. The Committee submitted an ‘interim’ report to the Attorney General in April, 2002, because some of the problems it had identified needed immediate action. It raised concern about the overcrowding of prisons, pre-trial imprisonment and the lack of granting bail, unfair trials, and the lack of timely inquests in cases of extra-judicial killings. 63
3.26 Need for further action. While the recent initiatives to address some of the problems with the enforcement of the rule of law are to be commended, the establishment of a fair, transparent and efficient system of justice will require, in addition to continuing the ongoing efforts, further action in several areas. Widening the use of ADR mechanisms can be helpful. However, experience elsewhere has shown that these mechanisms tend to work well when the judicial system in general works well. The following priority measures have been suggested, but require full public backing from the Government to be successful. They need to be costed and fully funded, including financing from the donor community:64 Expanding the use of ADR settlement mechanisms, such as mediation, arbitration and others; this will require a campaign to ensure awareness among the general public of the benefits of such methods; the question of who will pay for it also needs to be addressed; recourse to ADR could be made mandatory for certain types of cases. (IDB is providing technical assistance in this area). Reviewing the backlog of civil cases to identify those that have been abandoned or are no longer active and thus could be dismissed. Undertaking an audit of the judicial system to improve its efficiency by simplifying court procedures; Ensuring a full complement of judges, an increase in support staff, and basic equipment. The Chancellor recommends an increase in the number of High Court judges to 15. These appointments require a functioning Judicial Service Commission and, thus, action by Parliament. Introducing a program of sustained training of judges and prosecutors. Establishment of a commercial court with IDB assistance.
Conclusions
3.27 The link between governance and development is much debated. Recent research suggests a strong positive effect of better governance on income and, given the evidence of weak or negative effect of income on governance, argues for positive and sustained interventions to strengthen g~vernance.~~ This chapter has focused on critical aspects of governance-reform of public financial management, the judiciary and the public service. Improvements in these areas can be expected to favorably affect development prospects in three major ways. It can:
e Achieve a more efficient and effective delivery of public services in general; this would address a major complaint voiced during the consultations with civil society as part of the PRSP preparation process;
e Strengthen the rule of law, thereby improving the security situation and, more generally, creating a greater sense of trust in government. That, in turn, facilitates service delivery and, more specifically, helps create a favorable climate for private sector activity; and
e Have a positive fiscal impact through improved revenue collection and greater allocative and operational efficiency in public spending. As a result, the Government would get more value for the money it spends, have the means to lower the deficit, and could reduce the size of the budget, thereby diminishing the crowding-out effect of the budget.
25 While action in all three areas of reform is needed to improve development prospects, perhaps the most crucial is improving performance in the public service which, apart from the civil service, includes, teachers, police and the judiciary. It is hard to see how progress in other areas of reform can be achieved without better qualified and motivated public sector employees.
26 4. INVESTMENT CLIMATE AND GOVERNANCE
4.1 This chapter discusses the investment climate in Guyana, with particular focus on governance, the financial sector, institutional capacity and infrastructure. Other critical areas such as macroeconomic stability and human capital are discussed elsewhere in the report. Overall, private sector development remains seriously hampered by the increased deterioration in the security situation, the political tensions which have been diffused only recently, corruption, and state discretion in implementing laws and regulations and poor physical infrastructure services. Some progress has been made in these areas, but much remains to be done in order to improve the business climate for, and promote, private sector development.
Private Sector Profile
4.2 The private sector participates in all sectors of Guyana’s economy and contributed about two- thirds to GDP in 2001. The main activities remaining in the public sector are sugar (16 percent of GDP), government services (12 percent) and bauxite mining (2.5 percent). Guyana’s small size and historical approach to economic development has resulted in a small number of firms of all sizes. Although reliable statistics are not available, there are six to ten large private sector groups with operations in manufacturing, distribution, lumber, agro-business and finance that dominate the private sector, a few medium-sized companies in mining, shrimp and fish, timber and wood products and rice, and many small and informal micro enterprises. Guyana’s economic management during the 1966-1988 period encouraged the growth of a substantial underground economy. As controls were removed with economic liberalization after 1988, profits in the parallel economy eroded. Underground activity declined, but remains substantial as discussed in Chapter 2.
4.3 Investment activity in Guyana has been especially low in recent years, with private investment declining from 12 percent of GDP in 1997 to 8 percent in 2002. Expectedly, short-term credit to the private sector at the end of 2001 was the same as in 1997 and term loans did not increase between mid- 2000 and end-2001. Foreign direct investment averaged about US$50 million per annum between 1997- 2001, mainly in mining, forestry and fishing. The main private sector exports are gold at US$125 million, rice at about US$50 million and all manufactures at about US$75 million per annum in 2000-2001.
4.4 The government’s Public Enterprise Privatization Program has divested most of its public enterprises including seven financial institutions, national airline and distribution, pharmaceuticals, engineering, telecommunications and electricity companies. The government’s sale or liquidation transactions total at least 60 percent of its net asset holdings. It is taking steps to privatize the bauxite mining companies and improve management in the sugar industry, the two main commercial activities still owned by the government (see Chapter 6). Slow progress in establishing appropriate institutional and regulatory frameworks for privatized industries such as telecommunications, electricity and air transport has limited the gains from privatization (see below). The Government Privatization Unit plans to study the impact of privatization.
4.5 A wide range of business associations exist, including the Guyanese Manufacturers Association, sectoral associations such as the Forest Products Association of Guyana and Chambers of Commerce in each region. Many of these organizations belong to the Private Sector Commission (PSC), the umbrella business advocacy organization. PSC had only 14 corporate and 14 business association members at the end of 2001. In October 1999, the Government organized a Business Summit with the private sector. It formulated an action plan to advance private sector development and a joint govemment-private sector unit was established to oversee implementation. Although several measures have been implemented, business leaders complain that no real improvements have occurred.
27 4.6 Good progress has been made in recent years to improve Guyana’s economic policy regime. However, there are still important issues-policy as well as implementation-which are not conducive to private sector development and impede Guyana’s competitiveness within and outside the region. The fiscal incentives are often discretionary, and there is no level playing field. Many licenses are required to start-up and operate a business, and they are difficult to obtain and renew.66 Also, impediments to clearing goods through customs and irregularities in public procurement continue to impede private initiative. The “quality of regulations” index in Guyana is rated at the very low end of the scale of the Caribbean Region for 2002 (see figure 4.1)67.
Figure 4.1 : Regulatory Quality, Caribbean Region, 2002
Cayman Islands Bermuda Bahamas Puerto Rico Barbados Martinique French Guiana Dominica Antigua and Barbuda Trinidad and Tobago Grenada Jamaica St Vincent and the Grenadines St. Lucia St. Kitts and Nevis Belize REGIONAL AVERAGE Guyana Suriname Haiti
Cuba I ~ 0 10 20 30 40 50 60 70 80 90 100
Figure 4.2: Rule of Law, Caribbean region, 2002
Cayman Islands Barbados Bahamas Bermuda -i-I Mart niqJe I P,enoRico I Antigua and Barbuda 3 French Guiana Dominica St Vincent and the Grenadines Trinidad and To bag0 St. Kitts and Nevis St Lucia Grenada Belize REGIONAL AVERAGE Suriname Jamaica Guyana Cuba Haiti
0 10 20 30 40 50 60 70 80 90 100
Source: Kaufmann et al. (2003).
28 4.7 The legal and judicial system also makes it difficult to do business in Guyana. As discussed in the previous chapter, the courts are clogged, waiting lists are long, and judges have little experience in resolving commercial disputes. Decisions are not systematically written or published and executing any kind of judgment or arbitration award is not easy. These shortcomings account, among other factors, for the low score of the “rule of law” index (see figure 4.2).68 Infrastructure is a serious bottleneck to private investment. Despite three decades of public investment, Guyana lacks a deep-water port, its road and rail systems are deficient, electric power is unreliable and expensive, and telecommunications services are limited. Finally, qualified workers and managers are scarce because of emigration.
4.8 The main problem for business investors, highlighted in the FIAS report (2002), is the perception of physical risk resulting from political riots in Georgetown. The inter-party warfare has impeded the reform process and dampened the investment climate. Law and order has emerged as a serious concern, with the incidence of violent crime reaching unprecedented proportions in urban Guyana and now becoming the main concern of private businesse~.~~To attract substantial new investment, Guyana needs to persuade potential investors that it is an orderly, reliable democracy. Investors are also deterred by the extent to which delay characterizes policy decision making in Guyana. This is in part a by-product of Guyana’s highly centralized political decision making process.
Eliminating State Discretion
4.9 Decades of socialist government and ideology have left an anti-business residue. Government officials view the business community with suspicion. Recently, government-business relations suffered a setback in drafting the new Investment Code (see below). The business community preferred an automatic, non-discretionary tax regime. This clause was, however, removed by the government. While there were substantive arguments on both sides, the incident reinforced existing suspicions. Guyana’s business environment suffers from excessive government regulation and discretion. In the Heritage Foundation’s Index of Economic Freedom, Guyana ranks 93rd out of 161 co~ntries’~.In the “government intervention” component, it places lower than any country in the Latin American region except Cuba, Haiti and Venezuela. Excessive regulation and case-by-case discretion lead to red tape and corruption, which is endemic in Guyana. Any regulation that does not serve a public need should be eliminated and remaining rules should be automated, especially in taxation and investment.
4.10 Tax System. Since 1990, Guyana’s tax system has undergone a series of reforms aimed at reducing fiscal imbalances. These welcome reforms sought to broaden the revenue base, improve compliance and remove earlier distortions including conversion of all specific consumption taxes to ad valorem bases, elimination of exemptions for state corporations and a reduction of consumption tax rates from 14 to 3. The tariff structure for imports was simplified and the share of exempted imports reduced. The market exchange rate was adopted for customs purposes and the operations of the Customs and Inland Revenue Departments merged under the newly created Guyana Revenue Authority (GRA).
4.1 1 Despite these reforms, Guyana’s tax structure remains typical of developing countries, with more reliance on indirect than on direct taxes. Business taxes are high and complex with many exemptions, remissions, holidays, and government discretions. In particular, import taxes have remained high and the level of tax exemptions granted has escalated since 1999.7’ These exemptions have adverse fiscal implications and impose an administrative burden. Enforcement of filing income tax returns and paying corporate taxes is selective. Thus, only a few people and companies file returns and pay taxes.72 The tax system is also inequitable because of a low threshold for personal income tax, which is mostly paid by employees and largely evaded by the self-employed.
4.12 To address these problems, the Government is implementing a comprehensive tax reform program that would broaden the tax base, reduce economic distortions, improve equity and strengthen tax
29 and customs administration. It has established a GRA and appointed a new head in August 2003 whose main task was to increase revenue collection, reduce corruption at the GRA and transform the work cu1tu1-e.~~In August 2003, the Government also amended the fiscal tax law to introduce a number of policy reforms. The reforms in tax policy, which have either been adopted or remain to be adopted, are: Eliminating discretionary tax and customs duty exemptions and repealing sections of the Income Tax, Customs, Consumption Tax and the Financial Administration and Audit Act (done); Limiting income tax holidays to new firms that create employment located in depressed areas or that conduct economic activity in specific fields. Limiting most tax holidays to five years and making them nonrenewable (done); Imposing consumption taxes (at a rate of 10 percent) on all services provided by hotels and professionals (done); Converting the Consumption Tax into a Value Added Tax (VAT). Introducing a system of excises on standard commodities, while abolishing selective indirect taxes such as on travel. Introducing a presumptive tax for businesses below the VAT threshold (to be undertaken); Reducing the corporate income tax for “commercial” companies in two phases from 45 percent to 35 percent, which is the rate for “non-commercial” companies (to be undertaken); Changing the base of minimum tax from turnover to gross assets, while maintaining the rate at 2 percent, and extending the tax to “non-commercial” companies (to be undertaken); Increasing withholding taxes from 10/15 percent to 20 percent, the minimum rate under the personal income tax (done); and Increasing the annual threshold of the personal income tax in three phases beginning in 2003 from G$216,000 to at least G$300,000; increasing the top marginal rate from 33.3 percent to 35 percent (to be undertaken); and imposing a minimum income tax on self-employed professionals (done).
4.13 Investment Code: Guyana is a signatory to the International Center for the Settlement of Investment Disputes Convention (ICSID) and to the Multilateral Investment Guarantee Agency Convention (MIGA). It also has bilateral investment agreements with a number of countries. Recently, Guyana sought to change its investment legislation to improve the investment climate, provide investor protection and advertise its hospitality to foreign investors. As a result of the business summit in 1999, a team of international and local consultants prepared a draft investment law and two reports that conformed to best international practice. The draft law was extensively discussed with private and public sector stakeholders. Before it was submitted to parliament, however, two important changes (among many others) were made: first, the automaticity of the tax regime was removed; and secondly, the law was converted into a “code”, which is a non-binding guideline in the Guyanese legal system.
4.14 Thus, an opportunity was lost to improve transparency, level the playing field for all investors, and provide them with legal protection. Moreover, private sector confidence in the Government’s commitment to improving the investment climate was dented. Recently, the Government has approached the Private Sector Commission to revive discussions with a view to amending the code. Consequently, a new investment law was tabled in Parliament in August 2003 with additional amendments made in October. The draft law represents a major improvement over the investment code and is consistent with the new tax law which was approved in August. Guyana has in general a relatively liberal investment regime with few restrictions on entry and most sectors open for investment. It has no limitation on foreign equity participation and foreign investors are not screened, unless they lobby for special incentives. To bolster private sector confidence, it is recommended that the Government reinstate the
30 non-discretionary tax regime and other important clauses and convert the investment code into an investment act.
4.15 The Mining Act. The existing mining act was introduced in 1989 and is no longer consistent with the regulations in effect for environmental protection. A new mining law is being formulated to make the sector more attractive to foreign investment and more balanced in its treatment of the environment and issues related to indigenous tribes. Establishment of any large new mines, and associated facilities such as access roads, camps and company towns, will require careful regulation to minimize and mitigate adverse environmental and social impacts. Three of the major issues that need to be addressed are: (i)the removal of restrictions on foreign investors to own medium-scale (between 27 and 1400 acres) claims (at present, small (up to 27 acres) and medium-scale claims are reserved for Guyanese firms only); (ii)security of land tenure; and (iii)the redefinition of the state’s role by establishing the legal basis for public mining institutions to focus on leasing and regulation. The new Mining law and implementing regulations, as presently envisaged, should provide a firm legal basis for controlling the ongoing, highly destructive informal placer mining (for gold and diamonds), such as by requiring settling ponds to keep sediment from degraded rivers.
Improving Financial Intermediation
4.16 Guyana has a small, almost entirely private financial system with six commercial banks (three domestic and three foreign), one merchant bank, one building society, four trust and finance companies, a pension fund (public), several general and life insurance companies and a securities exchange is scheduled to start operations in May 2003. It has a relatively high M2/GDP ratio at about 0.71, probably because of sizeable remittances from emigrants and the large underground economy. Interest rates have declined in recent months partly because Treasury bill rates have come down and bank liquidity is high. Because of a slow economy, the demand for loans is slack. Moreover, banks are cautious to lend because of a high level of non-performing loans in their portfolios. Nevertheless, interest spreads remain large to cover bad debt provisioning requirements. Commercial banks’ non-performing loanshotal assets were about 33 percent at the end of 2002, mainly because of a downturn in the rice sector. Domestic banks are more exposed than foreign banks. However, banks’ bad debt provisions have already reached 50 percent of outstanding loans and capital is considered adequate. Negotiations are in progress to reschedule these loans with government support.
4.17 The Bank of Guyana, the central bank, regulates the banks, the finance companies and the building society. Recently, it strengthened banking prudential regulations and supervision to ensure compliance with the Financial Institutions Act (FIA). Prudential regulations are scheduled to conform with Bank of International Settlements standards in the near future. FIA regulations relating to procedures for the efficient resolution and exit of insolvent financial institutions from the market will need to be upgraded and modernized. The Government is continuing to implement the Securities Act, 1998. A Securities Council has been established and companies with more than 50 shareholders have begun to register. Management for the Securities Exchange has been appointed and it is scheduled to open soon. An Insurance Act has been passed and a Commissioner of Insurance appointed. A Money Laundering Prevention Act was passed in 2001, giving the Bank of Guyana implementation responsibility. It intends to begin operations with technical assistance to train staff. Key financial legislation is under review to support future growth of the sector and strengthen the central bank.
4.18 The number of Guyanese living abroad is high and their annual remittances are sizeable (see Box 5.1). These flows are estimated at US$90 million, almost double the amount of annual foreign direct investment (USAID, 2002). Potentially, these flows could increase to about US$300 million annually. The cost of making these transfers is high, however, and there is no competition in that service. The use of banking institutions and electronic transfer facilities through automatic teller machines would reduce
31 the transfer cost considerably. In March 2003, National Bank of Industry and Commerce, Guyana’s largest commercial bank, launched an account to account transfer facility using SWIFT.
Strengthening Institutional Capacity
4.19 For reasons discussed in chapters 2 and 5, qualified and experienced staff are now difficult to retain in the private and public sectors, and professional ranks are fast being depleted. In response to this situation, Demarara Distillers Limited, one of Guyana’s largest groups, has enhanced its staff recruitment, training and development. It has taken proactive initiatives by reaching out to new university, technical school and secondary school graduates with training attachments and work-study opportunities. Because of the slow economy, employment opportunities for newly qualified graduates are limited. At the current pace of emigration, Guyana will not have many experienced and qualified people over the medium-term. Civil service capacity is especially weak and administration systems are outmoded. In order to improve the investment climate, capacity strengthening is needed in investment promotion, tax administration and land administration.
4.20 Investment Promotion: Guyana has an investment promotion agency (Guyana Investment Agency or Go-Invest) which is in need of strengthening. Although the agency gets substantial support from USAID’s Guyana Economic Opportunity Project, it lacks the resources and organization needed to fulfill its mandate (FIAS, 2002). Nevertheless, a new chief executive officer is trying to revive its usefulness.
0 Go-Invest could contribute to policy reform by functioning as the channel of communication between the private sector and the Government. It should act as the Secretariat for the business-government dialogue process;
0 Go-Invest could fulfill its functions more efficiently. It could provide assistance to existing companies and potential investors in dealing with government agencies. It could also compile information about Guyana and some domestic companies and disseminate it to interested investors. More proactively, it could provide services to match domestic companies and foreign investors and also market Guyana to targeted countries in selected sectors; and
0 Go-Invest is also responsible for export promotion, a role it has recently begun to emphasize. Its mandate is to assist Guyana in diversifying exports and improve export competitiveness. It could support local companies by providing market information and links and help them to participate in overseas trade fairs and hold domestic exhibitions.
4.21 Tax and Customs Administration: Recognizing the need to improve the GRA’s capacity and efficiency, the Government has appointed a new director and his deputy to the GRA and plans to take the following steps:
0 Strengthen GRA’s management and give it full authority to recruit and dismiss employees. Improving GRA’s work culture and code of conduct and implement a credible plan to eliminate corruption. Form a team of trusted officers to verify the most important corporate tax returns submitted in the past two years;
0 Implement a new taxpayer identification number in the internal revenue department and customs and trade administration;
0 Introduce a self-assessment system for income and property taxes and repealing the requirement to file by employees with only one source of income; and
0 Improve inter-agency cooperation to fight smuggling.
32 4.22 Access to Land: Most land in Guyana is publicly owned and usually leased and investors do not have easy access to land.74 “There is a substantial incidence of informal transactions in the land market.. . [as] formal mechanisms .. are widely perceived as being too costly, unfair or lengthy as to be either practical or aff~rdable.”~’Generally, the absence or inaccuracy of lease and ownership documents and widespread conflicts have undermined tenure security over land rights?6Guyana’s objective should be to have an ample supply of privately owned land, which an investor can buy or lease with security of tenure.77 Guyana’s land administration is weak and surveys and new registration systems are needed. Documenting rights through adjudication and titling will be difficult because of conflicting claims. With support from the IDB and DFID, the Guyana Commission for Lands and Surveys has made good progress in implementing a program of institutional strengthening, the objective of which is to enhance tenure security and access to land, reduce vulnerability, encourage better and more sustainable use of resources, and promote private investment for opening new land for economic de~elopment.~~Despite these institutional advances, most land is still owned by the state and policies can pose impediments to private investment.
Improving Infrastructure
4.23 Good infrastructure services are necessary to encourage private investment in productive areas. For a poor country with a small population, export led growth is the only option. All potential exports such as agro-processing, tourism, garments, electronics, information technology, etc. require reliable electric power at international prices, good road, port and air facilities and world-class telecommunications capability (the water sector is discussed in chapter 5). Although Guyana has made significant improvements in the last decade, many shortcomings remain. As demonstrated by the electricity and the telecommunications sectors, in-spite of privatization, there has been little benefit to the economy. The issue is not privatization per se, a policy which should be maintained, but rather the absence of good regulations and their lack of adherence.
4.24 Electricity. Guyana’s small electricity system provides services to about 60 percent of the population, mostly along the coast. In 1999, the Government sold a 50 percent stake in the Guyana Electricity Company (now Guyana Power Limited, GPL) to AC Power Ltd., a consortium of the Commonwealth Development Corporation (CDC), the Electricity Supply Board of Ireland and the Government. GPL was under a private management contract whose terms include a guaranteed rate of return, accompanied by performance targets. A new Electricity Sector Reform Act (ESRA) was also passed, which maintained GPL’s exclusive rights over distribution, but which limited exclusivity in generation to a five year period, after which independent power producers were expected to bid to supply the power needs of the company.
4.25 Despite privatization, electricity service is not consistent (outages and voltage variation) and scheduled prices are the second highest in the Caribbean region, requiring companies to install their own generating capacity. GPL contends that many consumers make only partial payment for their electricity usage by bribing GPL staff. Lower revenue collection, a delayed tariff adjustment, and the imposition by the Public Utilities Commission of a heavy fine upon AC Power for its failure to meet technical and commercial loss reduction targets have exacerbated financial pressure on GPL, which was already suffering because of rising oil prices. This led to a crisis in March 2003 which culminated in the withdrawal of the strategic investor as CDC sold its holding for US$1. The authorities now face the immediate challenge of preventing further blackouts by correcting under-investment in essential maintenance, whilst maintaining fiscal stability. In the coming months, they will need to develop an action plan for steering GPL towards renewed private participation, under an improved contractual and regulatory framework.
33 4.26 Transport. Guyana’s road network stretches for 1610 miles. About one-fifth of the network is primary roads, another fifth is feeder roads, and the remainder is interior roads and trails. Much of the network is in poor condition. Improving overall maintenance and rehabilitating selected roads and bridges could lower the cost of transport substantially and spur economic activity in several areas. Guyana does not have any deep sea port facilities, which limits the size of ships that can dock. Port facilities handle merchandize inefficiently, although competition has lowered handling charges by up to 30 percent. Ports need major improvement. Equipment is needed to remove wrecks, to dredge, to load, to make pallets, and to fight fires. The feasibility study of developing a deep-water harbor and a container port should be initiated. Air transport is limited in coverage and in passenger and cargo capacity. It is also very expensive. Many of Guyana’s airports lack landing lights and navigation equipment which are expected to be funded under the IDB’s Air Transport Reform project. As the Government does not have the capacity or resources to substantially improve transport infrastructure, it should consider concessions or other forms of public-private partnership arrangements.
4.27 Telecommunications. Guyana has adequate telecommunications infrastructure to support the development of information and communication technologies. Telecommunications service is considered expensive, however, and the existing private monopoly has impeded the introduction of wireless technology and of internet services. With multilateral aid, there is a substantial program aimed at increasing connectivity and access. It is recommended that competition be allowed in this sector and/or regulations be improved to facilitate Guyana’s access to world-class telecommunications services.
34 5. INVESTING IN HUMANDEVELOPMENT
5.1 The goal of reducing poverty in Guyana depends on the success of its human capital investment strategy. Indeed, strengthening and sustaining human capital will be critical if the economy is to grow in the medium and long term. This recognition is at the core of both the National Development Strategy (NDS) and the PRSP. Implementing the strategies means improving the quality of health and basic education and expanding services to the hinterland, expanding retraining opportunities for newly displaced workers, and protecting and enhancing the human capital investments of the poor and vulnerable population through social protection interventions. Progress has been made, but major hurdles remain to achieve these objectives. This chapter examines some of the critical challenges facing the social sectors and outlines key policy recommendations.
Social Welfare Performance-Mixed Results
5.2 Guyana’s social welfare as measured by key social indicators has improved since the deterioration evident through the 1980s and early 1990s. Yet basic indicators remain significantly below those of most other countries in Latin America and the Caribbean (Table 5.1). Guyana ranked 92d out of 175 nations on the UNDP’s index of human development in 2001 (HDR 2003), trailing all Caribbean states with the exception of Haiti, Dominican Republic and Grenada. Guyana does not rank better on the UNDP gender-related index (GDI), coming 74th out of 144 countries. These summary indices suggest a low and in some cases declining level of social development.
Table 5.1: Selected Social Indicators: Guyana and Comparators, 2001 Guyana Latin America Lower-Middle I and the Income Caribbean Countries Poverty incidence (% below poverty line, 1999) 35 Urban population (% of total population) 38 75 42 Life expectancy at birth (years) 63 70 69 Infant mortality (per 1,000 live births) 54 30 32 Child malnutrition (% of children under 5) 12 9 11 Illiteracy (% of population 15+) 1 12 15 I Source: World Bank, Social Indicators Data Base, 2003.
5.3 Indicators. Life expectancy at birth has fluctuated over the last decade, but by 2001 it had fallen below its 1990 level to 63 years, well below that of regional Caribbean neighbors and the Latin American and Caribbean average life expectancy of 70 years.79 Although infant mortality has declined from 64 per 1,000 in 1990, the 2000 level of 54 far exceeds average rates in Latin America and lower-middle income countries. Maternal mortality is also alarmingly high at 168 per 100,000 live births, roughly consistent with sub-Saharan African averages. Malaria remains one of the principal causes of morbidity, with nearly 42,000 reported cases in 2000. Tuberculosis is on the rise, and HIV/AIDS has become a pandemic disease, with an estimated adult incidence of three to seven percent, the highest in the Caribbean after Haiti.*’
5.4 Guyana has plentiful and good quality raw water resources.81 Approximately 92 percent of the population now has access to water, better than many countries in Latin America and on par with higher- income countries. Major improvements in water infrastructure by the Government with outside financial assistance have occurred in the past few years. However, reliability of treated water services remains poor. Water is often available for only a few hours a day, particularly in areas outside Georgetown, and
35 an inconsistent water distribution system combined with insufficient maintenance of drainage facilities continues to contribute to a significant incidence of water-born illnesses.82
5.5 As with health, the education system experienced marked deterioration during the 1980s, but has improved since. Primary school enrollment rates are high and secondary enrollment is respectable, while grade repetition rates at the primary levels are low and have been declining, standing at about 2.4 percent in 2000.83 Despite reasonable enrollment, chronic student and teacher absenteeism contribute to a low level of performance. National performance on the Caribbean Examinations Council (CXC) scores are significantly below the Caribbean average, although there has been improvement in secondary school entrance examination (SSEE) since the early 1990~.~~These results suggest a generally poor quality of schooling, consistent with the apparent decline in literacy across the country. The official literacy rate is 98.6 percent for adults 15 and older, however functional literacy is likely to be as low as 55 percent. It is estimated that nearly a third of children graduating from primary schools do not have basic literacy skills.85 The problem is much worse among out-of-school youth, of which, according to the Ministry of Education, up to 90 percent operate below acceptable levels of functional literacy.
5.6 Pro-Poor Growth spending. As shown in Figure 5.1, the central government’s pro-poor growth spending4.e. spending on education, health, housing and water, and other poverty alleviation programs-has substantially increased since 1997, both in real and relative terms. It grew by an annual average rate of 5.9 percent in real terms between 1997 and 2002, faster than GDP growth (0.7 percent) and total spending (3.2 percent). As a share of GDP, it increased from around 15 percent in 1997 to 20 percent in 2002. Both education and health increased sharply in relation to GDP during the period under review, with the share of education more than doubling and the share of health increasing by 50 percent. In both sectors, the increase is accounted for by non-wage spending (books, school supplies, drug supplies). The authorities have met their HPC targeted objectives for all of the main social spending categories since 2000. Figure 5.1: Pro-Poor Growth Spending
Average Annual Growth Rates (“A) p.a. for Social Average Share of GDP for Social Sectors (1997-2002)
Education
HeaHh
~ Total Spendlng
~~ousmgand Water I Health = I Poverty Alleviation I Programs
-5 0 5 10 15 0 5 10 15
I Average Share of Total Public Spending for Social Social Spending as a % of Total Spending and GDP Sectors (1997-2002) , 24 47 22 45 0 20 43 n 18 4 g 41 8 16 p 39 Housing and 37 - 14 Water I ~ 35 12 1997 1998 1999 2000 2001 2002 2003
36 5.7 Public social sector spending in Guyana compares favorably with other countries in the region as shown in Table 5.2. Except in the case of social security and welfare where the figure is comparable to other Caribbean countries, but far below the average for the rest of Latin America (notwithstanding the large variations between countries). Spending on housing and water are of a similar magnitude to social security and welfare and consistent with other countries in the Caribbean region.
5.8 The number of teachers and health workers-key performance indicators under the EHIPC initiative-show improvement over the period 2000-2002 (Table 5.3.) The number of teachers (primary and secondary) increased by 5-6 percent per annum over the same period, the ratio of trained teachers by 5-10 percentage points, and the students drop out rates declined by 3 percent. With respect to the health sector, the number of workers remained almost unchanged during 2000-2002. The number of new trained teachers averaged 5 19 per annum over the 2000-2002 period, 200 more than the annual average over the 1996-99 period.
Table 5.2: Social Sector Expenditures: Guyana and Region, 2000 Latin America and the Indicators (%of GDP) Guyana Caribbean a Public health expenditure 3.4 2.8 Public education expenditure 7.5 6.8 Social Security and Welfare 2.0 5.5 Housing and water 2.1 0.8 Total 15.0 15.9
a 2000 or most recent year available. Includes housing expenditure only. Sources: IMF Government Finance Statistics Yearbook, 2001 ; Ministry of Finance Estimates of the Public Sector, 2001.
Table 5.3: Guyana: Selected Education and Health Indicators, 1999-2003
Primary teachers (number) 4808 (of which trained, Yo) 57% Secondary teachers (number) 241 2 (of which trained, Yo) 64% Total no. of new trained teachers 576 Student Drop outs (primary) 2209 2100 2005 1992 n.a. Student Drop outs (secondary) 2500 2326 2275 2198 n.a. IHealth care workers (number) 3475 3502 3460 source: Government of Guyana
Cross-Sectorial Challenges
5.9 Implementation gridlock. The failure to make substantial progress on policy implementation stems largely from political gridlock and mistrust of civil society which impacts on the provision of social services. Often public services are perceived to have a strong political dimension benefiting certain population groups more than others. While the solutions to the political problems are multidimensional and cannot be treated adequately in depth here, there are a number of incremental steps that could both help to improve service delivery and alleviate the political tensions. From a service delivery perspective, it is important to continue the process of devolving the social sector decision making and increasing the
37 autonomy of local authority. A much better understanding of the role of central and local governments, NGOs and civil society in the delivery of social services is needed. In addition, attention should be given to de-politicizing the social sectors to the extent possible. This can be achieved in part by developing budget allocation rules and regulating the quality and quantity of services in a transparent, well-conceived manner, and regularly monitoring the application of the established policies and programs. Increasing the involvement of civil society and NGOs in the provision of services and monitoring performance will also help to gain the support of society and increase local capacities. Government cannot do it all alone, and it is necessary to forge stronger partnerships with the Guyanese society at large.
5.10 Institutional capacity. The planned devolution of central government decision making and management is encouraging, with line ministries moving away from service provisions toward policymaking and oversight functions. The Ministry of Health is adopting a system of regional Health Management Committees (HMCs) to coordinate local service delivery and has already corporatized the Georgetown Public Hospital. National water and sanitation services have been merged into a single privately managed company where previously separate parastatals provided services for Georgetown and the rest of the country. Cost recovery measures are underway along with planned service expansion.
5.1 1 But devolution, decentralization and privatization are not panaceas for inefficiency and lack of capacity. At the local levels, the capacity to effectively administer programs needs to be strengthened. RDCs, NDCs, and HMCs need to improve their financial management, gain technical expertise in managing services, and ensure community participation in the follow-up and evaluation of local service delivery and management. Experience elsewhere in Latin America suggests that community participation is essential to achieve efficient service provision in a decentralized environmenLg6 Central line ministries in the social sectors by and large continue to operate in a state of continual fire-fighting. This is partly the result of incomplete devolution of decision making, and partly limited capacity. They do not have the skill mix necessary to carry out the new policy and oversight functions. Monitoring, evaluation, and policy analysis capabilities must be developed.
5.12 Emigration and low public sector wages. The retention of qualified personnel is a chronic problem in all sectors. The vacancies are largely a consequence of low public sector pay and emigration. It is estimated that between 20,000 and 50,000 Guyanese migrate annually for the United States, the United Kingdom and Canada (see Box 5.1). Many of these are trained medical personnel and teachers. Brain drain combined with low wages has contributed to a vacancy rate (before the abolition by the Public Service Ministry of all vacancies) of up to 40 percent of the posts in the Ministry of Health, and nearly half of primary school teachers and 43 percent of general secondary teachers were classified as untrained in 1999/2000.87 Similarly, 30 percent of human services staff positions within the Ministry of Labor and Human Security jobs are vacant. Unfilled vacancies have clearly compromised the ability of line ministries to operate effectively. The shortage of qualified medical personnel and teachers are felt most acutely in the rural interior regions where poverty is highest. More than 70 percent of the specialist medical personnel are expatriates, many from Cuba, India and China through technical cooperation programs.
5.13 The problem of staff retention is well-recognized in Guyana and receives attention in the PRSP. There are a number of initiatives underway to address the problem in different sectors. The Basic Education Access and Management Support (BEAMS) project will provide in-service training opportunities and will develop teacher accommodations in remote areas. The recently approved EFA-FTI proposal will devote nearly US$5 million to training teachers in the hinterland areas using a distance learning approach, constructing houses for teachers and providing a hardship allowance. A goal of the project is to improve the retention rate of teachers in the hinterland by 20 percent by 2015. These are consistent with the Education Strategic Plan for 2003-2007 which envisages to build houses for teachers and improve the school working environment through infrastructure improvements. The National Health
38 Plan envisages a strategy of facilities consolidation combined with training programs and revised reward and promotion systems to increase and retain skilled health staff.
5.14 Given the critical nature of the problem, additional innovative approaches to staff retention should be considered. The need for downsizing Government and reducing the public sector wage bill has been noted in Chapter 3. With well-designed streamlining of staff positions across Government, it may be possible to significantly increase the salaries of remaining personnel to address the difficulty posed by noncompetitive wages. Consideration should be given to the recruitment and training of medical and education personnel from within local communities, particularly in remote regions; the creative use of assignment rotations; hardship stipends; and deferred education and investment benefits, building on ongoing initiatives. The emigration problem is not restricted to Guyana and is a phenomenon throughout the Caribbean. Regional consultations and approaches may be considered as well. Ultimately, however, stemming the tide of human capital will come from improvements in the general economic and political conditions in Guyana. Emigration plays an important factor in many aspects of the economy and yet not much is known about it. It is therefore suggested that an in-depth study be conducted to learn more about the profile of emigrants and the impact of emigration on the economy, with the view of designing mechanisms to improve the net impact of emigration on the economy.
5.15 Budgeting and resource allocations. As noted above, social sector spending in Guyana is increasing, yet the problem of low quality services and limited access in hinterland regions persists, with little improvement in aggregate social indicators over time. The proposed 2003 government budget would be the largest in the history of Guyana, with further increases in the health and education budgets over 2002. While there is some evidence of historic underspending in these sectors, it is important to ensure that new resources are spent effectively.
39 5.16 Budgets are determined and allocated largely from a historical perspective, rather than through a process of performance monitoring and assessment. There is limited ability to allocate new resources to priority areas. The allocations of sectoral resources should be reviewed on an ongoing basis as part of the planning and budgeting process. For example, the public health sector spends more than a quarter of its expenditures on drugs and medical supplies and about a third on staff compensation.88 This allocation suggests that health expenditure is focused more on hospital and specialized care rather than on primary health care, health promotion, and education. The draft National Health Plan 2003-2007 has put increased emphasis on primary care activities, which should be monitored. In education, the share of expenditures spent on primary education in the late 1990's was in the range of 27-30 percent, considerably below the norm of 40-50 percent in many developing countries.89 This imbalance will be partially addressed by the EFA-FTI proposal. In general, there are no mechanisms in place to routinely monitor program performance and spending decisions, and to translate findings back into the budgeting process. Developing and implementing such a system should be a priority across sectors.
5.17 There has been good progress in improving budgeting practices and moving to a program-based system in both the Ministry of Health (MOH) and the Ministry of Education (MOE) through the Guyana Economic Management Program (GEMP). Both ministries are using a program budget process rather than recurrent line-item budgeting, thus improving the ability to track program costs. Unfortunately, the rest of the Government still uses the old system, creating inefficiencies in reconciling the systems. In addition, old fiduciary practices are still largely followed, whereby the Ministry of Finance withholds a portion of the budgets of line ministries, forcing them to request cash releases periodically throughout the year and hindering smooth program implementation and future planning.
5.18 The operational roles of central ministries and local actors is unclear in certain areas. This is to be expected in the early stages of reform, but the relationships should be formalized as soon as possible. For example, management authority in health is fragmented between the MOH, MOF, Ministry of Local Government, and the RDCs. Inconsistency in the operation of sectors can be difficult for local levels of Government. RDCs typically administer procurement for hospitals and clinics, but procurement pertaining to communicable diseases (e.g., vaccines) is handled from the central ministry. In the education sector, RDCs are not involved in procurement at all. Formal regulations and linkages are needed to govem interactions between the center and regions. This will become more critical as central ministries further devolve responsibilities for services management.
5.19 Establishing regulations and quality control can also help to increase the involvement of the private sector in service provision. The private sector has expanded rapidly in health care. In 1999, for example, it was estimated that nearly half of all health visits were to private facilities?' Yet the quality of these services is not monitored, and their use is not factored into sectoral planning.
5.20 Privatization and restructuring. As the restructuring of key industries such as bauxite and sugar proceed, there will be negative short term consequences for the social sectors. Parastatals have in the past provided a range of services to employers and their families, including health care, education, and sanitation and water access. Restructuring is eliminating these company services, forcing families to tum to public systems. In addition, the planned retrenchment of workers will have limited means to pay for public or private services, creating a potential crisis in access to care for these families and increased demand for social safety nets and labor market interventions. One estimate places the number of retrenched GUYSUCO workers at about 6,000 over the next few years (assuming the closure of the Demerara mills) and another 850 at LINMINE, potentially affecting some 37,000 people through family association^.^^ Finally, the semi-privatization of basic infrastructure services such as water and electricity, notwithstanding the long term efficiency and coverage benefits, is resulting in short term price shocks coupled with threats of termination for delinquent accounts. Average electricity tariffs are expected to increase by 15 percent in 2003, while water rates may increase between 20 and 50 percent
40 depending on use. Taken together, these effects are placing an increased burden on the health, education, and social welfare systems.
5.21 A critical short-term need is to improve and possibly expand social safety net programs in order to facilitate access to services by the poor and vulnerable. A main area of concern is to keep children and families in school and receiving primary health care to prevent deterioration of welfare and human capital. Currently, there is only a limited exam fee subsidy, a school feeding program operated by the Ministry of Education, and subsidized school uniforms from the Ministry of Labor, Human Services and Social Security. A more comprehensive targeted voucher program is under consideration, as is a water subsidy for the poor.92 Experience from the rest of Latin America on the use of conditional cash transfers in education and health and targeted subsidies may be valuable for Guyana.
5.22 A second need is to increase training and employment opportunities for dislocated workers. The two principal poverty programs, the Social Impact Amelioration Program (SIMAP) and the Basic Needs Trust Fund (BNTF) have been geared primarily to supporting health, education, water and sanitation infrastructure through communities and NGOs, with a limited project-specific local labor component. The Linden Economic Advancement Program (LEAP), a large initiative funded by the European Union, will focus directly on enhancing job opportunities by offering vocational training and microcredit resources to displaced workers in the Linden area. There are other initiatives, including the Skills Training and Employment Program (STEP) for unemployed youth operated by the Ministry of Education, but more systematic consideration of training opportunities coupled with access to small business and microcredit for older workers should be undertaken with the participation and consultation of the private sector.
5.23 Indigenous people. Box 5.2 discusses in some details the profile and challenges facing the indigenous people who account for about 8 percent of the population. The Amerindians are especially vulnerable, with 80 percent below the poverty line. Although Amerindian communities are integrated to some degree into the cash economy, the majority still engage largely in subsistence activities and thus depend on natural resources (agriculture, forestry, mining) which are under environmental threat. The Government has implemented some programs aimed at reducing poverty among the Amerindian communities through improving access to employment opportunities and enhancing the delivery of basic services. It has also undertaken a program of institutional reforms to address the issues of economic and social development among the Amerindians, including the establishment of the Ministry of Amerindian Affairs. But, the Government has yet to elaborate a comprehensive strategy for fully addressing Amerindian concerns: access to land, environment degradation, and economic empowerment.
Sector-specific challenges
5.24 Health. A major priority in the sector is the consolidation of management and service delivery reform efforts discussed above. Some underutilized facilities will be closed, others consolidated, and some hospitals converted to outpatient polyclinics. Adequately upgrading, maintaining and staffing these facilities, with attention to hinterland areas, will be crucial. In addition, critical vertical programs need strengthened implementation efforts. The UN estimates that between 1999 and 2001 HIV/AIDS was the number one cause of death in Guyana in terms of years of potential life lost, and it is already the fourth leading cause of death nationwide. An HIV/AIDS National Strategic Plan has been developed in consultation with international donors, encompassing education, counseling, and adoption of treatment guidelines and some access to antiretroviral drug therapy. Communicable and vector-borne diseases with rising prevalence, such as malaria and TB, require similar attention. There is a pending application to the Global Fund for HIV/AIDS and TB for US$16 million to fund initial activities. It is recommended that these efforts be accelerated. Consideration should be given to the systematic inclusion of NGOs and private sector groups in public education campaigns. Maternal and child health interventions should be a
41 further priority, reducing the need for more costly treatments at a later stage. These National Priority Programs must not be lost to the objective of organizational reform.
5.25 Education. The education sector has been a priority for the past several years for both Government and donors. As a consequence, there are a number of large donor-supported programs at various stages of implementation, in addition to assistance from smaller bilateral agencies and UN organi~ations.~~Coordination occurs informally to a degree through the Donor Thematic Group on education chaired by the MOE, and through multi-donor initiatives such as EFA; however more systematic coordination that sequences and links interventions could benefit Guyana. There are several strategic issues to be addressed in the sector, from cumculum reform to improving tertiary education through STEP to strengthening the capacity of MOE. However, most initiatives can be summarized as efforts to remove the various constraints that affect the supply of, and demand for, quality education.
42 Priorities include: teacher training and retention, facilities management and availability of books and school supplies, and accessibility and affordability of school attendance for families. A targeted education subsidy is being considered.
5.26 Social protection. With the ongoing industrial restructuring and the aging of the population from natural causes and migration, social protection takes on an important dimension. In general, existing programs are inadequate in terms of targeting and benefits. For example, over 70 percent of the poor are Amerindians, yet they receive less than 10 percent of social assistance benefits on a~erage.~’Many small safety net programs exist providing only meager benefits. The system would benefit from a rationalization exercise focusing on consolidation of programs and improved benefits. Better integration and coordination of programs across ministries should also be a priority. Rationalization and capacity building has begun with the assistance of a World Bank technical assistance program to the Ministry of Labor, Human Services and Social Security through the Public Sector Technical Assistance Credit. See box 5.3 for a detailed discussion of social safety net programs.
5.27 Water, sanitation and housing. Priorities in the water and sanitation sectors should be first on infrastructure rehabilitation and maintenance, and rationalization of existing facilities; and second on expanding water and sanitation access to rural cominunities. Prior to 2000, poor infrastructure had contributed to costly inefficiencies and chronic water-borne diseases. The Guyana Water Company estimated that more than three-quarters of all water provided was lost from damaged mains and improper connection^.^^ Despite Guyana’s high quality source water, in many cases by the time it reached the consumer it had become contaminated through damaged pipes and low pressure. The 30-year-old sewage system in the Georgetown area was in a near state of collapse, with communities outside Georgetown largely dependent on pit latrines and septic tanks without effective sanitation services.
5.28 Since 2000, with assistance from the IDB, the EU and the CDB, good progress has been made in the rehabilitation of the water infrastructure and in the improvement of the water quality in Georgetown and the lower costal area. Also, progress on rationalizing facilities and cost recovery has been made with the adoption by Government of a reform strategy for the water sector, the establishment of the single water company (Guyana Water Inc.) through the merger of the two existing water companies, and the passage of the water bill that establishes quality standards and a mechanism to manage water resources. The start-up of a management contract to a private operator in January 2003 is expected to increase access to and quality of the water services, as well as sector cost recovery - it is too early at this stage to assess the performance of the private operator. The operator has reviewed and presented its “capital improvement program” (US$ 15 million per year over a ten-year period) which would require donor support. The dilemma facing Guyana is that improving infrastructure access is key to greater social and economic inclusion and yet, given the vast distances and the low population density, the improvement would be costly and would require both operating subsidies (until sustainability is reached over a period of several years) and targeted subsidies to ensure access and affordability to the poorest facing steep tariff increases.
5.29 The housing difficulties can be largely attributed to outmoded laws and procedures which hinder development. Squatter settlements are prominent in Georgetown-about 20 percent of the city’s population are classified as squatters, the majority of whom live in communities with unfit dwellings.” Addressing these problems will require a combination of legal and procedural reform for land development and regularizing squatter communities. There are currently efforts in place, supported by IDB technical assistance, to address the issues facing the housing sector. Furthermore, since 1999, government has embarked on a countrywide program to regularize the squatters (subdividing land, building infrastructure, and granting titles). To date 99 areas out of 140 (covering 90,000 people) have been regularized. The IDB is supporting a US$30 million low-income settlement project, the EU has
43 recently approved a small project to upgrade infrastructure in squatter areas, and a revolving credit fund has been created to help low-income families build houses.
Conclusions
5.30 Many of the challenges to human development and service provision have been long recognized by Government and stakeholders. Key issues have been identified in national strategy documents and health and education plans. Each of the Government line ministries has responded in meaningful ways to the challenges, reflected in a variety of ongoing reforms supplemented with extensive donor-supported initiatives. This chapter has examined some of the remaining key challenges facing the social sectors,
44 most of which are inter-related. Many can be addressed through improving sectoral planning and implementation of programs. The main conclusions are: Implementation gridlock is the greatest barrier to improved human development outcomes; Planning, monitoring, and budgeting processes need to be strengthened at the central line ministries; Functional roles need to be formalized for local Government and service agencies, and management capacity strengthened; Civil society, the private sector, and NGOs should play a more prominent role in the administration and monitoring of the social sectors within a devolved policy environment; Retention of qualified staff must be addressed at all levels; Although some progress has been made in addressing the needs of the indigenous people, the Government has yet to elaborate a comprehensive strategy for fully addressing their concerns, notably access to land, environment degradation, and economic empowerment; and The burden on public social programs is likely to grow with restructuring of traditional industries, necessitating greater reliance on short-term social protection interventions.
45 6. MEDIUMTERM OUTLOOK-PRODUCTIVITY GAIN AND EXPORT DIVERSIFICATION
6.1 This chapter discusses growth prospects of both the traditional sectors-sugar, rice and mining- and the non-traditional sectors. It argues for a major restructuring of the traditional sectors and for a bold move into a new direction in support of economic diversification. Two medium-term scenarios are discussed here for illustrative purposes: a base case scenario (reform) and a low case scenario. It is clear that Guyana's best option is to move aggressively in improving the political climate and the security situation in the country and implementing reforms if growth is to be resumed and sustained.
Revitalizing Agriculture-Shifting Towards More Competitive Activities
6.2 Agriculture is concentrated on the coastal plains where farming is protected from the intrusion of saline water by mangroves, dikes, sluices and concrete walls, known collectively as sea defenses. Sugar and rice are the main agricultural activities on the coast, and cattle production is the main agricultural activity in the intermediate and Rupununi savannahs. Many other crops (i.e. fruits, vegetables, spices, small ruminants and tree crops) are produced under extensive cultivation for the domestic market. In 2002, agriculture (including fisheries and forestry) accounted for 33 percent of GDP, 46 percent of merchandise exports, and was the main source of employment for the 70 percent of the population living in the rural areas"'. Weak support services, deterioration of the drainage and irrigation facilities, high cost farm-to-market infrastructure and insecure land tenure are amongst the key impediments to agricultural growth.
6.3 Sugar Sector. The sugar industry accounts for 16 percent of GDP, a fifth of the cultivated land, 23 percent of foreign exchange earnings, and 6 percent of the labor force. For nearly fifteen years, efforts have been made to restructure the sugar sector and to prepare the Guyana Sugar Company for privatization."* Appointment of a private manager in 1992 brought costs down and led to an increase in the level of field and factory effi~iency.''~By 2000, Guyana was producing sugar more competitively than the other Caribbean producer^."^ Thanks to preferential market arrangements and GUYSUCO's private management, sugar-- production more than doubled during this period, rising from 130,000 tons in i990 to 331,000 tons in 2002. Yields increased to current average Figure 6.1: Sugar cane: Average yield 1999-2001 ("a) of 61 MT's per hectare, some 87 percent above the average for the Guadeloupe Caribbean as a whole (Figure 6.1). Martinique Although three-quarters of GUYANA Jamaica Guyana's sugar production was Barbados exported to the EU at prices more Haiti than triple the world market prices, St Kitts & Nevis about 20 percent of production Trinidad and Tobago was high-cost and had to be cross- Grenada s~bsidized.''~ In total, the Puerlo Rico industry's cross subsidization Dominican Republic amounts to about 2 percent of Caribbean GDP annually. Cuba St Vincent & Grenadines Bahamas 6.4 The sugar sector faces Dominica tremendous challenges: the 0 10 20 30 40 50 60 70 80 challenge to preferential quotas in Source: Source FAO, Agrostat (2002) its main European markets, low
46 and declining world prices for sugar, and antiquated factories which impede the achievement of lower cost production. The long term trend in world market prices is projected at US$9 cents/lb in real 2000 US dollar terms by 2015, half the current level of production cost in Guyana. Depending largely on the EU's review of the sugar regime and on the effect of challenges posed to the EU sugar at the WTO, Guyana's sugar export prices could fall much sharper and sooner.'06 Given substantial pricing uncertainty, the main focus of sugar sector restructuring is to reduce, over time, the cost of production to international levels.
6.5 GUYSUCO's plans for the restructuring of the sugar industry include: (i)development of a new and modem factory at Skeldon while increasing production in Berbice; (ii)closure of the loss-making factories in the Demarara region;'07 (iii)a reduction in labor costs-through attrition and voluntary retrenchments-which have grown over the last decade from 41 percent to 56 percent of total recurrent costs; (iv) a shift in management contracting and wage policy from a production to a profitability basis; and (v) elimination of the sugar levy on windfall profits. Efforts are being made to add value to domestic sugar production by increasing co-generation of electricity, launching new lines of packaged sugar, building a refinery at Skeldon to make white sugar for export, and expanding distillery capacity and exports of processed spirits. Additional measures to boost field-level productivity, that are being supported under the Agriculture Improvement Program, include an increase in the conversion of state to freehold lands, introduction of more drought and pest-resistant crops, promotion of in-filling and better land management techniques, and mechanization of selected field operations.'08 The restructuring of the sector is expected to increase efficiency and lower production to a financially optimum level. With the new Skeldon plant coming on line, Guyana's production capacity will rise to 450,000 tons per annum by 2006.'09
6.6 The capital investment required to build a new factory at Skeldon and to renovate existing factories, is estimated at US$llO million, equivalent to nearly 14 percent of 2002 GDP. This excludes a possible US$20 million in additional financing for a refinery at Skeldon, if that is pursued. In a market economy, the Government can hardly afford to be the main source of finance for the commercial sectors. Over time, the financing burden for the sugar sector should be shifted from the public to the private sector. Improvements in the regulatory structure will be needed to inspire more private sector investment in sugarcane. Replacing the sugar levy on GUYSUCO's profits with dividends and corporate tax, striking a medium-term wage-setting agreement linked explicitly to productivity, and modifying the existing GUYSUCO management contract to provide positive incentives for increasing GUYSUCO's profitability are amongst the measures that would make the industry more attractive to private finance.
6.7 To reduce field costs, more sugar should be purchased from private growers, rather than being produced by GUYSUCO. Under present arrangements, GUYSUCO has little incentive to buy from private growers or to supply them with technical services. A new cane payment formula should be put in place that provides incentives to farmers to deliver high-quality cane and to processors to buy from private growers and supply them with technical services. This implies that the 70:30 percent revenue- sharing arrangement should be reduced to a 62:38 percent split and that cane payments to farmers be explicitly linked to factory recovery rates.' lo Restructuring the sugarcane sector is likely to increase unemployment when the existing older plants in the Demerara area are closed. The actual amount of unemployment is unknown, but could amount to over 8,000 persons in the medium-term. Since any sugar plant closings would only occur after the Skeldon plant is operational, this provides the Government with two to three years to prepare suitable severance and job training assistance."'
6.8 In the long-run, there is little reason why the Government should continue to own, operate or manage GUYSUCO, or indeed any other commercial company. Experience worldwide demonstrates unambiguously that private ownership of commercial business has an important and positive influence on productivity, profitability and investment choice, especially in a quickly-evolving and highly-competitive export-oriented sector. As access to preferential markets fades, there is the risk that Government's
47 attempts to rescue the sector could hinder the redeployment of resources into activities with which Guyana may well be far better off. Moreover, in the 1990s, sugar production and productivity soared, while rural poverty stagnated.lI2 In the long-run, if sugarcane development is to be an engine of rural development and poverty reduction, cane producers will need to share in both production risks and returns. Other countries, most notably Thailand and Malaysia, have transformed state-owned plantations into smallholder-cooperatives (in Malaysia, FELDA) and smallholder-owned limited liability companies. In these cases, the impact on rural poverty reduction has been nothing short of remarkable.
6.9 Rice Sector. Rice traditionally accounted for a fifth of agricultural income and about 8 percent of Guyana’s GDP. After prices and trade were de-controlled in the early 1990s, productivity and production increased (Figure 6.2).Il3 Similar to sugar, Guyana has had recourse to preferential market access for rice in the EU, where prices have ranged from two to three times the world market level. Rice production reached a historical low of 288,000 tons in 2002 due to drought and weak prices. Earnings in the rice sector have been on a declining trend since 1998 because of declining international market prices. Delayed payments by millers and decreasing availability of credit to cover production costs has disrupted planting schedules and has contributed to greater difficulties in irrigation, drainage and dam maintenan~e.”~Over the long-term the most serious issue will be the loss of preferential entry into the European Union in 2007. Guyana’s cost of rice production is in the order of US$340- US$400 per MT, compared to production costs in the range of US$80 to US$lOO per MT in China, Vietnam, Thailand and Burma, the leading global exporters. Given that rice production is highly labor intensive and wages in Guyana are four to five times that in the low-cost Asian states, the long-term competitiveness of this 2 industry is questionable. The main immediate challenges facing the rice sub- sector include the need to strengthen research and extension services, rehabilitate drainage and irrigation infrastructure, resolve mounting credit arrears, and improve the quality of exports.
6.10 High-Value Crops. With an end to preferential market access approaching, diversification into crops that can be produced more competitively for export is warranted. Guyana produces a wide variety of fruits, vegetable and other crops, many of which, if grown with modern technology, have better global market prospects than rice. Ensuring that research and extension policy focuses on providing a range of technology options to rice farmers can help to facilitate a shift into more competitive crops. Assisting private agro-industry associations to develop the marketing information and marketing services necessary to penetrate new agro-export markets and maintain reliable product quality can help to expand economic opportunities and diversify the export base. This is also an area where fuller analysis of technical options appears warranted.
6.1 1 Forestry. The total land area of Guyana is about 215,000 km2, of which more than 75 percent is forested. Almost all is state owned, with nearly half of the forested lands allocated for commercial forestry purposes. The share of forestry in GDP has increased from 2.6 percent in 1996 to 4.5 percent in 2002. Taken together with milling and other forms of processing, the forestry sector accounts for nearly 10 percent of GDP. Some 500,000 cubic meters of wood is produced each year, and forestry accounts for US$40 million in annual exports. Low forest use fees, short concession periods, provision of one-year
48 cutting permits, a lack of industry experience in sustainable management and inadequate land use planning are amongst the main impediments to sustainable forestry development. The bulk of the saw mills have vintage equipment, and traditional producers are being displaced from the local lumber market by a large number of roving, chainsaw millers. These informal producers have even lower timber recoveries, no fixed capital costs, pay little or no forest fees and taxes, and often poach their timber from formal operations.
6.12 Progress has been made in fostering sustainable forestry development through the introduction of a tree tagging system, boosting Forestry State Commission monitoring and surveillance, and by transforming the forestry commission into a self-financed and professionally managed and operated organization. Government intends to introduce a code of practice for processing, which will discourage unregistered mills and will inspire modernization investment in wood processing. New sustainable cultivation certification procedures will be introduced by the FSC to ensure that exports meet strict world market criteria. Implementation of the code of practice for wood processing and the establishment of a wood certification facility should boost timber quality, and in so doing, will raise export supply and improve incentives for value-added manufacture. On the supply side, increased utilization of existing concessions, the release of popular bullet wood from the protected species list and continued expansion in new concessions auger well for a substantial increase in sustainable forest production over the medium- term. Indeed, a doubling of log production and exports in the next decade appears well within reach provided appropriate environmental measures are put in place. In this regard, the forestry law needs to be amended to ensure adequate environmental protection, and a code of practice for processing forest products needs to be adopted.
Sustainable Mining Development
6.13 Mining in Guyana takes place in the country’s interior, where the majority of the population consists of Amerindian tribes. Many of the miners who work for the small- to medium-scale operations come from the coastal parts of Guyana and spend only a short time in the area before returning to their homes on the coast. Because mining takes place close to rivers, mining byproducts frequently end up in the river. In 1995, Guyana witnessed one of the world’s worst mining disasters, when three billion liters of cyanide effluent spilled into the country’s largest river, the Essequibo. Guyana’s mines have traditionally dumped effluent into local rivers, creating sedimentation and mercury contamination problems in adversely affected river basins. Mining operations often encroach on ancestral native lands and while they may provide social amenities (Le. a clinic or school), these tend not to be well maintained once the mine runs out. Informed and equitable dialogue should lead to mining-contract terms that protect the natural environment and improve the livelihoods of indigenous landholders. Guyana has a substantial, least explored and developed mining potential. At present, mining activities are concentrated on bauxite, gold and diamond. Some 10-15 percent of the labor force are directly or indirectly involved in mining. Gold and diamond mining has been growing rapidly, bauxite production is declining and has been a burden on the b~dget.”~Low recovery rates, the paucity of geological data and high costs of river-based shipping are among the factors impeding the development of the sector.
6.14 Bauxite sector. Guyana’ bauxite deposits yield high-quality bauxite used for the refractory, abrasive and chemical markets. In the 1960s, Guyana supplied nearly three-quarters of the global demand for these products. Since then, Guyana has lost market share as new competitors, in particular Brazil and China, entered the refractory market with a lower priced and superior quality product. Soft global market conditions have led to a steady decline in international market prices and, as a result, Guyana’s bauxite industry has been recording financial losses for the better part of the past two decades. In 1980, the bauxite sector accounted for 34 percent of GDP and provided over 50 percent of the value of Guyana’s merchandise exports. The bauxite sector currently accounts for only 5 percent of GDP and 2000 jobs, and costs the budget 1.7 percent of GDP in subsidies-a level which is not fiscally sustainable.
49 6.15 With the aim of securing the industry, attracting private investment and re-establishing Guyana’s reputation for reliable supply, the Government has attempted to privatize the mines since the early 1990s but this has met with little success. In 1991, the Government signed a private management contract to run the operations of Linmine which resulted in the downsizing of employment in half. Since 1992 the Government has been providing subsidies to maintain the operations of the mines and its workforce in the face of declining productivity and increased competition from the Far East. In 2001, Alcoa proposed the merger of Aroaima (ABC) and Bermine. When this did not happen, Alcoa turned over its equity shares for US$1 to the Government later that year. In September 2002, Aroaima and Bermine were merged operationally in order to match equipment, blend routines and reduce the cost of river dredging. Together, the two mines account for 1.2 million MTs of total production. The combined Aroaima and Bermine company faces substantial challenges: it is operating at less than half of total capacity with heavy government subsidies and their two principal buyers have announced that they will reduce purchases to a third of current levels by 2004.
6.16 Efforts to restructure the distressed bauxite mines continued in 2002. Towards this end, Government has laid off a net of 1060 workers and has agreed to provide severance payments in a lump sum for any displaced workers.“6 Cambior has expressed interest in buying Linmine in 2003.’17 This will hinge on identifying suitable arrangements for securing a reliable power supply for the mine, reducing employment and sourcing adequate financing to modernize Linmine’ s equipment. If Linmine is privatized, its production could rise from a fifty-year low of 61,000 tons in 2002 to 200,000 tons of refraction quality bauxite by 2006. With restructuring and identification of alternative markets for ABC- Bermine MAZ, Guyana’s total production of metallurgic and non-metallurgic bauxite could increase from its current level of 1.6 million metric tons to just over 2 million metric tons by 2006.”8
6.17 Gold and Diamond Sectors. Guyana began to export gold in 1993 with the opening of the Omai open-pit on the banks of the Rio Essequibo. The mine is operated by Cambior, a Canadian mining company and produces around 10 tons annually. By the mid-l990s, gold was Guyana’s second largest generator of export earnings, after sugar. There is a relatively high level of informal gold mining activity in the country. Including Omai, total declared gold production was 13.6 tons in 2002. But the prospects for gold production are mixed. Omai, which accounts for 75 percent of the gold currently produced, will run out of reserves in 2005.
6.18 Extensive prospecting for diamonds by foreign companies in the 1990s has produced impressive growth. Diamond production has increased from 30,000 to 40,000 carats in the mid-1990s to a peak of 248,000 in 2002. Most of what is now produced are alluvial, industrial grade diamonds. Increasing output will either require chemical treatment to raise recovery rates (which poses environmental risks) or new investment in larger-scale mines.
6.19 If the Government continues with its present policies, structures, and institutions, by 2010, gold output will likely decline by at least 60 to 70 percent and diamond production will flatten out. However, if the Government introduces reforms that inspire greater private investment in sustainable mining, gold production could climb back to as much as 10 tons per annum by 2010 and diamond production could rise by 30 to 40 percent in the next five years.
Improving Natural Resources Management
6.20 Given Guyana’s natural resources’ endowments (agriculture, forestry, mining and water) and the central role of their exploitation for the country’s economic development, any sustainable development strategy will require a broader environmental framework that combines environmental, economic, and social concerns. Such a framework should include policies and institutions regulating user rights and obligations in exploiting the country’s natural resources and protecting areas for conservation. This will
50 include, inter alia, the specific policy actions that have been highlighted at the sector level throughout this chapter. The “greening” of international markets for commodities such as timber and minerals puts pressure on governments to define clear environmental management practices and standards, as part of a favorable business environment for international investments.
6.21 The Government is committed to addressing environmental issues, as spelled out in its recent National Environmental Action Plan, but there is a need for a more focused and consistent approach to these issues. Concrete steps are being taken on the conservation and sustainable use of protected areas, through the GEF Guyana Protected Area System (NPAS) project which is being prepared under the leadership of the World Bank and support from the German government. The project would assist in establishing the legal, regulatory and technical framework for national protected areas system in Guyana, taking into consideration indigenous land claims and resource use issues.
Diversification for Future Growth
6.22 Manufacturing, tourism and other high-value services remain at a nascent stage of development in Guyana. Taken in combination, these sub-sectors account for less than 10 percent of GDP and total employment. Even in the traditional sectors-sugar milling, mining and forest product development- manufacturing provides little value addition to abundant raw materials. Primary products and linked services, still dominate economic activity. Countries in Central America and the Caribbean that have grown the fastest over the past two decades have diversified economic activity, away from primary goods towards manufacturing and high-value services. In each instance, structural change was led by foreign investment that contributed to a rapid expansion of exports. For example, in El Salvador, a nation with internal security problems and a legacy of state-led development, the share of agriculture in GDP declined from 38 percent in 1980 to 10 percent in 2000, while manufacturing and services expanded from 57 percent to 83 percent. Growth averaged nearly 6 percent per annum during these two decades. In contrast, the share of agriculture in Guyana’s GDP increased from 23 percent in 1980 to 31 percent in 2000 while the share of manufacturing declined from 12 percent of GDP to 8 percent of GDP.
6.23 Numerous studies show that foreign direct investment plays a key role in fostering economic diversification and integrating countries into the global marketplace. Moreover, developing nations that have utilized global economic integration to foster structural change and sustained rapid economic growth have had the best track record in reducing poverty.”’ Foreign direct investment brings links to developed country markets, transfers technology and know-how in new products and improves management and productivity. These benefits spill over into the rest of the economy as domestic firms and workers acquire the same capability. Moreover, as exports grow, other supporting services such as banking, communications, hotels and ancillary services become more efficient. Net foreign investment in Guyana has averaged just US$50 million per annum, almost all into mining.
6.24 Establishing a pathway to inclusive political development, internal security and macroeconomic stability, while making steady progress in structural reform to provide an enabling environment (as described in chapter 4), will be essential to motivate private sector investment. Beyond this, Government could demonstrate its commitment to increasing and broadening the foreign direct investment base by exploring the feasibility of
0 Establishing export processing zones or free trade zones: these can serve to facilitate diversification and export growth. More importantly, they can expedite reforms in an enclave setting that can catalyze country-wide reform. Experience elsewhere, however, shows that countries having such arrangements are increasingly under pressure to remove many of the advantages that can be construed as trade subsidies;
51 0 Establishing an informatics park: Guyana has the geographic potential to compete with and complement other developing countries that have established call center and back-office processing services. If Guyana’s telecommunications services improve, an informatics park could serve as a base for investors in this sector;12’ and
0 Fostering international connectivity: highways of about 200 miles in the south-west, 200 miles in the north-west and a deep water harbor in Georgetown would link Brazil via Lethem and Venezuela’s La Horqueta respectively, to an Atlantic port. Alternative access to the Atlantic through their own territories would require traversing difficult terrain and is more than double the distance. Given the current controversies about these huge investment projects, in-depth analyses are needed.
6.25 Such collective goods are expensive and some measure of public-private partnership will be needed to reduce costs and ensure that strategic assets are delivered and managed efficiently. None will pay off, however, unless and until Guyana’s political divisiveness, lawlessness and policy constraints to private sector development are addressed. If policy reforms progress and special measures are implemented to increase and diversify foreign direct investment, the payoff could be substantial. Starting from a very low base, and assuming that it would take two to three years to restore political and macroeconomic stability, a double-digit growth target in manufacturing and high-value services between 2005 and 2015 is feasible and is within the range experienced by other diversifying small economies, such as Mauritius.”’ If this growth target is achieved, the share of non-traditional manufacturing and high-value services could easily double from about 5-6 percent of 2002 GDP to 10-12 percent of GDP by 2010. More importantly, a foundation for diversifying the economic base would be established, while the demonstration effects and forward and backward linkages arising from foreign investment would shift the economy as a whole to a far higher growth and poverty reduction trajectory.
Prospects and Risks
6.26 Low case scenario. Forecasting Guyana’s medium-term economic outlook is difficult because it hinges on its leaders’ willingness to overcome political divisiveness, lawlessness and policy constraints that keep Guyana operating far below its economic potential, and trap so many in abject poverty. A low case scenario assumes that current political instability and internal insecurity continues and, although the sugar and bauxite sectors are restructured,’22 public policy remains largely unchanged. This implies: private investment would continue to fall below replacement levels, depleting assets; and the high rate of emigration would increase and skill shortages would mount. Mounting urban under-and un-employment would add to instability, crime and lawlessness. In such an environment, donor budget support might not be forthcoming and could potentially fall by some 4-5 percent of GDP.
6.27 Faced with a revenue loss and flagging private investment, the government deficit would widen to a precarious 15-18 percent of GDP, draining resources out of a fragile banking system and causing domestic debt to rise at an unsustainable pace. Lacking sufficient foreign finance, construction of the new sugar mill at Skeldon would be delayed; the bauxite industry would likely collapse and there would be little to replace the Omai gold mine when its reserves are exhausted in 2005. In addition, if preference margins in sugar erode, Guyana’s exports could drop in half (from US$490 million in 2002 to at best US$300 million in 2005-2007). That decline would immediately hamper the nation’s ability to import, leading to shortages of capital goods, spare parts, fuel and consumer goods. Expansionary deficit spending could only stem the decline for a few years before exchange rate devaluation, rising inflation and a mounting domestic debt would bring the economy to a standstill. By 2005-2007, per capita incomes could fall back to the pre-ERP levels, thus erasing all the gains made in the 1990s and substantially increasing the proportion of the population below the poverty line.
52 6.28 Base case scenario. That depressing scenario can be avoided, if the process of constitutional and political reform is sustained leading to inclusive political and social development and a commitment to rule of law, as agreed in May 2003. In that case, the slide into lawlessness and criminal violence could be reversed. Simultaneously, improved macroeconomic performance and progress in implementing structural policies would signal the Government’s intention to support private-sector led, export-driven growth and poverty reduction. Medium-term macroeconomic stability would be reinforced by sharply reducing public consumption, restructuring the sugar and mining sectors, halting transfers to loss-making state enterprises, and focusing public investment on high-priority public goods.
6.29 Restructuring in the sugar sector would proceed, with wages and management-company remuneration linked explicitly to industry profits. Uneconomic segments of the sugar industry would be hived off, restructured or closed. Private investors would be secured for the bauxite industry and given the authority to introduce measures needed to restore profitability. Restrictions on foreign investment in forestry and mining would be removed and better practice codes enacted to reward environmentally sustainable practices. Discretionary fiscal and tax practices would be halted; an investment code that provides for equal treatment of all investors would be promulgated; tax reform would broaden the base while bringing rates down; competition would be introduced in telecommunications; prudential regulations and supervision would be improved for financial markets, the electricity sector restructured, and more rational tariff-setting arrangements introduced to restore service quality.
6.30 To provide a special boost to foreign investment, special promotional measures, private-public partnerships in areas such as export processing zones or informatics parks could be developed and a long- term commitment made to establishing infrastructure connectivity with Brazil and Venezuela. As private investment increases, the public sector would be downsized and professionalized, with pay linked to performance measured according to well-defined program outcomes; a more modem budgeting and debt management system would be introduced and the foundation of a commercial legal framework would be built on the basis of an effective first-tier system of dispute resolution. Returns to public spending in education and healthcare would increase by focusing government outlays on essential primary health care, sanitation and schooling, and allowing the private sector, community groups and NGOs to manage and deliver much of the other social services.
6.31 What may happen to the economy in such an optimistic scenario? Table 6.1 provides projections, for illustrative purposes only, of key macroeconomic indicators over the next five years. Debt relief and external budget support would be forthcoming. This support would help finance near-term public goods and the construction of the new Skeldon sugar factory. Once credibility is established, new domestic and foreign investment would return. In 2004-2005, the economy is bound to experience only a modest recovery, given the immediate impact of the restructuring in the mining sector and the closure of the Omai gold mine. But thereafter, economic activity should recover faster. By the end of the decade, private investment could reach 12 percent of GDP and FDI could increase to just under US$lOO million per annum. By the second half of the decade, the average rate of economic growth could recover to 3 to 4 percent, and per capita incomes could reach over US$1100 by 2010. Poverty incidence, after rising due to the restructuring of the public service and the sugarcane sector, and following the closure of the Omai mine in the 2005, would fall at a steady rate thereafter. By the end of the decade, the poverty headcount could fall to around 30 percent of the population. As discussed in the previous chapter, the social safety net would need to be strengthened to mitigate against the social cost arising during the next few years.
53 Table 6.1: Guyana, Medium Term Prospects (percentage change unless indicated
2003 2004 2005 2006 2007
Real GDP at factor cost -0.2 2.0 0.8 1.8 2.9 Nominal GDP (US$ million) 749 797 825 843 876 Public Investment (% of GDP) 15.7 23.0 16.2 14.1 13.8 Private Investment (% of GDP) 6.6 7.0 8.8 9.8 10.2 Consumer Price Index, average 5.8 4.6 3.5 3.0 3.0 Nonfinancial Public Sector Balance (% of GDP, before grants) -16.6 -17.8 -13.9 -11.5 -10.1 Nonfinancial Public Sector Balance (% of GDP, after grants) -10.8 -1 1.6 -7.4 -6.0 -5.2 Current Account Balance (% of GDP, excl. official transfers) -17.4 -18.9 -17.2 -15.9 -14.9 Gross Reserves (in months of imports) 3.0 3.7 4.4 4.0 4.0 Extemal Public Sector Debt (% of GDP) * 155 163 169 171 173 I I
6.32 Under this scenario, the medium-term payoff may not sound too much-3-4 percent per annum growth rate and poverty headcount at 30 percent by the end of the decade, given the extent of the reforms to be implemented. But this is unavoidable as many policy and institutional changes will take time to yield results and the short-term outlook is modest under the best circumstances. The big payoff is, however, expected to happen in the next decade as Guyana’s competitiveness increases and economic diversification reaches its full potential.
54 ENDNOTES
Chapter 1
See Leo A. Despres, “Ethnicity and Resource Competition in Guyanese Society” in Despres, ed., Ethnicity and Resource Competition in Plural Societies, Mouton, The Hague 1975. Also Leo Despres, Cultural Pluralism and Nationalist Politics in Guyana, Rand McNally, Chicago. Jai Narine Singh, Guyana: Democracy Betrayed a Political History 1948:1993. Kingston Publishers, Jamaica, 1996. Edwin Ali, The Rise of the Phoenix in Guyana’s Turbulent Politics, Georgetown, 1997. See “No End in Sight to Govemment Opposition Deadlock” Stabroek News, April 01,2002. Moses Nagamootoo, Guyana Leadership, Mimeo, 2003. See The Initiative, Hopes, Aspirations, Political Attitudes and Party Choices in Contemporary Guyana. Survey Conducted by St. Augustine Research Associates, University of the West Indies, Trinidad 2000; Deryck Brown, “Ethnic Politics and Public Sector Management in Trinidad and Guyana” Public Administration and Development Vol. 19: 367-179. Rupert Roopnarine, Some Intemal Dynamics of Insecurity: The Case of Guyana Mimeo; Dennis Watson and Christine Craig, Guyana the Crossroads, North South Center, University Miami, 1996. See also Selwyn Ryan, Democratic Govemance and the Social Condition in the Caribbean UNDP, New York; ”Power Sharing in the Caribbean: The Search for Equity and Security” Caribbean Dialogue, Vol. 8, Nos. 1&2, January-June, 2002; Ivelaw Griffith, “1997 Political Change, Democracy and Human Rights in Guyana.” Third World Quarterly, Vol. 18. Selwyn Ryan, Winner Takes All: The Westminster Experience in the Caribbean. Institute of Social and Economic Research, UWI., St. Augustine, 2000. * The Philadelphia model is the American model, in which the popularly elected President has full executive powers. In the Westminster formula, the Prime Minister (in theory) is not elected by the people but is called upon by a Monarch or an appointed Head of State to form a govemment after the election results are known. The first-past-the-post system is the system in use in the United Kingdom, the Anglophone Caribbean and most of the Commonwealth wherein the candidate who gets a majority or a plurality, i.e. passes the winning post first, is declared the winner in the particular constituency. Arend Lijphart, Democracy in Plural Societies: A Comparative Exploration, Yale, 1997; “Consociational Democracy” World Politics, Vol. 21 (January 1984) 207-225; Electoral Systems and Party Systems: A Study of 27 Democracies 1945-1970, Oxford 1994. David de Cairies, “Can Majority Rule Work?’ Trinidad and Tobago Review, December 1998. loPeoples National Congress Shared Govemance Mimeo, 2002; Peoples Progressive Party/Civic Towards Greater Inclusive Govemance in Guyana, State House. Georgetown 2002, Tyrone Fergusson, Structural Adjustment and Good Govemance: The Case of Guyana Public Affairs Consulting Enterprise Georgetown. See the extended debate on the merits of power sharing in Guyana conducted in the Stabroek News between David Hinds, Freddie Kisson, Prem Misir, Clarence Ellis, Eric Phillips et. a1 throughout 2002. Leslie Ramsammy. The PPP/C’s Commitment to Shared or Inclusive Govemance. aw\~:.v_i~~~~n:ti;irihbe:tni701iiics.com. December 18,2002. l2However, there were complaints from the WPA, other minor parliamentary parties, and key groups in civil society that they were excluded from the process which resulted in the communiquk. The WPA is also dissatisfied with the manner in which its involvement in the sectoral communities was resolved. The PNCR was accused of pursuing a “winner take all” position in respect of the allocation of posts assigned to the Opposition, notwithstanding its overall position in respect of power sharing. l3By the end of September 2003 the High Representatives of the Govemment and the Opposition were able to report to the Stakeholder Group that all 7 of the new Standing Committees (Parliamentary Management; Appointive Committee; Constitutional Reform Committee; Natural Resources Sectoral Committee; Economic Services Sectoral Committee; Foreign Relations Sectoral Committee) had been appointed. Appointments to several of the Constitutional Commissions had been made, though there was more work still to do to finalize some of the composition of these Commissions. l4Guyana Human Rights Association, Ambivalent About Violence: A Report on Fatal Shootings by the Police in Guyana, 1980- 2001. l5According to data compiled by the Guyana Human Rights Bureau, the number of persons shot to death by the Police between 1980 and 2001 number 239. Of these, 187 (78%) were of Afro-Guyanese origin, 29 (12%) were of Indo-Guyanese origin, 2 (1%) were Amerindians, 7 (3) were of mixed race and a further 14 (6%) of unknown origins. During the 1993 - 2001 period, there were 113 fatal shootings 99 (88%) of which were Afro-Guyanese, 8 (7%) were Indo-Guyanese while the remainder were of other racial or unknown origins. The Police are also being executed by persons who regard them as being their tormentors and oppressors. Since February 2002,23 have been shot. East Coast villages such as Buxton and Annandale have become prime sites of increased criminal activity, but the problem is national in scope. There were 142 murders recorded in 2002, almost double the number committed in 2001 when 79 persons were reportedly killed. Forty-seven persons were killed between January and April 2003. l6Buxton, one of the better known villages to be founded by freedmen following emancipation, has in recent years become one of the key centers of political militancy.
55 l7The Caribbean Drug Trend Report issued by the United Nations Office on Drugs and Crime (UNODC) revealed that some $3.68b from the illicit drug industry passed through the Caribbean inn 2002. Cocaine transshipped through the Caribbean to the US market rose from 29 per cent in 1980 to 48 per cent in 2001. See also, Report of the CARICOM Regional Task Force on Crime and Security, Port of Spain, 2000.
Chapter 2 ’’ Economic indicators should be interpreted with caution because of Guyana’s large informal economy, smuggling and the role of remittances provided outside the banking system. The general trends in economic and social performance over time can be assessed with a reasonable degree of accuracy although annual estimates are subject to some uncertainty. During the 1980s, secondary school enrollments fell by 40 percent, a telling indicator of the collapse of social services. 2o The need to deepen market-orientedreform, and in particular to strengthen the institutional foundations of a market economy, was anticipated by Govemment. A National Development Strategy (NDS), prepared by some 23 technical working groups was launched in January 1997. The NDS provided a comprehensive set of recommendations aimed at fostering rapid growth and broad-based socio-economic development through a range of macroeconomic management, structural and sector reforms. Within the framework established by the NDS, Guyana’s Interim Poverty Reduction Strategy (1999) was formulated, and after intensive consultation and refinement, a PRSP was completed in 2002. 21 Guyana Civil Aviation Authority, the Maritime Authority, Georgetown Hospital, the Lands and Surveys Commission, and the Auditor Generals Office. 22 In the case of telecommunications, this has raised costs, inhibited development of wireless technology and slowed-down the introduction of internet services. 23 Just three firms pay 80 percent of all corporate tax. 24 These are a number of the reasons that the World Bank (2002) Guyana: Country Financial Accountability Assessment assigns Guyana a high country risk rating. 25 The Guyana Office for Investment (Go-Invest) reports that $126.6 million was invested in 96 foreign and domestic projects in 2002, primarily in the areas of mining, textiles, tourism and light manufacturing. Go-Invest also estimates that this investment will create some 3,000 new jobs. 26 Loayza et. al. report that Guyana’s trend per capita growth rate was 3.76 percent per annum in the 1990s, compared to an average of 1.76 percent per annum for Latin America and the Caribbean as a whole. See Norman Loayza, Pablo Fajnzylber and Cesar Calderon, 2002, Economic Growth in Latin America and the Caribbean, World Bank. 27 A three-fold increase in cocaine seizures by the policy between 1994-1996 and 1997 to 2001 is evidence of an increase in drug trafficking activity. This took place during a period in which cocaine seizures were relatively stable for the Caribbean as a whole. Regional trends presented by the United Nations Office on Drugs and Crime (Caribbean Drug Trends 2001-2002, Bridgetown Barbados, 2003) show that cocaine seizures in Guyana begun to converge to levels reported in Suriname, a major trans-shipment point for illegal drugs to Europe, during the latter part of the 1990s. 28 See Ebrima Faal, 2003, Currency Demand, the Underground Economy and Tax Evasion: the Case of Guyana, IMF Working Paper WPlO317, Washington D.C. 29 Schneider, F. and Enste, D.H. 2000, “Shadow Economies: Size, Causes and Consequences”, Journal of Economic Literature, VOI. 38, pp.77-114. 30 Rice producers and processors, who together account for K$10.2 billion out of K$47.8 billion in private loans and credit outstanding to the banking system account for the majority of the arrears. Thanks to high levels of provisioning and surplus liquidity in the banking system, there is little risk that large arrears will trigger systemic banking failure. 3’ Manuel Orozco, 2002, Remitting Back Home and Supporting the Homeland: The Guyanese Community in the US.: Final Report for the USAID Guyana Economic Opportunities Project, October 2002. 32 Options for sterilizing the macroeconomic impact of large unrequited foreign exchange inflows are limited in Guyana’s case. Efforts to build large foreign exchange reserves may not be possible given a high level of public debt, reliance on continued aid inflows and weaknesses in financial governance. The inflation of large aid inflows and remittances on macro-competitiveness merits further investigation. 33 Tanzi shows that that high levels of public spending in low income countries, and in particular current outlays, tends to hamper growth, contaminates the banking system and constitutes a source of macroeconomic vulnerability. See Vito Tanzi, 1997, The Changing Role of the State in the Economy: A Historical Perspective, IMF Working Papers, IMP119971114, Washington D.C. 34 See Govemment of Guyana, 2002, Guyana Poverty Reduction Strategy Paper, p. 51. 35 These include three Paris Club reschedulings during 1991-95, Naples terms in 1996 and Lyon terms in 1999 36 Debt relief under the original HIPC initiative was provided on Lyons terms (80 percent net present value reduction of eligible debt) and amounted to US$256 million in net present value (NPV) terms and started to become available in May 1999. In 2000, a second phase of debt-reduction,under the enhanced HIPC, provided additional relief of $329 million in net present value terms. Linked to debt relief were a number of reforms, including: (i) completion of a PRSP; (ii) maintenance of stable macroeconomic conditions in line with performance targets set under the IMF’s PRGF; (iii) improving governance by reforming public procurement legislation and tracking HIPC resources in the budget; (iv) improving social sectors and structural performance by increasing the number of teachers and health care workers, developing a plan for the 2002 population census; further reforming
56 the civil service; restructuring and modernizing GUYSUCO, completing the sale of GNCB in March 2003, tabling a new Investment Law in parliament and beginning the implementation of the IDB-financed SIMAP-111. 37 Guyana had satisfied the conditions for reaching the completion point under the original HIPC Initiative in May 1999. The conditions for reaching the floating completion point under the enhanced HIPC Initiative will require substantial progress to meet fiscal targets. Guyana is presently in arrears in its non-Paris Club debt. Progress in resolving non-Paris Club arrears will need to be demonstrated if Guyana is to access IMF finance after the E-HIPC completion point has been reached. 38 Under the IDB Technical Cooperation Design of the Public Sector Modernization Program (PSMP TC), which was approved in January 2000, staff audits of core government ministries, most regional administrations and a number of semi-autonomous agencies were carried out from May-June, 2002. Job descriptions and performance appraisal activities were not undertaken, owing to a joint IDB-COG decision in June 2001 to reformulate the PSMP TC, with a view to improving the sequencing of activities and removing potential duplication with the activities of other donors. It was instead agreed that the program should focus upon overview studies of the public service function and vertical institutional capacity assessments of the government ministries. 39 See World Bank (1994), page 3. Attempts to quantify levels of poverty in Guyana in the 1970s and 1980s have been carried out by Boyd, Ramprakash and the Pan-American Health Organization using income data for 1980 and nutrition survey carried out in 1971 40 The strong link between growth and poverty reduction in Guyana is similar to that of many other developing countries. Based on cross-country analysis, Dollar finds that when average incomes rise, the average incomes of the poor rise proportionately. This holds across regions, periods, income levels and growth rates (David Dollar, Growth is Goodfor the Poor, World Bank, April 2001). 41 The minimum wage increased by 615 percent from 1992 through 2001, or from G$2,801 (1992) to $20,045 (2001). In US dollar terms, minimum wages rose from US$24.00 to $105.77 per month between 1992 and 2001. 42 The 1999 Living Conditions Survey indicates that the proportion of poor households headed by women is similar to that of non poor households. This pattem was also observed in the earlier 1992 survey results. As such, the PRSP did not establish specific targets related to gender equality. In terms of broader public policy, the Government has undertaken to establish a special parliamentary committee to examine the status of women in Guyanese society. 43 This is an approximate estimate. Net financial inflows are treated, in the first round, as an autonomous transfer of resources to the domestic economy. Half of the foreign exchange inflows are assumed to leak out of the economy, in second round effects, through an increase in import demand (Le. the marginal propensity to import is assumed to be 0.5, consistent with 1990s experience). The first and second round effect is an increase in the supply of foreign exchange of some 22%-28% of GDP. This, in conjunction with an inelastic demand for foreign exchange (assumed of 0.6), drives the nominal exchange rate up by approximately 13%-17% over what it would be in the absence of such transfers. 44 The 2002 Aid Redbook lists 227 ongoing development assistance projects for 2002. 45 See High Level GovernmentlDonor Co-ordination Committee Meeting, 10 February 2003, Summary of the meeting held on 10 February 2003 at the UN Conference Room. Georgetown. 46 See Collier and Dollar, 2001, Development Effectiveness: What have we learned, World Bank. 47 External support under this initiative will also be used to train new teachers, pay teachers’ salaries, build new schools, help education systems respond to HIVIAIDS, augment teaching materials, provide teacher housing in the hinterlands, improve school feeding programs and put in place better education management and performance monitoring systems. (Government of Guyana, 2002, Education for All---Fast Track Initiative Country Proposal/Credible Plan, September 30, 2002.) 48 A recent inter-agency technical team of the UN Executive Committee for Peace and Security visited Guyana in December 2002. Their mission reported that: “The economic decline, insecurity, and fear described above are affecting the very fabric of Guyanese society. There is a growing conviction among many Afro-Guyanese of an Indo-Guyanese political plot to keep them permanently disempowered; conversely, many Indo-Guyanese perceive Afro-Guyanese political organizations as deliberately fostering criminality in order to create conditions for the overthrow of the elected Government.”
Chapter 3
49 Estimated at a quarter of the budget. See: World Bank, HIPC Expenditure Tracking Exercise. 50 E.g. in the health and education ministries. In the Accountant General’s Department, only 115 out of 260 positions are filled. The department does not have a single Certified Public Accountant or equivalent. The position of Accountant General has been vacant for three years. 52 The report on the Public Accounts of Guyana for 2001 was issued 1 day late. The report for 2002 is expected to be on time. 53 The survey, which states that public sector jobs remain attractive, may be referring to unskilled labor. It is the technical and managerial positions that are hard to fill, as government pay and benefits do not match those in the private sector, while for unskilled labor the public sector is still attractive as they have no options). 54 A series of studies have been completed with wider consultation, including 22 ministerial organizational diagnostic reports, and four overview reports on governance processes, structures, capacity and organizational performance measurement
57 55 The Govemance Network, (2003). Public Sector Modemization Design Plan. See Volume I,p.17 “the present state of all of the horizontal planning and management systems of the Govemment significantly impedes its ability to mobilize human and financial resources, plan for their utilization, manage their delivery, and assess their performance.”) 56 Some of these are underway. For example, the PRSC is supporting govemment actions to implement the necessary reforms and provide the institutional strengthening needed for their effective implementation in the following areas: (1) improvement of the oversight of Public Financial Management; (2) curtailment of the discretionary powers of Public officials; (3) strengthening the disclosure of public officials personal assets; (4) ensuring the independence of the office of the Auditor General. 57 For the impact on private investment, see “Guyana: A Diagnostic Study of the Foreign Investment Environment,” by FIAS. July, 2002. 58 Steven Weller and Richard J. Moore, “The Carter Center Report of the Feasibility Study on the Uses of Altemative Dispute Resolution (ADR) to Address Problems of Backlog and Delay in the Courts of Guyana.” Carter Center, September, 2000. Also, both the Chancellor of the Judiciary and the Head of the Bar Association made statements regarding the lack of sufficient qualification of judges. 59 See Steven Weller and Richard J. Moore, op. cit. 6o Vacancies exist for Magistrates: 7 out of 21 positions; for the High Court: 4 out of 12; and for the Court of Appeal: 2 out of 6. See Weller and Moore, op.cit. 62 By Steven Weller and Richard J. Moore, op.cit. 63 Prisons are overcrowded and conditions deplorable. Data for 2001 show that in the Georgetown prison, which holds 60% of all prisoners in the country, over 40% were awaiting trial. Within the total prison population in Guyana, 30% of those awaiting trial had been in prison for more than three years. Credit for time served is not generally given. See “Interim Report by the Criminal Law Review Committee,” April 2, 2002. 64 See also the already mentioned FIAS and Carter Center studies, 65 Kaufmann, Daniel and Aart Kraay, “Govemance and Growth: Causality which way - a survey of the world, in brief.” World Bank research paper. February, 2003.
Chapter 4
66 For a more detailed discussion of the investment legal framework see Arden and Price Consulting, (2003) “Guyana National Diagnostic Study” Support for Investment Frameworks in the Caribbean Community. According to this report, the estimated time it takes to execute some of the steps required to establish and operate a business in Guyana can take up to a year in the case of investment incentives and land lease (see Table E2) 67 Regulatory quality includes measures of the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development. 68 Rule of law includes several indicators which measure the extent to which agents have confidence in and abide by the rules of society. These include perceptions of,the incidence of crime, the effectiveness and predictability of the judiciary, and the enforceability of contracts. 69 In the first half of 2002, Government reported 9 policemen killed and 17 injured; 3 security guards killed and 7 injured; 5 businessmen killed and 75 injured; 689 armed robberies; 73 car hijackings; and a total of 4,826 indictable reported crimes. Over the past two years, as scores have been kidnapped, robbed, or killed, many have closed up their homes and businesses and emigrated, or have chosen to downsize or curtail their business activities. Few want to be visible for fear of attracting the notice of bandits. Some have made plans to shift operations from Georgetown to the Berbice, which they believe might be a more secure environment, though crime has increased there as well. 70 Op. Cit. FIAS, 2002 71 For example, actual taxes charged on imports depend on the importer and purported product use. These non-scheduled remissions amounted to 106 percent of customs revenue and 68 percent of total exemptions in 2001 (World Bank, 2002c) 72 For example, the three largest private sector groups account for 80 percent of corporate taxes. 73 When GRA was first established, it was unable to dismiss corrupt officers as envisaged under its operating legislation and as a result, GRA’s director resigned in 2002. 74 According to Arden and Price Consulting, (2003), “the major problem mentioned by the business/private sector associations was land ownership, as well as the transfer of propertylownership. Application for land concession is difficult, with 18 steps or processes between application and acknowledgement of land availability. It may take one year or more to receive a land title.” Page 16 75 See Bishop, Andrew R., (2003) “Land Policy, Land Administration and Management”, Commissioner of Lands and Surveys. Page 14. 76 See Harold Lemel, Patterns of Tenure Insecurity in Guyana. University of Wisconsin. Working paper No 43. March 2001 77 One of the principal problems in expediting land reforms seems to be the “rent seeking” that the status quo may be preserving. According to one source, there are about 280,000 acres of government declared land and another 340,000 acres of undeclared land. Govemment leases are currently averaging G$l,OOO/acre, most of which is not collected because it would be uneconomical to do so, while informal surveys suggest that some of this land is sublet to farmers at rates of G$30,000/acre. Because of the
58 titling and monitoring weaknesses, the sublet income is not traceable and not taxable. No sensitivity analysis has been undertaken about the gains and losses that would result from land privatization or having leases reflect market values, but clearly the potential revenue gains to government are substantial. 78 “Land Policy, Land Administration and Management”, Andrew. R. Bishop, Commissioner of Lands and Surveys, March 2003.
Chapter 5
79 Life expectancy in 2000: Suriname (72.9), Venezuela (72.9) and Trinidad and Tobago (73.8). Guyana also has a high infant mortality rate (56 per thousand live births in 1999) compared, for example, to 24 per thousand live births in Costa Rica. Source: UNDP. 8o Caribbean Epidemiology Center, 2000. UNAIDS reports that HIV infection has spread beyond the vulnerable groups to the general population (UN, 1999, Common Country Assessment for the Cooperative Republic of Guyana, Georgetown). The AIDS pandemic appears to be related to a number of factors, including the authorities belief that it would be confined to the minority ethnic group; a lack of popular awareness and limited access to retroviral drugs and other treatment. 81 The World Water Council ranks Guyana’s water quality fifth best among 147 countries according to its Water Poverty Index. The urban water supply system has deteriorated due to vandalism, lack of maintenance and fuel shortages. In Georgetown, the GS&WC estimates that 70 percent of the piped water is lost due to broken and damaged mains, and inappropriate connections (UN, 1999, Common Country Assessment for the Cooperative Republic of Guyana, Georgetown). 82 UNICEF, 1999 and Guyana Poverty Reduction Strategy Paper, 2001. 83 For example, the average repetition rate for grades 1-6 is relatively low at 2.4 percent. In Georgetown, Regions 3 and 6, the repetition rate is less than one percent, compared to Regions 1 and 9 (hinterland regions) where the average ranges from 11 to 15 percent. Drop-out rates from primary school ranged from 3 percent in the coastal region to 8 percent in the hinterlands during 1996-1999 (Govemment of Guyana, 2002, Education for All---Fast Track Initiative Country ProposaWCredible Plan, September 30,2002.) 84 Guyana’s CXC scores were the worst in the Caribbean in 1995, and in 1998 the pass rates in grades 1 to 3 was 23 percent lower than in 1994. See UNDP Guyana Human Development Report 1996 and UN Common Country Assessment 1999. 85 Ministry of Education. 2000 “A Functional Literacy Survey of Out-of-School Youth Ages Fourteen to Twenty Five.” University of Guyana. 86 ECLAC, The Fiscal Covenant, 1998. 87 United Nations Common Country Assessment 1999. UN Common Country Assessment, 1999. National Development Strategy for Guyana, draft August 1999. ’O Guyana Public Expenditure Review 2002, from 1999 Household Income and Expenditure Survey. ” See World Bank (2002h) Annex 111. The figure stated there for potential job losses in GUYSUGO is 8,000. ’*In December 2002, the IDB approved a Basic Nutrition Programme which will provide for: (i) child feeding practices, which includes nutrition training, dissemination, and a food coupon scheme, (ii) anemia reduction, which includes purchase and distribution of micronutrients to young children and pregnant women; and (iii) institutional strengthening and impact evaluation. 93 The Arawak language group is the largest, including members of the Arawak tribe, who are predominantly coastal, and the Wapishana, who live in the southem Rupununi savannas. The Carib speakers are the most diverse, including Caribs in the coastal lowland forests, the Akawaio in the lowland and upland forests of the Mazaruni River, the Patamona and Arekuna of the upland savannas and forests, the Makushi of the northem Rupununi savannas, and the Wai Wai in the Amazonian forests bordering Brazil. The Warao are the sole tribe of the third language and occupy coastal swamp areas. 94 While 76 areas have been legally gazetted, with boundaries described, under the Amerindian Act, only about half have accepted demarcation of their current lands. The remaining communities have not yet agreed to demarcation of their boundaries as they have some issue with the size and/or location of their described lands. 95 The high poverty rates are attributable to a complex mix of issues including the difficult terrain, dispersed settlement patterns, the high cost of administering projects in the interior, the dearth of certain skills among Amerindians and in the wider population, and the lack of an effective mechanism for channeling indigenous concerns to policy makers. 96 Guyana - Capacity Building in Amerindian Affairs; to assist in strategy formulation; preparation of a communications and outreach strategy and skills development; legislative review; technical assistance to the land demarcation process; and capacity building and training in skills related to public administration. ” The IDB Basic Education Access and Management Support (BEAMS) project; the Secondary School Reform Project supported by the World Bank; the Guyana Education Access Project (GEM) from DFID; the Primary Education Improvement Project (PEIP) supported by IDB; the Education For All - Fast Track Initiative (EFA-FTI) supported by several multilateral and bilateral agencies; and the Guyana Basic Education Teacher Training Program (GBET) from CIDA. 98 World Bank, “Social Safety Nets in Guyana: Review and Issues for Reform,” 2002. ” UN Common Country Assessment 1999. In 1995, it was estimated that 108,000 persons were living in squatter or unrecognized settlements (UN, 1999, Common Country Assessment for the Cooperative Republic of Guyana, Georgetown). Govemment housing programs have provided improved dwellings or urban sites-and-service plots to some 30,000 persons in the 1995-2002 period.
59 Chapter 6
lo’Information on agrarian structure is badly out of date. The Rural Farm Household Survey (1978) concluded that 75 percent of farm households could be classified as ‘small’ (that is, less than 15 acres in size), and that small farms control some 23 percent of the available land. While large farms (those over 15 acres) account for only 25 percent of farm households, they control 77 percent of the land. lo’The IDA Sugar Industry Restructuring and Privatization Project (Credit Number 2545-GUA) was intended to pave the way for the eventual privatization of the Guyana Sugar Company. With a change of administration in 1992, Govemment decided not to pursue privatization but to contract-out management. Thanks to buoyant export prices and favorable exchange rate movements, the Guyana Sugar Company was able to finance equipment required for modemization purposes in the early 1990s from retained profits, rather than drawing on extemal assistance (World Bank. Republic of Guyana: Sugar Industry Restructuring and Privatization Project, Credit 2545-GUA, Implementation Completion Report, June 6, 1997. ) Employment fell from 28,000 in 1991 to the current level of 18,500. Most of this shift in the work force has taken place through attrition and small-scale rationalization at the estate and factory level. Attrition is expected to continue at a rate of 2- 3 percent a year. lo4See LMC International, September 2000. Analysis of the Guyana Sugar Industry Strategic Plan-Main Report, page 65. “Guyana’s field costs are considerably better than those in most other Caribbean ACP sugar producing industries. .. In 1999/00, Guyana was very close to the world factory cost average, and Berbice was processing sugar at a cost of 14 percent below the world average.” In 2002, Guyana exported 184,000 tons of sugar to the EU, at an EU protocol price of $474 per ton and a EU SPS Sugar price of 448 per ton. Another 12,000 tons was exported to the US at a tariff-rate quota price of $397 per ton, and 55,000 tons was exported to CARICOM markets at prices some 40 percent above world market prices. No sugar was exported at the prevailing world market price of $132 per ton (F.O.B. Guyana). lo6Australia, Brazil and Thailand challenged the EU subsidy on EU sugar exports at the WTO in September 2002. This is expected to be heard by a WTO Dispute Resolution Board by the end of 2003. The three countries have requested an immediate end to the EU’s preferential sugar quotas. ‘07 The cost of production of sugar at the Demerara estate is 20 percent higher than at the most efficient, Berbice estate. It used to be 50 percent higher. logThese are amongst the measures included in the Government’s Agriculture Improvement Program (AIP). IO9 In an efficiency-maximizing case, production would decline from its current level of 331,000 tons to 250,000 tons in 2006 and then recover to 300,000 tons by 2015. See Millennium Institute, November 2002. Guyana-Impacts of Structural Reform in Bauxite and Sugar Economic Prospects and Poverty Reduction: Analysis with the T21-Guyana Model. ‘loSee LMC, 2002, The Potential to Increase Cane Production from Private Growers. In the case of the Linmine mines, the Govemment has agreed that all redundant workers would receive severance payments of up to two years of salaries and a training grant equal to 10 percent of the severance payment. It is likely that Government will offer similar benefits to any lay-offs in the sugar sector, although this will have to be negotiated with the individual unions. In 1999, some 44 percent of the sugarcane workers reported incomes in the bottom two quintiles of the income distribution and 24 percent reported income in the bottom quintile. ’I3Guyana’s rice yields averaged 4.1 MT per hectare between 1999 and 2001, about the same level as Vietnam’s, the world’s largest exporter. China, the world’s largest rice producer, had rice yields averaging 6.2 MMTs per hectare during the same period (FAO-Agrostat). Rice production is labor-intensive, and with daily wages in Guyana some three times the level prevailing in Southeast Asia and rural China, global competitiveness will be difficult to achieve. ‘I4GLSC and HTS Development Ltd., November 2002, Land Markets in Guyana: Trends, Structure and Issues, reports that returns to producing rice in 2002 are estimated at just G$1,600 ($8) per acre and that prices of rice-land have fallen by 40- 50 percent over the last four years. ‘I5 In addition, the discovery of 42 API oil in the Takatu Basin has rekindled interest in oil exploration. Four companies are exploring for petroleum in Guyana: Exxon-Mobil Repsol, Century Guyana Ltd. and CGX. ‘16 Approximately half of those retrenched workers have been temporarily employed in a gold strip-mining operation. ’I7 Cambior’s (Omai Gold Mines Limited) privatization plan involves a capital investment of approximately US$30 million for 80 percent of the shares. Under Cambior’s restructuring plan, the rail haul would be ended, a new wash plant would be installed and the power supply and dust removal would be improved. Projected sales from the mine are US$15.3 during the first full year of operations, increasing to about US$29 million by the third year. See Robeson Benson, 2003, Restoring Guyana as a Reliable Source of High Quality Bauxite for Metallurgical and Non- Metallurgical Applications, Guyana Geology and Mines Commission, Presented at the gth International Bauxite and Alumina Seminar, March 2-4, 2003. ‘I9 Stanley Fisher, 2003, Globalization and its Challenges, Ely Lecture, presented at the American Economic Association meetings in Washington, DC on January 3 2003. Fisher reports that: ” Globally, the decline in poverty has been fastest where economic growth has been fastest - in developing Asia - and slowest where growth performance has been worst - in Africa. In two related studies, Dollar and Kraay (2001a and 2001b) conclude, based on data from 92 countries, that on average the income of the lowest fifth of the income distribution rises one-for-one with aggregate income, and that this same relationship holds for
60 growth that is induced by trade liberalization. Another way of thinking about this is that changes in income distribution are relatively small, and thus that growth is likely to dominate in its effects on poverty.” I2O India has done remarkably well in information technology services with exports amounting to $3 billion in 2000 and growing at 50 percent per annum. Its success in call centers and bock-office processing services is partly based on staff speaking English and providing 24/7 capability in call centers or back-office operations for the US and UK markets. See India: Country Assistance Strategy Paper, World Bank 2001. Mauritius presents an example of a remote, ethnically divided country that has promoted foreign direct investment to diversify their economic base and foster export-led growth. Mauritius’s economy was also dominated by sugar until it began to diversify in the 1980s, first into tourism and then into garment manufacturing, electronics and international banking. Its income per capita increased from $260 in 1970 to $3800 in 2000; the contribution of manufacturing increased from 15 percent of GDP in 1970 to 24 percent in 2000 and exports increased from $491 million in 1980 to $2.8 billion in 2000. See World Bank, Mauritius: Country Assistance Strategy Paper, 2002. 122 A simulation model has been built to assess the effects of restructuring the sugar and bauxite industries on economic performance and poverty reduction.
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63 Roopnarine, Rupert, (2002) “Some Intemal Dynamics of Insecurity: The Case of Guyana”, Mimeo.
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65 Guyana - Annex Table 1: Key Economic Indicators
Indicator 1997 1998 1999 2000 2001 2002
National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 Agriculture 35 35 35 31 30 31 Industry 34 31 30 29 29 29 Services 31 35 35 40 41 41 Total Consumption 79 83 85 92 94 93 Gross domestic fixed investment 30 29 23 23 22 20 Government investment 18 15 12 14 14 13 Private investment 12 13 12 9 8 7
Exports (GNFS)b 99 96 97 96 93 93 Imports (GNFS) 109 108 105 111 109 106 Gross domestic savings 21 17 15 8 6 7 Gross national savings' 16 13 13 7 4 5
Memorandum items Gross domestic product 749 718 696 712 711 717 (US$ million at current prices) GNP per capita (US$, Atlas method) 890 860 870 910 900 880 Real annual growth rates (%, calculated from 1988 prices) Gross domestic product at market prices 6.2 -1.7 3.0 -1.4 3.4 -1.1 Gross Domestic Income 6.2 -1.7 3.0 -1.4 3.4 -1.1 Gross domestic product at factor cost 6.2 -1.7 3.0 -1.4 2.3 1.1 Real annual per capita growth rates (%, calculated from 1988 prices) Gross domestic product at market prices 5.8 -2.2 2.4 -2.0 2.7 -1.8 Total consumption 10.4 2.5 4.3 6.5 5.2 -3.5 Private consumption 9.3 2.4 4.0 0.4 5.7 -5.4 Balance of Payments (US$ millions) Exports (GNFS)b 740 689 65 1 684 662 672 Merchandise FOB 592 547 5 04 505 490 495 Imports (GNFS)~ 813 775 728 789 777 766 Merchandise FOB 578 54 1 495 5 27 526 507 Resource balance -73 -86 -77 -104 -114 -94 Net current transfers Current account balance -109 -112 -95 -109 -129 -107 Net private foreign direct investment 52 44 48 67 56 44 Long-term loans (net) 38 13 -111 43 43 12 Official 18 10 14 40 45 7 Private 20 4 -125 3 -2 5 Other capital (net, incl. errors & ommissions) 16 37 167 61 46 56 Change in reservesd 3 17 -9 -62 -16 -5 Memorandum items Resource balance (% of GDP) -9.8 -12.0 -11.1 .14.6 -16.1 -13.1 Real annual growth rates ( YR88 prices) Merchandise exports (FOB) 13.8 -1.6 -5.8 3.9 -5.6 -1.3 Primary 13.8 -1.6 -5.8 3.9 -5.6 -1.3 Manufactures 13.8 -1.6 -5.8 3.9 -5.6 -1.3 Merchandise imports (CIF) 12.7 4.2 -13.2 -1.0 0.2 -2.2
66 Guyana - Annex Table 1: Key Economic Indicators (Continued)
Indicator 1997 1998 1999 2000 2001 2002
Public finance (as % of GDP at market prices)e Current revenues (incl. Grants) 37.6 32.2 33.4 39.5 39.1 40.5 Current expenditures 27.0 26.5 26.6 34.8 35.2 35.1 Capital expenditure 15.6 12.6 9.1 12.2 12.4 11.4 Overall fiscal deficit (-) (after grants) -5.0 -6.9 -2.3 -7.5 -8.5 -6.0 Foreign financing 0.4 1.9 5.2 5.3 6.0 2.7
Monetary indicators M2/GDP 60.3 63.6 62.3 65.7 69.7 71.3 Growth of M2 (%) 11.7 6.8 12.1 10.9 8.9 5.5 Private sector credit growth / -65.3 -367.2 -119.4 -103.2 31.7 -4.8 total credit growth (%)
Price indices( YR88 =loo) Merchandise export price index 96.7 90.7 88.7 85.6 88.0 90.1 Merchandise import price index 108.2 97.3 102.6 110.2 109.7 108.3 Merchandise terms of trade index 89.3 93.2 86.5 77.6 80.2 83.2 Real exchange rate (US$/LCU)f 117.4 102.7 104.8 112.9 108.2 97.9
Consumer price index (% change) 3.6 4.6 7.5 6.1 2.7 5.3 Consumer prices (end of period) 4.2 4.7 8.7 5.8 1.5 6.1 Consumer prices (average) 3.6 4.6 7.5 6.1 2.7 5.3 GDP deflator (% change) 1.4 3.0 11.2 6.6 -0.8 4.4
a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.
67 Guyana - Annex Table 2: National Accounts
Part A: Current Price Data (in millions of local currency units)
1997 1998 1999 2000 2001 2002
Gross domestic product at market prices 106679 108002 123665 130012 133403 137748 Net indirecitaxes 16935 17531 18570 21926 21185 19986 GDP at factor cost 89744 90471 105095 108086 112218 117762 Agriculture 31813 31309 36405 33602 34006 36298 Indushy. of which 30276 27853 31503 31383 32455 33661 Manufacturing 10265 8501 10576 8813 9263 10410 Services 27655 31309 37 187 43101 45757 47803
Resource balance -10382 -12944 -9948 -18988 -21456 -17789 Exports (GNFS) " 105402 103678 119379 124882 124234 128152 Imports (GNFS) 115784 116622 129327 143870 145690 145941
Total expenditure 117061 120947 133614 I49000 154859 155537
Consumption expenditures 84689 89801 104683 119565 125644 127987 Government 18709 19913 23467 32077 33236 35619 F'rivate 65980 69888 81216 87488 92408 92368
Gross domestic investment 32372 31146 28931 29435 29215 27550 Total government investment" 19271 16666 14285 17950 18275 17414 Total private investment. 13101 14480 14646 11485 10940 10136
Total fixed investment 32372 31146 28931 29435 29215 27550 Total changes in stocks 0 0 0 0 0 0
Domestic savings 21990 18201 18982 10447 7759 9761 + Net,factor income -10846 -10493 -10060 -9515 -10983 -10149 + Net current transfers " 5696 6622 6926 8582 8254 7680 = National savings 16840 14330 15849 9514 5031 7292
97509 113605 120497 122420 127599
a. "GNFS" denotes "goods and nonfactor services." b. Gross domestic fixed capital formation only. c. Derived as a residual; includes increase in stocks. d. Total net unrequited aansfers excluding official capital grants
68 Guyana - Annex Table 2: National Accounts (continued)
Part B: Shares of Gross Domestic Product (percentages calculated using current price data) Base-case (most likely) projection
1997 1998 1999 2000 2001 2002
~~ Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 Net indirect taxes 15.9 16.2 15.0 16.9 15.9 14.5 Agriculture value added 29.8 29.0 29.4 25.8 25.5 26.4 Indusny value added, of which 28.4 25.8 25.5 24.1 24.3 24.4 Manufacturing 9.6 7.9 8.6 6.8 6.9 7.6 Services value added 25.9 29.0 30.1 33.2 34.3 34.1
Resource balance (X-M) -9.7 -12.0 -8.0 -14.6 -16.1 -12.9 Exports (GNFS) 98.8 96.0 96.5 96.1 93.1 93.0 Imports (GNFS) 108.5 108.0 104.6 110.7 109.2 105.9
Total expenditure 109.7 112.0 108.0 114.6 116.1 112.9 Govemment consumption 17.5 18.4 19.0 24.7 24.9 25.9 Private consumption 61.8 64.7 65.7 67.3 69.3 67.1 Govemment investment 18.1 15.4 11.6 13.8 13.7 12.6 Private investment 12.3 13.4 11.8 8.8 8.2 7.4
Gross domestic savings 20.6 16.9 15.3 8.0 5.8 7.1 Gross national savings 15.8 13.3 12.8 7.3 3.8 5.3
Memorandum items GDP deflator 1732.2 1784.1 1984.0 2114.9 2098.0 2190.0 Consumer price index 111.0 116.1 124.8 132.4 135.9 141.8 Total GDP (million current USS) 749.2 717.6 696.3 712.0 711.1 717.4 Conversion factor used (LCUNS$) 142.4 150.5 177.6 182.6 187.6 192.0 Per capita gross national product 897.7 882.9 9202 910.0 925.6 917.4 (Atlas method: in 2UOU US%)
a. "GNFS" denotes "goods and nonfactor services.''
69 Guyana - Annex Table 2: National Accounts (continued)
Part C: Constant Price Data (in millions local currency, constant 1988 prices) Base-case (most likelv) projection
1997 1998 1999 2000 2001 2002
GDP at market prices 6159 6053 6233 6147 6359 6290 GDP at factor cost 5360 5270 5426 5353 5475 5538 Agriculture 1576 1474 1672 1520 1572 1654 Industry, of which 1709 1693 1667 1640 1689 1661 Manufacturing 63 1 577 652 562 576 61 1 Services 2075 2103 2087 2193 2214 2222
Resource balance -599 -726 -501 -898 -1023 -812
Exports (GNFS) ~ 6085 5811 6017 5905 5922 5852 Imports (GNFS) 6684 6537 6519 6803 6944 6664
Total expenditure 6758 6779 6735 7045 7381 7102
Consumption 4889 5033 5276 5653 5989 5824 Government 1080 1116 1183 1517 1584 1626 Private 3809 3917 4094 4137 4405 4197
Gross domestic investment 1869 1746 1458 1392 1393 1278 Total government investment 1113 934 720 849 871 795 Total private invesment 756 812 738 543 521 483
Total fixed investment 1869 1746 1458 1392 1393 1278 Total changes in stocks 0 0 0 0 0 0
Terms-of-uade (TT) effect 0 0 0 0 0 0 Gross domestic income 6159 6053 6233 6147 6359 6290 Domestic saving (TT adjusted) 1269 1020 957 494 370 466
Net factor income -626 -588 -507 -450 -523 -463 tiNP at market pnces 5532 5465 5726 SbV7 5835 5826
a. "GNFS" denotes "goods and nonfactor services."
70 Guyana - Annex Table 2: National Accounts (continued) Part D: Annual Growth Rate (calculated from data in constant 1988 prices)
1997 1998 1999 zoo0 zoo1 2002
GDP at market prices 6.2 -1.7 3.0 -1.4 3.4 -1.1 Agriculture 4.0 -6.5 13.4 -9.1 3.4 5.2 Indushy, of which 9.6 -0.9 -1.5 -1.6 3.0 -1.6 Manufacturing 2.4 -8.6 13.0 -13.8 2.5 6.1 Services 5.3 1.3 -0.8 51 1.o 0.4
Exports (GNFS) 2.3 -4.5 3.5 -1.9 0.3 -1.2 Imports (GNFS) 6.1 -2.2 -0.3 4.4 2.1 -4.0
Total expenditure 9.9 0.3 -0.7 4.6 4.8 -3.8 Consumption 10.8 2.9 4.8 7.1 5.9 -2.8 Investment 7.5 -6.6 - 16.5 -4.6 0.1 -8.2
Gross domestic income 6.2 -1.7 3.0 -1.4 3.4 -1.1 Gross domestic saving -8.4 -19.6 -6.2 -48.4 -25.1 26.0
Per capita growth rates Per capita GDP (mp) " 5.8 -2.2 2.4 -2.0 2.7 -1.8 Per capita GNP (mp) 3.1 -1.7 4.2 -1.1 1.7 -0.9 Per capita total consumption 10.4 2.5 4.3 6.5 5.2 -3.5 Per capita pnvate consumption Y.3 2.4 4.u 0.4 5.7 -5.4
a. "GNFS" denotes "goods and nonfactor services." b. "mp" denotes "market prices"
71 Guyana - Annex Table 3: Exports and Imports
1997 1998 1999 2000 2001 2002
A. Value in current prices (US$ millions)
Total merchandise exports (FOB) 592.4 547.0 503.7 505.0 490.1 495.2 Principal primary products 443.8 404.8 393.2 365.0 347.3 334.3 Rice 84.2 73.3 71.1 51.8 50.1 46.1 sugar 133.3 129.0 136.2 118.7 109.2 118.7 Bauxite 89.4 78.5 77.2 71.2 61.0 35.2 Gold 136.9 124.0 108.7 123.3 127.1 134.4 Manufactured goods 110.8 96.9 65.3 82.5 77.4 84.0 Other goods " 37.7 45.3 45.2 57.5 65.4 76.9
Total merchandise imports (CIF) 640.8 600.7 549.9 585.2 583.9 563.4 Food 70.5 81.3 73.4 69.0 69.3 66.2 Other consumer goods 111.0 112.4 101.5 95.4 98.7 93.2 POL" and other energy 100.0 72.0 88.5 121.0 131.5 125.9 Intermediate goods n.e.i.' 174.5 172.4 151.0 168.2 169.1 165.0 Primary goods Manufactured goods Capital goods 184.8 162.6 135.5 131.6 115.3 113.0
B. Value in constant YR88 prices (US$ millions)
Total merchandise exports (FOB) 612.9 603.0 567.9 590.3 557.1 549.7 Rice 33.4 32.8 30.9 32.2 30.3 29.9 sugar 184.1 181.1 170.6 177.3 167.3 165.1 Bauxite 197.6 194.4 183.1 190.3 179.6 177.2 Gold 43.5 42.8 40.3 41.9 39.5 39.0 Manufactured goods 85.5 84.2 79.3 82.4 77.8 76.7 Other exports 68.8 67.7 63.8 66.3 62.5 61.7
Total merchandise imports (CIF) 592.3 617.5 536.1 530.9 532.0 520.3 Food 27.5 28.6 24.8 24.6 24.7 24.1 Other consumer goods 43.2 45.1 39.1 38.7 38.8 38.0 POL and other energy 134.3 140.0 121.6 120.4 120.6 118.0 Intermediate goods n.e.i. 112.6 117.4 101.9 100.9 101.1 98.9 Primary goods Manufactured goods Capital goods 274.7 286.4 248.7 246.2 246.8 241.3
Memorandum items Export volume growth rate 13.8 -1.6 -5.8 3.9 -5.6 -1.3 Import volume growth rate 12.7 4.2 -13.2 -1.0 0.2 -2.2
C. Price Indices (YR88 = 100)
Merchandise export 96.7 90.7 88.7 85.6 88.0 90.1 Merchandise import 108.2 97.3 102.6 110.2 109.7 108.3 Merchandise terms of trade 89.3 93.2 86.5 17.6 80.2 83.2
D. Non-Factor Services (YR88=100)
Exports ot NFS" - volume index Exports of NFS - price index
Imports of NFS - volume index Imports of NFS - price index
a. includes primary products not specifically identified. b. "POL" denotes "crude oil and derivates." c. "n.e.i." denotes "not elsewhere included." d. "NFS" denotes "nonfactor services."
72 Guyana - Annex Table 4: Balance of Payments (US$ millions at current prices)
1997 1998 1999 2000 2001 2002
Total exports of GNFSa 740.1 688.8 650.7 684.3 662.1 67 1.8 Merchandise (FOB) 592.0 547.0 503.7 505.0 490.1 495.2 Nonfactor services 148.1 141.8 147.0 179.3 172.0 176.6
Total Imports of GNFS 813.3 774.8 728.1 788.6 776.6 765.6 Merchandise (FOB) 577.8 540.9 495.0 526.9 525.8 507.0 Nonfactor services 235.5 233.9 233.1 26 1.7 250.8 258.6
Resource balance -73.2 -86.0 -71.4 -104.3 -1 14.5 -93.8
Net factor income -76.2 -69.7 -56.6 -52. I -58.5 -52.9 Factor receipts -72.3 -66.5 -53.0 -46.1 -52.5 -46.9 Factor payments 3.9 3.2 3.6 6.0 6.0 6.0 Interest (scheduled) 0.0 0.0 0.0 0.0 0.0 0.0 Total interest paid ' Net adjustments to scheduled interest Other factor payments 3.9 3.2 3.6 6.0 6.0 6.0
Net private current transfers 40.0 44.0 39.0 47.0 44.0 40.0 Current receipts. of which Workers' remittances 32.0 35.2 31.2 37.6 35.2 32.0 Current payments
Net official current transfers
Current account balance -109.4 -111.7 -95.0 -109.4 -129.0 ,106.7
Official capital grants 24.0 13.0 149.0 13.0 31.0 35.0
Private investment (net) 64.0 52.0 21.0 78.7 45.1 35.4 Direct foreign investment 52.0 44.0 48.0 67.1 56.0 43.6 Portfolio investments 12.0 8.0 -27.0 11.6 -10.9 -8.2
Net LT' borrowing 37.6 13.3 -111.1 42.8 43.2 12.2 Disbursements' 64.9 57.5 50.6 64.3 63.3 42.2 Repayments (scheduled) 29.1 45.2 736.0 24.0 22.0 26.0 Total principal repaidD Net adjustments to scheduled repayments Net other LT inflows I.8 1.o 574.3 2.5 1.9 -4.;
Adjustments to scheduled debt service Debt service not paid Reduction in arrears/prepayments (-)
Other capital flows Net short-term capital -1.5 30.4 18.9 -13.5 -15.7 8.3 Net capital flows n.e.i." 0.0 0.0 0.0 2.5 5.6 8.2 Errors and omissions
Change in net international reserves 3.3 17.4 -8.6 -6 1.7 -15.8 -5.0 (-indicates increase in assets)
Memorandum items Total gross reserves. of which 315.3 276.4 267.0 296.7 284.8 280.0 Total reserves minus gold 315.3 276.4 267.0 296.7 284.8 280.0 Gold (at year-end London price) 0.0 0.0 0.0 0.0 0.0 0.0 Total gross reserves (in months' imports G&S') 4.6 4.3 4.4 4.5 4.3 4.2
Exchange rates Annual average (LCU/US$)' 142.4 150.5 177.6 182.6 187.6 192.0 At end year (LCWUSS) 144.0 165.3 180.5 184.8 189.5 191.3 Index real average exchange rate (YR88 =loo) 117.4 102.7 104.8 112.9 108.2 97.9 Current Account Balance as % GDP -14.6 -15.6 -13.6 -15.4 -18.1 -14.9
d. "n.e.i." denotes "not elsewhere included." e. "G & S" denotes "goods and services." f. "LCU" denotes "local currency units." g. The index of the real exchange rate reflects US$/LCU. so an increase is an appreciation at the real exchange rate.
73 Guyana - Annex Table 5: External Debt Stocks and Flows (US$ millions at current prices)
~~
1997 1998 1999 2000 2001 2002
External debt (DOD)
Public & publicly guaranteed 1370.3 1229.2 1186.3 1180.1 1170.2 1214.4 Official multilateral creditors, of which 665.6 699.7 581.4 597.6 630.4 677.2 IDA 218.1 234.5 183.5 179.6 177.9 195.6 IBRD 19.4 15.9 12.3 8.3 5.2 3.0 Official bilateral creditors 623.4 452.0 562.4 537.7 489.5 485.9 Private creditors, of which 81.3 77.5 42.5 44.8 50.3 51.3 Bonds 0.0 0.0 0.0 0.0 0.0 0.0
Private creditors nonguaranteed 0.0 0.0 4.5 4.1 3.6 3.2 Total LT DOD 1370.3 1229.2 190.8 1184.2 1173.8 1217.6
ST debt 107.9 132.6 147.2 129.6 128.6 145.0 Use of IMF credit 157.1 154.2 140.2 117.4 97.6 96.2
Total DOD (LTtST+IMF), of which: 1635.3 1516.0 178.2 1431.2 1400.0 1458.8 Principal arrears 116.1 94.8 71.6 73.4 78.1 81.8 Interest arrears 91.9 86.2 82.0 77.8 92.5 100.6
Debt and debt burden indicators
Total debt service (US$ millions at current price 132.1 136.3 95.2 71.0 44.1 154.5 Interest (LT + ST t IMF) 55.7 62.8 39.2 29.7 19.5 109.6 Principal (LT + IMF) 76.4 73.5 56.0 41.3 24.6 44.9
Total DOD and TDS DOD I exports (XGS) ratio 233.7 230.6 235.1 211.8 217.1 222.1 DOD I GDP ratio 218.3 211.3 212.3 201.0 196.9 203.3 TDS I exports (XGS) ratio 18.9 20.7 15.1 10.5 6.8 23.5 - Historical data from Debt Reporting System (DRS); other data projected by country operations division staff. "LT" denotes "long-term," "ST" denotes "short-term." "DOD" denotes "debt outsanding and disbursed" "TDS" denotes "total debt service." "XGS" denotes "exports of goods and services," which comprises exports of goods. nonfactor services, factor receipts, and workers' remittances
74 Guyana - Annex Table 6: Public Finance (Central Government) (at current prices and exchange rates)
1997 1998 1999 2000 2001 2002
Total current revenues 40097 34786 41353 51396 52121 55814 Direct taxes 12193 11854 13617 16023 1672 1 I9043 Indirect taxes 19345 19221 20028 22175 21052 21757 On domestic goods and services 14962 14740 15438 17165 16262 17123 On international trade 4383 4481 4590 5010 4790 4634 Nontax receipts 8558 3712 7707 13198 14348 15014 (of which current grants)
Total Current Expenditures 28809 28590 32922 4528 1 46907 48379 Interest on external debt 6485 5649 5900 6902 6842 6566 Interest on domestic debt 3615 3028 3556 5103 4832 4287 Transfers to private sector 0 0 0 0 0 0 Transfers to other NFPS' 0 0 0 0 0 0 Subsidies 427 1 4437 5430 10769 11565 11537 Consumption 14438 15476 18036 22508 23668 25989 Wages and salaries 8298 9166 11821 14318 14833 16271 Other consumption 6140 6311 6215 8190 8835 9718
Budgetary Savings 11288 6196 843 1 6114 5213 7434 Capital Revenues 0 0 0 0 0 31 Total Capital Expenditures 16635 13656 11222 15824 16511 15677 Capital transfers 1934 0 369 0 0 0 Budgetary fixed investment 14700 13656 10853 15824 16511 15677
Overall balance (- = deficit) -5347 -7460 -2791 -9710 -11297 -8212
Sources of financing (+) 5347 7460 279 I 9710 1 I297 8212 Official capital grants 0 0 0 0 0 0 Net external borrowing 386 1999 6437 6857 7978 3734 Net disbursements (cash) Adjustments to scheduled principal repayments (-) Adjustments to scheduled debt service (+) Net monetary system 1096 -1552 -4614 5882 1544 2523 Net other domestic borrowing 3865 7013 968 -3029 1775 1955
Shares of GDP (%)
Current revenues 37.6 32.2 33.4 39.5 39.1 40.5 Current expenditures 27.0 26 5 26.6 34.8 35.2 35.1 Budgetary savings 10.6 5.7 6.8 4.7 3.9 5.4
Capital revenues 0.0 0.0 0.0 0.0 0.0 0.0 Capital expenditures 15.6 12 6 9.1 12.2 12.4 11.4 Overall Balance (- = deficit) -5.0 -6.9 -2.3 -7.5 -8.5 -6.0 Official capital grants 0.0 0.0 0.0 0.0 0.0 0.0 Net external borrowing 0.4 1.9 5.2 5.3 6.0 2.7 Monetary system credit 10 -1.4 -3.7 4.5 1.2 1.8 Other domestic financing 3.6 6.5 0.8 -2.3 1.3 1.4
Government Debt (DOD /c at the end of the year, in (millions LCUs. unless noted))
External debt 195005.6 228609.9 218567.5 220203.5 226149.3 231445.1 External debt (in US$ millions) 1370.3 1229.1 1186.4 1180.1 1170.1 1214.4 Debt to monetary system 15722.7 14170.6 9556.6 15438.1 16982.1 19505.1 Other domestic debt 14598.6 19978.4 20491.2 15199.3 15387.3 17257.3 Total government debt 225326.9 262758.9 248615.3 250840.9 258518.7 268207.5 Total government debt as percent of GDP 211.2 243.3 201.0 192.9 193.8 194.7
Tax burden indicators (%)
Direct taxes / GDP 11.4 11.0 11.0 12.3 12.5 13.8 Indirect taxes on domestic G&S" / GDP 14.0 13.6 12.5 13.2 12.2 12.4 Indirect taxes on domestic G&S i private consumption 22.7 21.1 19n '9.6 17.6 18.5 Taxes on international trade / merchandise imports 5.3 5.5 5.2 3.L 4.9 4.8
c. "DOD" denotes "debt outstanding and disbursed." b. "G&S" denotes "goods and services.''
75 Annex Table 7: Guyana, Investment Climate
Year Guyana
Private Investment Environment Private Sector GDFIlGross Domestic Fixed Investment (%) 2002 36.8 Domestic Credit to Private Sector (stock, % GDP) 2002 43.0 Real Lending Rate 2002 -2.2
Openness Trade (imports+exports)/GDP (%) 2002 199.0 FDI inflows (net, % GDP) 2002 6.0 WTO member? 1995 Yes
Infrastructure Paved Roads (% of total) 2000 26.3 Registered Motor Vehicles (per 1000 persons) 2000 6.9 Cost of Calls to US (US$ per 3 min.) 2003 2.8 Electricity consumption (kwh per capita) 2002 661.8
Wages and Productivity Minimum Wage (US$ per day) 2002 5
Source: World Bank LDB, MF, Guyana Ministry of Public Works, Statistics Bureau, GT&T
Annex Table 8: Guyana, Vulnerability Indicators
1999 2000 2001 200:
Banking Sector Indicators Foreign currency to total deposits (9%) 37.6 42.1 44.2 Non-performing loans of commercial banks (% of total) I/2/ 35.7 38.2 37.2
Reserve Cover Indicators Reserve cover of imports (months of imports) 4.4 4.5 4.3 4.2 Reserves to short term debt 1.9 2.3 2.2 1.9 ReservesM2 0.7 0.6 0.6 0.5
Prices Annual change in terms of trade (%) -8.4 -9.0 3.6 3.4 Annual change in REER (%) 2.0 7.8 -4.2 -9.5 Annual change in average exchange rate (%) 18.3 6.1 2.7 5.3
External Current account balance (% of GDP, excl. official transfers) -14.0 -15.3 -18.1 -14.8 External Debt (% of GDP) 177.6 167.8 171.1 171.4
Fiscal sustainability indicators Nonfinancial Public Sector Balance (% of GDP, before grants) -6.1 -14.0 -15.2 -14.0 Nonfinancial Public Sector Balance (% of GDP, after grants) -1.7 -6.3 -7.0 -5.8 Primary balance (% of GDP, before grants) 1.7 -4.8 -6.3 -6.1
Source: World Bank LDB, IMF I/Loans with payments overdue for more than three months 21 Covers all commercial banks. Figures for 2002 are preliminary
76