Report No. 11 705-GUA Guyana Private Sector Development June 4, 1993 Latin America and Caribbean Region Trade, Finance, Industry and Energy Division Country Department III FOR OFFICIAL USE ONLY jjx . . . v~~~~~~~~~~~~'j Docuentothe Wotrl 1bek1 This documrent has a rj liPl recipients only in-the pe_~oaal*Of*1 nc kflen a not otherwise be disclosed . i3thj4 VWM -~~ .....-... -t:~-* tX. < ..- ACRONYMS AND ABBREVIATIONS CAD Civil Aviation Department CARICOM Caribbean Community CD Certificate of Deposit CET Common External Tariff COFA Cooperative Financial Institutions Agency EC European Community ERP Economic Recovery Program FIC Fiscal Incentives Committee GAIBANK Guyana Cooperative Agricultural and Industrial Development Bank GBTI Guyana Bank of Trade and Industry GCIS Guyana Cooperative Insurance Service GCMFB Guyana Cooperative Mortgage Finance Bank GDP Gross Domestic Product GFC Guyana Forestry Commission GGMC Guyana Geology and Mines Commission GMC Guyana Marketing Corporation GNCB Guyana National Cooperative Bank GNCB Trust GNCB Trust Corporation GNEC Guyana National Engineering Corporation GREB Guyana Rice Export Board GUYMIDA Guyana Manufacturing and Industrial Development Agency GUYSUCO Guyana Sugar Corporation IPED Institute for Private Enterprise Development NIS National Insurance Service NBIC National Bank of Industry and Commerce PCS Public Corporations Secretariat PSR Public Sector Review UNDP United Nations Development Program USAID United States Agency for International Development CURRENCY EOUIVALENTS Currency Unit = Guyana Dollar G$1.0 = US$.008 US$1.0 = G$126 (as of June 4, 1993) FISCAL YEAR July 1 - June 30 FOR OFFICIAL USE ONLY PREFACE The purpose of this report is to recommend measures to improve the efficiency of the Guyanese economy by focussing on private sector development, particularly through increasing private sector ownership and strengthening the legal and regulatory framework facing the private sector. The report should be read in conjunction with the World Bank's Public Sector Review (Report No. 11753-GUY), which examines the role of the public sector and suggests where the Government should focus its limited resources to carry forward the necessary reform process initiated under its Economic Recovery Program. Chapter I is a brief introduction. Chapter II reviews the obstacles faced by the Private Sector and recommends improvement in the business environment. Chapter III documents the experience with privatization under the previous administration and sets out an agenda for the Government's objective to increase the role of the Private Sector in the economy through a transparent program of privatization. Chapter IV analyzes supervision and regulation of the financial sector and discusses the sequence and timing of a program to increase competition and reduce the role of the State in the allocation of credit. Chapter V discusses the constraints and provides recommendations for improvements in the incentive regime in the trade system, the mining sector, and agriculture, forestry, and tourism. Annexes provide a matrix summarizing the policy recommendations in each major sector. This report is based on the work of a Bank mission to Guyana in November, 1992. Mission participants were William Shaw (mission leader), Mark Dorfman (financial sector), Fred Barnard (mining), Hemant Shah (privatization and fiscal incentives), Arnold McIntyre (Caribbean Development Bank - trade policy), Luis Guasch (monetary policy), and Azita Amjadi (trade simulations). Sanjivi Rajasingham was responsible for producing this report. Adeline Francois provided invaluable assistance in its preparation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GUYANA: PRIVATE SECTOR DEVELOPMENT Table of Contents Page No. EXECUTIVE SUMMARY ..................... i I. INTRODUCTION ...................................... 1 II. IMPROVING THE PRIVATE SECTOR BUSINESS ENVIRONMENT ... 3 A. Constraints on Private Sector Growth ................... 3 B. The Regulatory Environemnt and Government Services C. Fiscal Incentives ................................ 4 D. Recommendations ............................... 8 III. INCREASING THE ROLE OF THE PRIVATE SECTOR. 9 A. Experience with Privatization .9 B. The Future Program ............................ 11 C. Recommendations .............................. 18 IV. THE FINANCIAL SECTOR ........................... 20 A. Monetary Management ........................... 20 B. Analysis of the Financial System ...... .............. 24 C. Analysis of Principal Financial Institutions .... .......... 31 D. Recommendations .............................. 40 V. REGULATORY STRUCTURE IN MAJOR COMMERCIAL SECTORS . 42 A. The Trade Regime ............................. 42 B. The Mining Sector ............................. 47 C. Agriculture, Forestry and Tourism ........ ............ 59 D. Recommendations ............................. 64 ANNEXES ANNEX I: Privatization Annex 1.1 Recommendations for the Privatization Program Annex 1.2 Public Corporations Divested 1989-92 Annex 1.3 Salient Financial Statistics of Public Corporations Remaining be Privatized ANNEX II: Financial Sector Annex 2.1 Recommended Action Program for Financial Sector Reform Annex 2.2 GNCB Restructuring Program Measures to Date Annex 2.3 Matrix of Recommended Provisions in a Revised Financial Institutions Act Annex 2.4 Technical Assistance Program for the Bank of Guyana Banking Supervision Department Table 2.1 Accounts of the Banking System Table 2.2 Monetary Survey Table 2.3 Interest Rates and Spreads Table 2.4 Structure of the Financial System Table 2.5 New Building Society Financial Statements Table 2.6 Financial Statements Summary--GNCB Table 2.7 Financial Statements Summary--GNCB Trust Table 2.8 Financial Statements Summary--GAIBANK Table 2.9 Financial Statements Summary--GCMFB Table 2.10 Financial Statements Summary--GCIS Table 2.11 Financial Statements Summary--NIS ANNEX III: Trade Annex 3.1 Recommended Program for Improving the Trade Regime Table 3.1 CARICOM Existing and Newly-Approved CET Rates Table 3.2 Explanation of CET Suspended Rates ANNEX IV: Mining Annex 4.1 Recommended Program for Strengthening the Mining Sector Table 4.1 Principal Non-Bauxite Mineral Properties ANNEX V: Agriculture Forestry and Tourism Annex 5.1 Recommendations to Improve Regulatory Framework Governing Agriculture, Forestry and Tourism MAP: IBRD 11683R1 (i) EXECUTIVE SUMMARY 1. It is crucial for the Government to continue to encourage private sector development. Enhancing the enabling environment for the private sector and thereby increasing private sector participation in the Guyanese economy is critical to sustaining economic recovery from the depression of the 1980s. Guyana experienced more than two decades of policies that established the public sector as the principal actor in the economy. The State controlled the major economic activities (bauxite and sugar), owned most of the commercial and industrial companies, dominated the financial system, and imposed severe controls on most private sector transactions. These policies resulted in a rapid decline in output, the exodus of many of the better-educated and highly-skilled workers, and a severe deterioration in the country's economic and social infrastructure. In light of this experience, the previous administration began the process of creating a more appropriate environment for private-sector led growth by dismantling the system of economic controls. The elimination of most price controls, freeing of interest rates, establishment of a market-based exchange rate mechanism, and removal of most trade restrictions have improved efficiency and increased confidence in economic policy. However, progress has been slow on essential steps to transfer ownership of public sector enterprises to the private sector. 2. The economic problems facing the economy and the need for rapid and sustained growth to reduce poverty makes it imperative to deepen the reform process by rapidly increasing the share of the private sector in all economic activities. Decades of State domination of the economy have left both infrastructure and public sector industrial enterprises in extremely poor condition, with obsolete and dilapidated equipment. Hundreds of millions of dollars in new investments will be required in most sectors of the economy, and the public sector lacks the resources to make such investments and has shown that it cannot manage them efficiently. Further, the Government must devote its energies to the provision of those services that the private sector cannot currently supply effectively: education and health, some infrastructure, and the administration of justice. Assigning the private sector the full responsibility for the production and marketing of goods and services is the only strategy that holds the promise of sustained development. 3. In a sense, the next step in the reform process is more difficult than the task faced by the last administration. The major achievements of the previous Government were in stabilizing the economy and restoring growth, and in introducing market-oriented reforms through the elimination of distortions. The new Government, while consolidating these efforts, must undertake activities which are more resource-intensive in effect, to implement a broad-based enabling environment for private sector development, including a more effective privatization program and, where necessary, strengthening the regulatory role of the State. The purpose of this report is to suggest where the Government should focus its severely limited resources in carrying forward this program. (ii) Improving the Private Sector Business Environment 4. Guyana is relatively free of the unnecessary bureaucratic requirements that hamper the private sector in many other countries. Nonetheless, clear administrative rules need to be agreed upon and set out regarding the basis for private sector operations in the country. The weakness of the public sector makes the required compliances burdensome, and many services provided to businesses by the Government remain inadequate. In addition, a plethora of discretionary incentives to businesses has eroded the Government's ability to collect revenues and has contributed to a non-transparent process of negotiating contracts and ventures with the Government. 5. The Government should complete the process initiated by the past administration of eliminating unnecessary restrictions on private sector activities. Adoption of the fast track for moving to the reduced CARICOM Common External Tariff (CET) rates is necessary to improve the efficiency of the economy and reduce the incentive for contraband imports. Given Guyana's market determined exchange rate system and relatively low wage costs, rapid implementation of the lower tariff schedule should bring substantial benefits with few costs. Trade licensing requirements should be reduced to the minimum necessary to enforce tax collection, ensure compliance with international agreements, and meet health and safety requirements. 6. The criteria used for granting discretionary fiscal incentives (duty exemptions, tax holidays, and consumption tax exemptions) are not clear, the process is not transparent, and its impact on the allocation of investment is difficult to determine. The process imposes a considerable administrative burden on investors, both because the need to generate excessive information and because of long delays while the Government considers applications. The provision of discretionary fiscal incentives should be eliminated, along with complementary reductions in tax rates to avoid imposing an excessive tax burden. Increasing the Role of the Private Sector 7. The Government should move forward rapidly on a broad-based program to privatize public sector assets in the economic sectors. This program should continue to involve private sector capital and management in the sugar and bauxite industries, continue albeit in a more transparent and orderly fashion, the privatization process for the industrial and service enterprises controlled by the Public Corporations Secretariat, and also extend the process to the Government's share of banking and insurance. Privatization should be accompanied by the establishment of an appropriate regulatory framework in industries that are not sufficiently competitive or that provide significant public goods. 8. The Government should continue its efforts to involve the private sector in bauxite and sugar. These two industries account for more than half of both exports and output, and are the first priority for government action. The introduction of private capital and management into the bauxite industry is crucial to Guyana's development, given the importance of the industry, the opportunities afforded by Guyana's position in the bauxite market, and the severely deteriorated state of the existing capital stock. The enhanced private sector participation (including restructuring) of GUYSUCO is essential to provide the capital to facilitate the rehabilitation of the sugar industry and to ensure efficient management. Complementary reforms (iii) would allow GUYSUCO to retain the foreign exchange it earns, transform the sugar levy into a fixed percentage of the EC price, and eliminate GUYSUCO's monopoly on sugar. 9. The former Government initiated the privatization of the smaller public sector enterprises. However, the program was flawed by a lack of transparency, a diffusion of management responsibilities, and questionable procedures. The new Government should move as quickly as possible to define a privatization program that ensures an open process that facilitates rapid privatization of the remaining enterprises that operate in competitive markets. The privatization strategy should include most all of the companies now managed by the Public Corporations Secretariat. Most of these are small industrial or service establishments that serve no strategic function in the economy. Rapid implementation of the program would reduce uncertainty among private investors and avoid a further deterioration of publicly-owned enterprises due to their uncertain status. 10. At the outset of the restarted program, it is important to consummate some relatively simple privatization transactions and thereby provide a positive demonstration effect. Furthermore, despite the need for speed, the procedures should be carefully defined with a view to ensuring transparency and equal treatment. In each case, any regulatory issues and framework should be agreed upon at the outset. Thereafter, the transactions should focus on obtaining the highest price for properties sold, subject to an agreed set of "rules of the game" without unnecessary conditions on the operation of the company or the provision of special benefits to buyers. A strong effort should be made to prepare and disseminate financial and operational information on the companies to be sold. Valuation of properties should be done by external agencies, to ensure the integrity of the valuation process. The privatization procedures should be as open as possible. Sales of most assets should be done through an open outcry auction, and should be widely publicized. For larger assets and companies sold as going concerns, where sealed bids will be necessary, the bids should be opened publicly. TMe Financial Sector 11. The Government should implement a privatization program for the financial system. The Guyanese financial sector is dominated by the State, which owns the bulk of financial assets and continues to restrict entry. There is little competitive pressure, risk taking, or financial innovation. Some of the public institutions are in extremely serious financial conditions, and will need financial and operational restructuring. While the liberalization of the financial system under the previous administration improved the regulatory framework governing the financial sector, efficient financial intermediation will require increased competition and greater private sector participation. 12. The next steps in financial sector reform are to encourage new entrants into the financial system and sell most public sector assets. New bank licenses should be granted as soon as possible. In the short term, the Government should sell its remaining shares in the Guyana Bank for Trade and Industry (GBTI), the National Bank for Industry and Commerce (NBIC), and the GNCB Trust Corporation. The restructuring of the Guyana National Cooperative Bank (GNCB) must be completed, followed by its sale to the private sector. Implementation of a loan recovery program for the Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK) should continue, followed by the development of alternative means of channeling (iv) donor funds through the financial system. The Government should sell or liquidate public sector financial institutions that do not efficiently fulfill a legitimate purpose, including the Guyana Cooperative Mortgage Finance Bank (GCMFB) and the Guyana Cooperative Insurance Service. Finally, an independent actuarial evaluation of the National Insurance Service (NIS) is necessary, followed by revision of contribution and benefit formulas, as well as investment policy guidelines. 13. The privatization of the financial system must be accompanied by efforts to strengthen the regulatory framework, improve the effectiveness of supervision and to ensure that there is an adequate competitive environment in the sector. The enforcement powers of the Bank of Guyana remain limited, only some deposit-taking institutions are subject to supervision, and prudential standards are not adequate. Necessary improvements in the framework for competition among financial institutions include the imposition of uniform reserve requirements on all deposit- taking institutions, elimination of remaining requirements for Bank of Guyana approval of deposits and loans in foreign currency, and, in the medium term, unification of the rate of taxation imposed on different financial instruments. Complementary efforts to strengthen the institutional capacity of the Bank of Guyana in monetary policy management is also needed. Regulatory Structure in Major Commercial Sectors 14. Finally, there is a need to rationalize the regulatory structure in all major commercial sectors, including trade, mining, agriculture, forestry and tourism. The reduction in the CET (discussed above) is a key step in this regard. Customs administration is weak. Slow customs procedures remain a barrier to an efficient trading system by imposing considerable costs on private companies that comply with the law, while the inability of customs to police the borders enables illegal traders to gain a substantial advantage over domestic production. Incorrect declarations by importers is common, as are inordinate delays in payments due to customs. A streamlining of customs procedures, including benchmarks for performance, and upgrading systems for customs is an important requirement. 15. The prohibition of foreign participation in small and medium-scale mining should be eliminated to facilitate access to foreign technology and capital. The requirement that all gold be purchased by the Gold Board in Georgetown continues to impose a substantial burden on gold miners. At a minimum, traders should be licensed to purchase gold from miners. Ideally, the Gold Board should be eliminated and the requirement to sell gold replaced by the requirement to declare gold and pay taxes. The mining sector suffers from a lack of effective environmental regulations, extended delays imposed by the inefficiency of the Guyana Geology and Mines Commission (GGMC), and a lack of transparency in the administration of rules governing the sector. Environmental regulations need to be developed in the mining sector and strengthened in the forestry sector, and enforcement mechanisms need to be improved. A review of the land tenure system should be undertaken to facilitate the granting of titles to leaseholders. I. INTRODUCTION 1.1 The past two decades have seen a progressive decline in the role of the private sector in the economy. The takeover of bauxite, sugar, commercial banks and major industrial and service enterprises, coupled with the establishment of new public sector enterprises, placed more than half the economy under the control of the public sector. Private sector activities were largely devoted to agriculture (particularly rice farming), construction, some services, the smaller manufacturing enterprises, gold and diamond mining, and trading. 1.2 Those areas of the economy dominated by the private sector were subject to strict controls which limited their ability to produce efficiently. Rice farmers had to sell their product to State-owned mills, miners had to sell their gold at distorted prices to the Gold Board, many inputs were subject to excessively high import duties and consumption taxes, and the overvalued exchange rate and price controls introduced severe distortions in the relative prices facing private sector businesses. Further, private sector activities were undercut by parastatals with access to budgetary support and preferred access to the Government-dominated financial sector. 1.3 The economy suffered from the progressive decline in the Government's ability to provide essential infrastructure. The transportation network fell in serious disrepair, greatly increasing the cost of goods in Georgetown and making it extremely costly for private entrepreneurs to operate in the interior. Lack of maintenance made some interior roads impassable, and the deterioration of ferry services made river crossings a severe bottleneck. Frequent power outages forced businesses (as well as private homes that could afford them) to operate on high-cost generators. Companies that used water in industrial processes had to dig their own wells or truck water from central locations. The breakdown in telephone services meant that it was often impossible to communicate within Georgetown, much less overseas, while some businesses had to operate entirely without telephones. Inadequate port facilities required expensive transhipment of goods to larger ports. The deterioration of Guyana's network of sea defenses led to flooding of agricultural and residential land by sea water, and continues to threaten the coastal strip where most of Guyana's farmland lies. 1.4 Perhaps the most serious impact of the decline in the competence of the public sector was the inability to maintain basic health and education services. Health facilities lacked essential drugs, equipment and personnel. In addition to the human tragedy involved, the economic cost in terms of lost hours of work has been substantial. The deterioration of all levels of the educational system impaired essential skills of the Guyanese workforce. Employers report that today's job entrants often fail to meet basic literacy requirements and fall far behind the educational level of new workers a few decades ago. This is a shocking indictment of the educational system, in a country formerly celebrated for high levels of literacy. While Guyana has, today, a severe shortage of teachers, the country also has supplied substantial numbers of teachers to the rest of the Caribbean. 1.5 The private sector reacted in predictable ways to the expansion of state control and failure of public services. Where possible, business was transacted outside of the legal restrictions imposed by Government through smuggling, tax evasion, and various other means of evading controls. The risk of such activities was not high owing to the decline in the public sector's ability to enforce the law, and the profits could be significant. To a certain extent, illegal trading helped ameliorate the adverse impact of controls. However, widespread tax evasion 2 contributed to the erosion in public sector finances, and an underground economy is not the most efficient means of organizing economic activity. 1.6 The most dramatic reaction to the deterioration in living standards and the problems inherent in a controlled economy was massive emigration, as many Guyanese left to enjoy a standard of living that was no longer available in their own country. It is estimated that approximately 500,000 Guyanese live abroad, about two-thirds of the number of people living in Guyana. The wave of emigrants over the past two decades represents an enormous loss to the country. The severe shortage of highly-trained personnel at all levels of the civil service and the private sector is a severe constraint on economic development. 1.7 The situation today is the outcome of the private sector trying to function under four fundamental and serious constraints; (i) the extremely poor status of the country's infrastructure; (ii) the extremely high level of dominance of the public sector in the economy; (iii) a seriously weakened financial system; and (iv) a distorted incentive regime. 1.8 Since initiation of the Economic Recovery Program (ERP), the Government has taken a number of steps to ease constraints on private sector activities. Most price controls were eliminated, interest rates were liberalized, the exchange rate is now based on market forces, and most trade restrictions were removed. By and large the ERP succeeded in dismantling the system of controls and established a relatively open and competitive regulatory framework. Foreign exchange transactions are mostly unregulated, there are few controls on foreign investment, and most prices are determined in the market. 1.9 The Government has made less progress in addressing the constraints that require substantial resources. Some improvements in power and telephone service have been achieved, and the most serious breaks in the sea defenses have been corrected. However, infrastructure services remain well below the quality of a few decades ago. Further, government ownership continues to impair the efficiency of important sectors of the economy, the education and health systems remain in disarray, and improving the skills of the labor force will take considerable time. The development of the private sector will require action in all of these areas, but the Government lacks the resources to make substantial progress in any of them. One of the most difficult problems facing the Government is how to allocate its scarce resources among all of these tasks. 1.10 The first constraint referred to above, namely the poor status of the country's infrastructure is being dealt with under the Bank's Public Sector Review (PSR) (Report No. 11753-GUY) prepared in conjunction with this report. (The PSR also addresses the Government's ability to provide public services-health, education and infrastructure-and consider macroeconomic and public sector administration policies.) The objective of this report is to seek answers to the other four questions: (a) how the environment for private sector could be improved (Chapter II); (b) what steps need to be taken to increase the role of the private sector and reduce the role of the State in economic activities (Chapter III); (c) what can be done to improve and strengthen the financial sector (Chapter IV); and (d) what controls should be eliminated and which regulations should be strengthened to improve the efficiency of the private sector with respect to the principal commercial sectors in the country: trade, mining, and agriculture, forestry and tourism (Chapter V). 3 II. IMPROVING THE PRIVATE SECTOR BUSINESS ENVIRONMENT A. CONSTRAINTS ON PRIVATE SECTOR GROWTH 2.1 Private enterprise in Guyana is weak. Manufacturing accounts for less than 10% of GDP, with the most important products including beverages, clothing, furniture, and metalworking. Most activities are characterized by low levels of technology and/or relatively low value added, for example operations that assemble imported components of garments for re- export, production of furniture which relies heavily on manual rather than machine processes, and metalworking shops that serve the local industry. The potential for export, besides assembly operations, is extremely limited owing to the limited quality and lack of standardization of most products. 2.2 These problems largely stem from the lack of adequate infrastructure and the breakdown of the educational system. Power interruptions continue to constrain the development of private business. Large enterprises that run machinery continuously (i.e. the brewery and rice mills) must rely almost entirely on their own generation capacity, greatly increasing their costs compared to countries where electrical power is provided by public utilities. Smaller companies, where own-generation of electricity is even more inefficient, must severely limit their reliance on machinery. While telephone service to existing customers has improved since the privatization of the telephone company, the expansion of telephone lines continues to be slow. Some firms operating outside of Georgetown conduct business without any telephone service. Transport remains a serious constraint, both due to the inadequacy of port services and the poor state of roads, bridges and ferries for internal trade. 2.3 A lack of adequate skills also makes it difficult to provide the high levels of quality essential for export. Severe economic problems over the past two decades resulted in a massive emigration of the better-educated and trained segment of the workforce. At the same time, dwindling public sector revenues led to a deterioration in the educational system. Managers frequently cited the low educational levels of recent graduates which make them difficult to train in specialized skills. Vocational training facilities do not have the teachers or equipment to provide adequate training in technical skills. B. THE REGULATORY ENVIRONMENT AND GOVERNMENT SERVICES 2.4 Guyana is relatively free of the unnecessary bureaucratic requirements that hamper the private sector in many other countries. With some exceptions, administrative requirements are limited to those necessary for tax compliance, for enforcement of normal regulations at the municipal level (i.e. zoning, building codes) and for environmental and health reasons. There are no legal provisions which favor domestic over foreign investors, who can invest in any sector of the economy and can repatriate profits freely. 2.5 Labor markets in Guyana are relatively free of policy-induced distortions. The Labor Act provides a voluntary framework for the settlement of labor disputes, under which either labor or management may ask the Ministry of Labor to intervene to mediate disputes. In the event of a strike, intervention by the Ministry is automatic. This process provides a 4 framework under which compromises can be reached, or at least work can resume pending resolution of a labor dispute. In any event, the Ministry's recommendations are not legally binding on the parties involved. The only exception concerns strikes which interrupt the provision of essential services, as defined in the Essential Services Act (largely health services, transportation and public utilities). If strikes affecting essential services cannot be resolved voluntarily, the Minister is empowered to impose arbitration. A panel of three arbiters (representing Government, employers and the trade unions) is appointed whose decision is binding by law. This does not happen too often, the last case being when arbitration was used to settle a strike against the Guyana Electrical Corporation in 1991. 2.6 Public services to the industrial sector suffer from the same problems facing other public sector activities: the inability to pay adequate wages to attract highly-qualified people. The Guyana Manufacturing and Industrial Development Agency (GUYMIDA) is the major source of assistance to the manufacturing sector. Besides its responsibility for the approval of fiscal incentives (discussed below) GUYMIDA promotes investments through the provision of information on markets and technical processes, through evaluation of investment projects, through technical support to enterprises by financing consultants, and through financing training, tours and other promotional activities. 2.7 The mission was not in a position to do a detailed review of GUYMIDA's support activities. However, the comments by private sector businesses were almost uniformly negative concerning the value of GUYMIDA's services. An evaluation of GUYMIDA was carried out in late-1991 by the UNDP, which indicated that GUYMIDA had not been effective in providing support to the manufacturing sector. The major constraints on GUYMIDA's activities include the low remuneration and high turnover of staff, lack of definition of its role in relation to other agencies, assignment of too many tasks for which GUYMIDA was not prepared to fulfill, lack of implementation by GUYMIDA of a recommended reorganization, lack of development or promotion of GUYMIDA's information and documentation center, and in general lack of acceptance of GUYMIDA's activities by the private sector. Given the recent experience, the Government should consider whether it is useful to continue GUYMIDA's efforts to support the manufacturing sector. The resources devoted to such efforts might be used more efficiently in higher-priority activities. C. FISCAL INCENTIVES 2.8 Despite considerable improvements in the structure of tax rates, the Central Government remains dependent for the bulk of revenues on taxes with relatively high rates. Over 70% of tax revenues comes from the company income tax, consumption taxes, and import duties. The company income tax rate is 35%, with dividends subject to a 15% withholding tax. Consumption taxes are levied on both domestic goods and imports, with the exception of inputs used by registered manufacturers. Consumption tax rates range from zero to 100%, although most goods are taxed at either 10% or 30%. Import tariffs are in the process of being reduced, although at present most goods are charged between zero and 45% (see the Public Sector Review for a discussion of the tax system). These high tax rates would make many economic activities prohibitively expensive and greatly reduce production, were it not for a complicated system of exemptions that are granted on an individual basis. The Guyanese government provides three kinds of discretionary fiscal incentives: income tax holidays; waivers of import duty on machinery, equipment and raw materials; and waiver of consumption taxes on imported 5 machinery, equipment and raw materials. l/ The promoters of a new industrial project must apply to the government through GUYMIDA to obtain these incentives, and the amount of incentives granted varies by project. 2.9 Amount, The amount of taxes foregone due to the fiscal incentives regime is difficult to estimate. Guyana follows the CARICOM Harmonization Treaty's prescriptions for fiscal incentives, which provides a schedule of varying lengths of tax holiday depending on the ratio of value added to gross revenue for each project. Some 31 applications were received for fiscal incentives in the first ten months of 1992. Of these, 21 received some forms of incentives: 17 were granted an exemption of the duty and consumption tax on imported machinery and equipment (the others do not appear to have imported equipment), five received exemptions of duty and consumption tax on imported inputs, and three received a 3-year income tax holiday. 2.10 The importance of fiscal incentives should decline as Guyana implements the new import duty rates recently agreed by CARICOM members. Import duties for competing capital goods and raw materials are to fall to 20% starting in 1993, and reach 10% by 1997, and duties on non-competing goods are to drop to 5% beginning 1993. A further reduction in consumption tax rates, also would reduce the importance of fiscal incentives. 2.11 Process, GUYMIDA, an agency of the Ministry of Trade, Tourism and Industry, reviews requests for fiscal incentives for industrial sector projects, which account for most of the incentives granted. Applications for fiscal incentives in tourism and the primary sectors are submitted to the concerned subject ministry. 2.12 To obtain fiscal incentives, the promoters must provide GUYMIDA an excessively detailed project application--the blank itself runs into 9 pages--requiring descriptive information concerning the project, product description, project timetable, ownership structure, history, capital structure, capital cost estimates, financial plan, production methods, machinery and equipment, raw materials, market survey, production and sales projections, operating costs and revenue, employment, and financial projections. Depending on the investors' preparation, providing a complete application may entail a few months after the initial contact with GUYMIDA and may require considerable assistance of the GUYMIDA staff. 2.13 GUYMIDA forwards the completed application to an inter-agency group called Fiscal Incentives Committee (FIC), which evaluates and recommends the type and extent of fiscal incentives. GUYMIDA is the convener and secretariat of the FIC. The Committee's six permanent members include representation from GUYMIDA, Treasury, Customs and Excise, Inland Revenue, and the State Planning Commission. In addition, representatives of the subject ministries are invited for each project. Within two weeks of distribution, FIC agrees, either through a meeting or a round robin approval process, to recommend a certain level of fiscal incentives to the Ministry of Finance. Under the previous administration, the Director of the I1 Guyana also provides incentives through the income tax code which are similar to those provided in most countries, including accelerated depreciation, carry forward of trade losses, and write-off of land development expenditure. The code also provides for remission of income tax equal to the share of exports in total revenue, up to half the income tax due otherwise. 6 Office of the Budget at Finance made the final decision. In the new administration, the review process has not fully settled and it appears that the applications are being reviewed by the Director of the Office of Budget, the Treasury Secretary, and the Advisor to the Minister, with the final decision being taken by the Minister. 2.14 Processing is extremely complex and lenghty. Projects may require up to three months for review by GUYMIDA. However, a large part of this time may involve preparation and revision of information required for application, rather than processing of the project by GUYMIDA. The FIC decision adds another 2-3 weeks, and it takes anywhere between 2-8 weeks to obtain the final decision from Finance. 2.15 Limitations of fiscal incentives. The fiscal incentives regime favors new industrial projects at the expense of capital investment devoted to maintenance, refurbishing, or balancing equipment. Similarly, projects in agriculture and services sectors are considered only for customs duty exemptions, and do not receive tax holidays. The rationale for introducing these biases in the allocation of investment is not clear. This is particularly true in Guyana where productive capacity is very badly depreciated. There is little economic justification to favor new capacity creation over replacement or maintenance of old capacity; in fact, the latter may well serve national interests better. 2.16 The criteria used for granting fiscal incentives are not clear, which makes it difficult for the investor to anticipate, or even to understand the reason for, the level of incentives granted, and may encourage the use of noneconomic criteria in decisions. The criteria for fiscal incentives include value added by the project, technology employed, employment creation, location of the project (rural or urban), foreign exchange earned or saved, and the size of the investment. However, there are no clear guidelines to translate these multiple and potentially conflicting criteria into fiscal incentives with any degree of consistency. For instance, the officials concerned could not explain whether the Government favors capital-intensive modern technology or labor-intensive but less efficient technologies. Also, some confusion exists concerning what projects should be considered for fiscal incentives. For instance, certain projects cleared through FIC were subsequently rejected by Finance because they were considered too "small"; however, there is no clear working definition of small projects agreed between GUYMIDA and Finance. Prospective investors probably understand the intent or the application of these criteria even less clearly, and it is unlikely that the fiscal incentives process actually encourages project formulations desired by the Government. In practice, subjective perceptions of the "adequacy" of the projected cashflows, and possibly political considerations, appear to determine the level of fiscal incentive granted to each project. 2.17 The information and details required to obtain fiscal incentives far exceed those required for merely establishing a new business. Most of the projects are small; of the 21 projects granted fiscal incentives in the first ten months of 1992 12 had a total investment of less than US$1 million, with the largest two being US$6.2 million and US$3.6 million; the rejected projects were typically smaller. For such small investors, the time and efforts spent in obtaining fiscal incentives is a serious impediment to businesses, although necessitated by the high levels of import duties and consumption taxes. 2.18 GUYMIDA has little capacity to monitor the businesses granted fiscal incentives to determine whether the goals of the project are met or the incentives used for the purpose stated 7 in the application. It is understood that the GUYMIDA and Finance officials attempt to relate the level of incentives, particularly tax holidays, to the projected value added of the project. There is a presumption that if, upon implementation, the project fails to generate the requisite value added, the incentives will be withdrawn. Such ex post review is very difficult to undertake, given GUYMIDA's limited resources, and in practice is not enforced. Also, it is likely that incentives granted some firms are not used for the intended investment. For instance, vehicles are imported duty-free if they are to be utilized for projects in rural/remote areas, but such vehicles are all too common on Georgetown roads. 2.19 To summarize, the fiscal incentives process has both conceptual flaws and implementation difficulties. Its objectives are not clearly justified. It is implemented with apparently desirable, but vague, criteria that permit excessive subjectivity. The process is excessively long and arbitrary from the investors' perspective. It consumes considerable resources of the Government, and is unlikely to have steered investments in the intended direction. The reforms of the fiscal incentives regime should aim to make them widely available, without discretion, and easy to understand a priori. 2.20 The Government should adopt the goal of reducing the role of discretion in administering the tax regime. The present tax regime is characterized by relatively high rates of import duties and consumption taxes, thus necessitating exemptions for some projects to enable Guyana to compete with other countries for investments. A preferable strategy would be to establish a tax system without discretionary exemptions but with low marginal rates. Such a system would have to be designed so that sufficient revenue is generated for a sustainable macroeconomic program, with rates low enough to attract investors 2/: (a) Consumntion taxes range from zero to extremely high rates for certain necessary inputs, for example motor vehicles. A reduction and simplification of rates would permit the Government to generate necessary revenues while avoiding the need for discretionary incentives. If the Government wishes to impose differential tax rates based on use (for example, taxing companies a lower rate for motor vehicles than households), this differential rate should be given all companies. (b) The anticipated fall in import duties under the new CARICOM agreement should make an elimination of import duty exemptions for most goods consistent with a reasonable tax rate for investors. As the tariff rate on non-competing capital goods and inputs will be only 5%, exemptions will have little impact. However, tariffs will be higher in the case of goods that compete with CARICOM production, 10% for primary inputs and capital goods and 15% for intermediate inputs. The Government might consider requesting an exemption from CARICOM to reduce such rates, or lobbying for changes in the CET. (c) Guyana's coryorate income tax rate is 35%. As income tax holidays have not been shown to be very effective in influencing investors' decisions, it is likely that such holidays could be eliminated without reducing the attractiveness of 2/ The Bank's view of the Guyanese tax regime is provided in the Public Sector Review. 8 Guyana to investors. Depending on the revenue situation, the Government should consider whether the elimination of holidays would allow any room for reduction in rates. Alternatively, capital-intensive and long-gestation projects can and do enjoy effective tax holidays through accelerated depreciation provisions and writeoff of initial expenses. Parameters of these tax rules can be easily adjusted to provide additional incentives, while avoiding a case-by-case scrutiny of each project. The proposed system of low tax rates, with any exemptions provided to all companies, would reduce economic distortions, provide a fairer and more transparent set of incentives, and greatly simplify the administrative burden imposed on investors. This approach is likely to encourage greater investment than the present system of high tax rates, with exemptions granted after a lengthy and non-transparent approval process. This approach also would permit the Government to allocate its limited administrative resources to other activities. The Fiscal Incentives Committee could be disbanded, and GUYMIDA could focus on providing assistance to investors in meeting other, necessary administrative requirements and the provision of information. D. RECOMMENDATIONS 2.21 Guyana is relatively free of the unnecessary bureaucratic requirements that hamper the private sector in many other countries. However, the weakness of the public sector means that compliance with those administrative requirements that exist can be burdensome and that many of the services provided manufacturers by the public sector are inadequate. Thus, the principal constraints on growth of the manufacturing sector are the lack of both adequate infrastructure and a sufficiently-educated labor force. The limited direct support for manufacturing activities, such as provision of market information, promotional activities, and technical assistance by GUYMIDA, has not been effective. While these activities are in principal useful, the Government should consider if the resources devoted to GUYMIDA might be used more effectively elsewhere. 2.22 The fiscal incentives regime (tax holidays and exemptions from consumption taxes and import duties) introduces biases in investment allocation that are difficult to justify and imposes a considerable administrative burden on investors. Moreover, the criteria for fiscal incentives are vague and the approval process is extremely complex, lengthy and not transparent. The Government should consider eliminating the use of discretionary fiscal incentives. Reductions in tax rates would be necessary to avoid imposing an unrealistic tax burden on enterprises, consistent with generating sufficient fiscal revenues to support the macroeconomic program. 9 III. INCREASING THE ROLE OF THE PRIVATE SECTOR A. EXPERIENCE WITH PRIVATIZATION The Role of the State 3.1 The State dominates most aspects of economic life in Guyana. In addition to its presence in public infrastructure (electricity, water and sewerage, transportation), the Government controls major industries such as sugar processing, rice milling, and bauxite mining. Further, through a group of 32 enterprises under the supervision of the Public Corporations Secretariat (PCS), the Government dominates and sometimes monopolizes engineering, repair workshops, brick making, pharmaceutical, timber and log processing, paint-making, printing, fishing, coconut and livestock, cattlefeed, processed foods, edible oils, retail distribution, and trading. Public ownership for most of these companies serves no apparent strategic national purpose. 3.2 The former Government began a concerted attempt to privatize public corporations, and 14 of the 32 public corporations under the PCS were totally or partially privatized/liquidated by October 1992. However, the implementation of the program raised widespread concerns about its transparency. The program was halted by the new PPP/Civic administration in November 1992, even as public tenders were open for two units. Management and Preparation 3.3 Management of the Program. The responsibility for privatization of public sector units has been divided between several agencies. A Divestment Unit was set up under the Public Corporations Secretariat (PCS) to execute all logistical functions relating to the privatization program. The Divestment Unit reported to, and executed the decisions of, the Divestment Policy Group. The President of Guyana chaired the Divestment Policy Group which also included the Ministers of Trade, Finance, Agriculture, and Industry. The Group made all the important decisions regarding privatization (acceptance of bids, etc.). In addition, the Divestment Unit also reported to a standing Cabinet sub-Committee called the Monitoring Committee, comprising of the same Ministers, plus representatives of Bank of Guyana and some others. The Monitoring Committee is a central government oversight body, and among others, periodically discussed the privatization program. 3.4 Despite this structure, the two largest privatization transactions-Guyana Telecommunications and Demerara Woods Ltd.--were handled by another agency, with little PCS involvement. Guyana Telecommunications was not on the first list of public units that PCS proposed to privatize. There was no clear explanation for transferring the largest privatizations outside the purview of the PCS and the Divestment Policy Group. Potential problems of fragmented responsibility for privatization are lack of transparency, lack of clarity about authority for decisions, and lack of uniformity regarding criteria and processes to be followed in soliciting and awarding bids. 3.5 Schedule, The scheduling of PCS units for privatization was based on the need for State financial support for "poor performers" and the staff availability to manage the privatizations. The Divestment Unit obtained approval for privatization of 10 corporations in the 10 first phase of the program. These were primarily loss-making units; some had completely closed down with only skeletal staff remaining. The main intent in privatizing these units was to prevent any further drain on State resources. Once several of these were privatized/liquidated or well along the way, 11 additional units were identified as privatization candidates. A unit would be "identified" as a privatization candidate through the initiative of the Divestment Unit or as a result of enquiries by interested investors concerning the units that were not formally announced for privatization. Preparatory work for privatization would be carried out a task force for each unit, including representatives of management and the Divestment Unit. 3.6 Information. It was often difficult to provide sufficient information on the company so that investors could make an informed decision. The accounts and other records of many government-owned companies, including such large enterprises as Guyana Airways, have been in arrears for many years, with the audited accounts unavailable for several years. Standard prospectus providing reasonably detailed information on the history of the company, capacities, line of business, audited financial accounts, inventory of assets, etc. have generally been unavailable. For instance, the "Company Profile" distributed for Demerara Woods Limited (one of the larger companies sold) consisted of 1.5 pages of rudimentary, descriptive information. 3.7 The paucity of information meant that investors had to spend considerable time and money in investigating companies, including correspondence with PCS for further information, waiting while PCS collected and compiled information from the unit managers, meetings with PCS officials and ministers, etc. Foreign investors would typically need to visit Guyana merely to obtain reliable basic information first hand. The lack of readily-available information is one explanation for the limited investor interest in the sale of businesses as a going concern. Some of the units have not attracted serious offers despite repeated advertisements over a period of years. 3.8 Valuation Valuation was performed both by PCS and by external agencies. Of the 10 companies for which information is available (out of the 14 units fully or partially privatized), one did not seem to have been valued prior to privatization, four were valued by the PCS or the Chief Valuation Officer, two were valued by external valuers, and two units whose assets were sold piecemeal were valued partly by the PCS/Chief Valuation Officer and partly by external valuers. 3.9 The practice of having one administrative unit, in this case the PCS, responsible for both valuation and managing the program is not desirable. One criteria for evaluating the performance of the unit administering privatization is the ultimate contract price relative to valuation. Thus, the unit would face a considerable incentive to provide a low evaluation. Given the importance of fair valuation in expediting negotiation process, it is advisable that the Government invest necessary resources in obtaining an external, professional valuation. The expense for it may be a good investment, if it provides an improved basis for negotiation. 3.10 As a rule, internally valued properties have sold for substantially more than the valuation, while those valued by external valuers have sold for substantially less. A comparison of valuations and actual prices agreed for 23 transactions reveals that 20 properties appraised by the Chief Valuation Officer or the PCS were sold, on average, for 38% above the valuation. By contrast, three properties/businesses valued by external valuers were sold at 30-40% below the 11 valuers' estimates.J/ Given the perverse incentives facing the internal valuers (see para. 3.9), one explanation for the consistent underestimation by public sector valuers and overestimation by external valuers is that the units were sold below their true value. The Tendering Process 3.11 Companies were either broken up and sold piecemeal, or sold as a going concern. Several small properties (office or factory buildings, commercial land, furniture, stocks, etc.) were sold through a sealed bid, public tendering process. In some cases, these properties were subject to multiple tenders because the initial bids were considered too low, although some of these properties clearly received multiple competitive bids. The multiple tendering process (requiring successive media advertisements and letters to earlier-round bidders exhorting them to revise upwards their offers) has been long and drawn-out, lasting as much as 12-18 months. That standard office and commercial properties should require such a lengthy disposal process is surprising and probably suggests lack of faith in the sealed bid process. An open outcry auction, on site, may well have engendered more confidence in the Government's handling of assets to be privatized. 3.12 In the early stages of the program, an important goal was generating foreign exchange, and executing transactions was critical to realizing of targets set under the IMF program. Nonetheless, there appear to have been significant shortcomings in the privatizations that were carried out, and many participants have expressed dissatisfaction about the lack of transparency in the process. Specifically, the manner in which bids were selected had many deficiencies. There was no clear cut process, and the procedures to publicize invitations for bids and their subsequent evaluation were not always consistent. Valuation of companies were also inconsistent, and in certain cases negotiations were held with only a single buyer. B. THE FUTURE PROGRAM 3.13 The privatization of parastatals is an essential element of the Government's overall program to increase the efficiency of the economy and ensure sustained development by encouraging a greater role for the private sector in the economy. The program should encompass the financial sector, the major productive sectors of bauxite and sugar, and the industrial and commercial enterprises managed by the Public Corporations Secretariat.4/ The challenge facing the new Government is to proceed rapidly with the privatization program, while avoiding the difficulties experienced over the past few years. 3/ An additional 10 transactions (full business or specific assets) were excluded from this analysis because of insufficient information about the date of transactions and the applicable exchange rates; however, the excluded transactions are not atypical of this pattern. A/ This chapter deals with only the latter. The report covers private sector involvement in the financial sector in Chapter IV and in the State's bauxite and sugar holdings in Chapter V. 12 3.14 The Government should move immediately to set out its agenda for privatization, and then press forward with initial, less difficult transactions to establish a good track record and provide momentum. In structuring the program, the Government should strive for the maximum speed while ensuring transparency, effective management, and correct valuation of properties. The design of the program should be as simple as possible, should avoid unnecessary conditions on the sale of properties, and should take into account concerns over employee compensation and diffusion of ownership. These concerns are elaborated below. Timing 3.15 Initiation of Program. It is important that the Government proceed with the privatization program as quickly as possible. The management of the program will provide a visible and dramatic signal of the new Government's commitment to private sector development. Success in the privatization process is important in itself, as well as to create a climate of confidence for domestic and foreign private investors. Further, the uncertainty surrounding the future of public sector companies and the low salaries have impaired morale in the potential candidates for privatization. Delays in privatization may lead to a loss of critical staff necessary for preparing the units for an orderly and profitable sale, as well as for maintaining current operations. Many units face urgent operational problems and decisions regarding capital expenditure, which cannot be dealt with until the future ownership of the company is determined. Because the sale process has been halted in mid-stream by the new Government, with the already announced sales and tenders of Guyana Pharmaceutical, Guyana National Engineering Corporation (GNEC) suspended, there is an urgent need to resume the privatization process as quickly as possible consistent with the need to ensure a fair and competitive process. 3.16 Schedule, The Government should prepare a timetable for privatization that seeks to build and increase the tempo of activity over the coming year. The Government immediately should announce its intention to privatize National Edible Oil Co., Guyana Stockfeeds, GNEC, Hope Coconut, Mards Workshop, Guyana Pharmaceutical, Guyana Fisheries, Sanata Textiles, National Padi, Guyana Rice Export Board, Guyana Stores, Guyana National Shipping, Guyana National Printers, Guyana Liquor, Guyana Glassworks, and Guyana Airways. There is little purpose in continuing government ownership of these units. Simultaneously, the Government should promise to resume sale proceedings and shortly thereafter announce a timetable for selling remaining units. The Government should set an ambitious, but realistic, goal with regard to the pace of privatization. The target pace of privatization should take into account the ability of the Government to perform the necessary tasks associated with the sale of public enterprises, and the markets' absorptive capacity. 3.17 The sale of Guyana Stores, GNEC, Guyana Pharmaceutical, and Guyana National Printers should receive priority because of their relatively clean accounts, profitable status, and the fact they need little restructuring. Guyana Stores would be a particularly good choice to begin the program because of its visibility and ease, and possibly immediate improvements in service and quality that may be realized after privatization. Guyana Fisheries and Stockfeeds have already been partly sold and the sale of the remaining assets should continue. Soap & Detergent, Glassworks, and Hope Coconut may involve some valuation and legal title problems that may require some time to sort out. 13 3.18 Privatization of Guyana Oil, Guyana Electricity Corporation and Guyana Airways should be preceded by having in place an adequate regulatory framework and/or for those that are monopolies (Guyana Oil) the monopoly should be eliminated. Issues pertaining to the Guyana Electricity Corporation should be handled in the context of the Government's program for the power sector. It may be possible to improve the purchase price of Guyana Airways through a tactical deferral, and the company may require a public issue. However, there is little strategic reason for continuing government ownership of the Airways. Objectives 3.19 Simnlicity. The objectives of privatization should be kept as simple as possible. It is recommended that realizing the best price for the public sector be made a principal, if not the only, objective for privatizing units under the PCS. While other initiatives--such as development of a stock market, encouraging corporate democracy through diffusion of shareholding, and workers' participation--are laudable, privatization of state units is not the only, or even the most important way to achieve them. Pursuit of these other goals may entail significant problems and should not be allowed to delay privatization of PCS units. 3.20 Transparency The procedures set out for privatization should be fair and transparent. All relevant regulatory action should be completed prior to or in conjunction with any privatization that such actions would affect. The procedures should also reflect guidelines to appropriately deal with unsolicited offers (which have often, in other countries, adversely affected the privatization process). 3.21 Partial Government Ownership. Retention of partial ownership in a unit to be privatized would not be wise. Retention of even a minority stake does not serve clearly identifiable purposes, and may result in favored treatment of the unit in the future, relative to other companies in the same industry. The Government may however stagger the sale of its stake in units where the size of the privatized company would restrict competition. However, such partial (but majority) privatizations should be carried out under a clear plan to sell all of the assets eventually, and under clear agreements that such subsequent sales would not interfere with principal shareholders' controlling rights. 3.22 Foreign Participation. The Guyanese investment policy does not discourage foreign investment; in fact, the previous privatizations gave local investors the impression that they were discriminated against. While there is no need for altering the policy, the Government needs to take steps to ensure that privatizations will not favor either groups. Conditions of Sale 3.23 In keeping with the simplicity objective, the Government should refrain as much as possible from seeking any promises concerning future production plans, injections of working capital, fixed capital, new technologies, etc.5/ Such discussions draw the Government into negotiations with individual investors, delay the process, and perpetuate the scope for and 5/ However, it may be beneficial for the Government to assume the liabilities of parastatals before privatization. 14 appearance of "sweetheart" deals. Instead, the Government should aim at a widely participated, competitive sale process that extracts the most value. Concerns for quality, safety, workplace standards, etc. should be addressed through industry-wide regulations, not through specific agreements with new owners. A good rule of thumb would be to not insist on any specific regulations/agreements than would apply to private units in a similar industry. 3.24 By the same token, the Government should refrain from making investments in companies that are due for privatization, offering to buyers of public corporations special privileges such as monopoly rights, other arrangements which restrict competition in the sector, concessional loans, favored access to government contracts or purchases, favorable tax treatment, or any other regulatory arrangement that would favor the particular buyer vis-a-vis potential competitors. Redundancies 3.25 The two principal workers' concerns are continuation of employment after privatization and (to a lesser extent) the right to acquire ownership. So far, however, it is fair to say that there has been little cause for concern with respect to redundancies caused by privatization. Guyana faces acute shortage of workers at all levels, and private wages are already considerably above public wages for comparable work. In some of the privatized units, wages have significantly risen after privatization, probably because the new owners found it necessary to pay reasonable wages to encourage productivity. In Demerara Woods, wages were raised by 70% in February 91, 50% in July '91 and another 55% in March '92. Similarly, employment may be expected to rise with an increase in output. 3.26 Nonetheless, as privatization continues, and affects sectors such as bauxite and sugar, the possibility of more widespread redundancies should not be dismissed. The Government would need to look carefully at issues related to mitigating the impact of privatization on employment. Some senior managers may be most likely to be affected by changes in personnel brought about new owners; such changes should not be restricted. Employees that do lose their jobs due to privatization should be ensured fair compensation subject to existing laws or collective and individual bargain agreements. The retrenchment compensation should be clearly agreed to prior to privatization to permit private owners to reach an informed valuation for the property. However, it would be desirable to refrain from urging retention of the existing work force by new owners. Workers' and Small Shareholders' Participation in Acquisition 3.27 A tender process for selling public corporations favors bids by larger investors, especially those with access to loan finance, with workers and diffused small investors being less able to participate in acquiring these companies. Nonetheless, there are several reasons not to focus on diffusion of privatized unit ownership at this point. First, many of the units are too small to necessitate diffused ownership, and some of the larger ones are either in serious trouble or only recently emerging from it. With the possible exception of Guyana Stores, there are few good vehicles for mass stock ownership. Second, institutional mechanisms encouraging diffused corporate ownership do not exist. Guyana does not have a stock exchange, there is very little trading in stocks, and even treasury bill auctions are not always fully subscribed. Languishing, under-subscribed issues is a real danger and would hardly serve the cause of privatization. Third, 15 there is no reason why the acquiring investors would not voluntarily dilute their shareholding to a controlling interest once these institutions are available. Finally, with treasury bill rates as high as 25% p.a., and the Govermment's precarious financial situation, the time value of cashing in government shares cannot be ignored. 3.28 A balanced approach towards these conflicting considerations may be as follows. The Government should declare its willingness to accept workers' buyout bids, since there is genuine apprehension about the Government's reception of such bids. Workers/Unions interested in a buyout should be encouraged to seek advise of local or foreign investment bankers or brokers to put together specific bids, and the Government may encourage potential investors to share equity with workers. However, price should remain the sole criterion for winning the bids and the overall timetable for privatization should not be compromised to permit worker participation. Management and Preparation 3.29 Management of the Program. A ministerial Oversight Committee (OC) provides a good forum to represent different branches of the government concerned with privatization. Its main objective would be to ensure consistency, transparency and professionalism of the privatization program. The ministries of Finance, Trade, Industry, Agriculture and Planning would logically participate in such a group. The OC should be responsible for determining and implementing a timetable of privatization, setting the conditions of sale for individual units, approving privatization strategies (e.g. going concern sale, piecemeal sale) for different units, and overseeing the work of the operational unit for privatization that is responsible for tidying up accounts, valuation, publicity, tendering, and post-sale follow-up. Once the OC is formed, none of the individual privatization cases should be transferred to a particular minister or secretariat. The views of different ministries concerning pace, scheduling, proportion of assets sold, the manner of privatization and conditions of sale should be fully coordinated, and as far as possible communicated through the OC. 3.30 The OC should continue to be supported by an executing agency, a Privatization Unit (PU). PCS continues to be a good agency to entrust with this responsibility because of the companies' reporting relationships with PCS, preparatory work already done at the PCS, and concentration of UNDP support there. Moreover, it is recommended that a representative from the Finance Ministry be added to the Privatization Unit. As privatization transactions reduce the normal supervisory responsibilities of PCS, it would be easier to draw the relevant staff for the PU from PCS. 16 3.31 The following chart describes the typical process of privatization that the PU should implement, overseen by the OC. Stage Tasks Time _____ ~~~~~~~~~~~~~~~~~(Weeks) 1 Valuation, tidy up accounts, prepare a privatization prospectus varies 2 Announce intention to privatize the specific unit, availability of the prospectus, date the tender will open or auction will be held l 3 Distribute prospectus, field enquiries 2-8 4 Open tender, accept bids 14 5 Conduct auction, or announce tender results; award bid or announce a I new tender 6 Open repeat tender, if first round bids unacceptably low 1-2 7 Announce acceptance, or postpone privatization if no acceptable bids 1 3.32 Preparing Units for Sale. The OC should oversee preparation of an informative prospectus for units to be sold. The ad hoc information production in the past should be replaced by a conscious effort to inform prospective investors. The OC should ensure that all information--even if requested by, or generated in response to, the queries of specific investors--is disseminated in some standardized form to all interested parties. 3.33 Several units appear to have significant backlogs in terms of preparation of standard accounts and inventories, and/or external audit of their accounts. The plan for privatization should specifically provide for realistic schedules and measures for getting the units' accounts prepared and preferably audited. Such information may be necessary in preparing a reasonably informative brochure. While outdated accounts is a somewhat endemic problem, privatization is an extraordinary exercise that merits provision of special resources from say, PCS, the Auditor-General's office, or external auditors. 3.34 Certain units have been advertised for sale repeatedly without apparent investor interest. Before offering them for sale again, their previous sale histories should be carefully examined to isolate the problems (unrealistically high valuation, failure to interest relevant investors, perceptions that units were not available to some, etc.) that prevented their privatization earlier. 3.35 Valuation and Other Professional Services. Because of the Privatization Unit's responsibility for negotiation, (see suggestions below for reducing the role of negotiated sales), as well as PCS's general oversight responsibility, they should not be given the responsibility for the Government's internal valuation. In light of the problems experienced in the valuation of properties under the last Government's program, the OC should seriously consider obtaining an 17 external professional valuation at least for the larger units. However, some caution should be exercised over the use of the valuation. The valuation should give the Government information on the market value of the property, but should not necessarily be viewed as the minimum acceptable price. Ultimately, the true value of the property is what the market will pay. As long as the process has been open and competitive, the Government should be willing to accept the market price. 3.36 Further, the general shortage of staff with relevant skills would argue in favor of using local or foreign investment bankers, brokers, or accountants to help the government in auditing, preparing a prospectus, canvassing for investors, and negotiating price. For the larger units, the additional cost may well be justified by the speed of negotiations or improvements in price obtained. Privatization Process 3.37 While preparation of the company, valuation and negotiations are important ways to safeguard government's interests in privatization, none is as important as ensuring wide, competitive investor participation in the acquisition process. Ensuring such participation mainly involves administrative and political skills, rather than technical, accounting, valuation, or economic expertise. Given the competing investment opportunities for Guyanese and foreign investors and very modest bidding for previous privatizations, there is a real danger of privatizations not taking off. Thus ensuring a wide competitive participation should be the primary responsibility of the OC. This entails several steps as follows. 3.38 First, the Government should publicize the program as widely as possible, using varied and well-targeted publicity means. The program and the units must be "sold" long before the point of sale tender advertisements for specific units, through meetings with banks and other institutional investors, industry/business associations, CARICOM and other foreign officials, press conferences, contacts with overseas Guyanese, communications with privatization press, other operators in the industry the pubic unit operates in, and the use of posters and other on-site publicity materials. Given Guyana's size, non-conventional and directed publicity can be free or extremely cost-effective in soliciting investor interest. However, caution should be exercised that informal contacts do not give any advantage to particular investors. The purpose of the publicity campaign should be publicity, not sales negotiations. 3.39 Second, investors must perceive that privatization process will be fair and fast. These perceptions respond better to demonstration than to assertion; thus the first privatizations under the new administration carry large signalling value. A unit with relative simple valuation issues, clean accounts, and record of profitability should be used to demonstrate transparency of process. Guyana Stores may provide a particularly good opportunity in this respect. 3.40 Third, as far as possible, assets should be sold through an open outcry auction, as this is the most transparent and simplest procedure. Commercial land, buildings, vehicles, furniture and other such properties provide particularly good opportunities to sell through open outcry public auctions and demonstrate the transparency of the process. For larger assets, or entire businesses, and particularly where foreign investor interest is expected, a sealed bid tender/auction would be necessary. However, the bids should be opened in the presence of the press and/or representatives of the business community (e.g. chamber of commerce 18 representative). The very low first round bids received for certain standard commercial properties may mean that bidders did not expect a truly competitive process, and used initial bids mainly to be shortlisted for negotiations. This mentality can be broken by publicly auctioning some small properties (vehicles, office space, etc.) with no or low reservation price in an open auction with a certain amount of fanfare. 3.41 Fourth, as discussed earlier, the OC should ensure that there is equal access to information by all interested investors. To ensure this, criteria should be established for acknowledging all investor queries, and as far as possible, available information-no matter who the original enquiry comes from--should be provided in standard forms. Bids by private investors are most time-sensitive. Frequently, complex financing and partnership arrangements underlie private bids; thus delays in agreement can fast erode interested investor group, making it more likely that the government negotiate with a single investor. 3.42 Finally, once the privatization process gets under way, there may be occasions of collusion among interested bidders. Of course, investors should be free to form syndicates or partnerships to acquire control, provided such partnerships intend to jointly own and run the business rather than merely exclude competition. Sound valuation and reservation price provide one measure against collusion. Threat of being blackballed from future privatizations provides another. C. RECOMMENDATIONS 3.43 The former Government initiated the privatization of public sector corporations and was successful in increasing the role of the private sector in the economy. However, the program was flawed by a lack of transparency, a diffusion of management responsibilities, and questionable procedures. The new Government should move as quickly as possible to define a privatization program that ensures an open process and facilitates rapid privatization of the remaining enterprises that operate in competitive markets. The program should be guided by the following concerns: (a) the objective of the program should focus on obtaining the highest price for properties sold in the shortest possible time, without unnecessary conditions on the operation of the company or the provision of special benefits to buyers; (b) employees that lose their jobs due to privatization should be ensured fair compensation. Thus far, this has not been an important problem, as the experience with recent privatizations has been for an increase in wages and few layoffs. However, this issue needs to be dealt with carefully, especially as privatization exercises extend to more difficult candidates; (c) the Government should allow for purchases of enterprises by workers and management. However, these groups would have to compete with other potential buyers, with the highest price the primary criterion for sale; (d) there is no rationale for retention by the Government of a minority stake in privatized companies; 19 (e) companies that have a monopoly position in the market (such as Guyana Oil and Post Office) should eliminate the existing monopoly or have in place an adequate regulatory framework to oversee their operations prior to their privatization; (f) an Inter-Ministerial Committee should be responsible for overseeing the program, operational responsibility vested in a Privatization Unit. Considerable efforts should be made to prepare and disseminate financial and operational information on the companies to be sold. Procedures should be established to ensure that all potential buyers have equal access to information. To the extent possible, valuation should be done by external companies; and (f) care should be taken to ensure that the procedures adopted generate confidence in the program. Sales should be widely publicized, with as many sales as possible conducted through an open outcry auction. For larger assets and companies sold as going concerns, where sealed bids will be necessary, the bids should be opened publicly. 20 IV. THE FINANCIAL SECTOR A. MONETARY MANAGEMENT Money and Interest Rates 4.2 Monea Aggregate. The Guyanese economy experienced a severe decline in monetary aggregates in the second half of the 1980s. The onset of the Economic Recovery Program in mid-1988 was accompanied by a continued fall in output (after an average decline of 3% per year from 1980-88). While in nominal terms the money supply expanded sharply, inflation accelerated even faster owing to the rapid depreciation of the currency, the removal of price controls, and supply disruptions. Ex-post, the demand for real balances fell severely; M2 dropped from 92% of GDP in 1987 to 57% in 1990 (see Annex Table 2. 1).Y Net domestic credit fell by 60% in real terms from 1987-90, largely because of a 75% decline (in real terms) in net domestic credit to the public sector as the Government tightened fiscal and monetary policies. The decline in domestic credit to the private sector (in real terms) was not as steep. In addition, individuals had access to credit from Guyanese abroad, not all of which was channeled through the banking system. Negative real interest rates and lack of confidence in the solvency of financial institutions, in part because of poor regulation and supervision, also contributed to the disintermediation. 4.3 The fall in monetary aggregates was slowed in 1991 and reversed in 1992 as the interest rate and foreign exchange regimes were liberalized, inflation fell, and confidence in Guyana's economic management and future increased. Key policies included the unification of the foreign exchange market, the liberalization of domestic interest rates, and the establishment of a competitive market for treasury bills. Net domestic credit doubled in real terms from end-1991 to June 1992, and M2 rose from 38% to 48% of GDP over the same period. GDP increased by 6% in 1991, and a similar rate of growth is estimated for 1992. 4.4 Interest Rates and SDreads. Deposit, lending and treasury bill interest rates were all below inflation prior to the liberalization of interest rates and introduction of competitive bidding for treasury bills in 1991 (see Annex Table 2.3). It appears that interest rates have now risen substantially above inflation, although the lack of a reliable price index makes it difficult to say for certain. Commercial bank lending rates averaged 33% in the first half of 1992, and inflation is believed to have been about 18% for the year as a whole. High ex-post real borrowing and lending rates in 1992 were understandable, considering expected exchange rate fluctuations and the considerable degree of uncertainty over future political and economic policies. Continued maintenance of sound macroeconomic policies and progress in addressing the serious structural problems facing the economy should, over time, facilitate a continued reduction in interest rates, broadly in line with international interest rates. All of these amounts are extremely high in terms of absolute financial depth when compared to the financial depth elsewhere in the Caribbean and internationally. Measurement of financial depth in Guyana is severely limited because of the probable under-estimation of GDP and the difficulty in arriving at an appropriate starting point in order to measure relative changes in savings. As a result, the figures for the degree of financial depth may be overstated. 21 4.5 The liberalization of interest rates and increased private sector participation in the banking system was accompanied by an increase in spreads. The spread between the weighted average commercial bank lending rate and the time deposit rate increased gradually from three percentage points at end-1988 to 12 percentage points at end-June 1992. This is a very high spread, given the low reserve requirements and absence of forced investments in the system, and may reflect limited competition. 4.6 Reserve Requirements. Cash reserve requirements are 11 % of demand deposits and 9 % of savings and time deposits. Liquid asset holding requirements are 25% of demand deposits and 20% of savings and time deposits, respectively. There are no forced investments in the system. However, in mid-1991 commercial banks were compelled to purchase G$4,089 million in three year debentures issued by the Treasury. The debentures were issued at a variable rate linked to the average of the rates over the last three months' Treasury bills. Cash reserve requirements appear low enough to not create an undue burden for efficient financial intermediation. Liquid asset holding requirements should be reviewed and calibrated as needed for monetary policy purposes. It is recommended that all deposit- taking institutions, including trust companies, the New Building Society and credit unions be subject to uniform reserve requirements for similar instruments. 4.7 Foreign Exchange Restrictions. Currently, all loans or deposits in foreign currency must be approved by the Bank of Guyana as must be all loans to foreign residents. This appears to be an unnecessary restriction given the openness of the economy. It may simply be a hold-over from the period of capital controls prior to the Economic Recovery Program. 4.8 Taxation. Direct taxes on financial institutions consist of a flat tax on profits of 35% (55% prior to January 1992). Tax rates on personal income are a flat 33-1/3 % (formerly in three brackets of 20%, 30% and 40% respectively). Interest from bank deposits is taxed only at a flat 15% rate, which is withheld at source21. The differential between the tax rate of 15% on bank deposits and the corporate or individual tax rate for other financial instruments has significant distortionary effects. Recognizing the importance of the 15% tax on deposit returns for the Government's revenue base, this mechanism should not be tampered with in the short-term. However, in order to eliminate the distortionary effects between financial instruments, the Government should consider in the medium term, taxing interest as ordinary income and applying the 15% withholding on deposits towards the total individual or corporate tax liability. Also, taxation of interest should be uniformly applied to the New Building Society and credit unions in addition to other financial institutions. The Government should consider the revenue impact of these changes, to determine whether the increase in the tax burden could be offset by reduction in income tax rates. Central Bank Autonomy 4.9 The Constitution assigns the Central Bank an advisory role to the Government, so that the Bank of Guyana is not an autonomous institution. The President can dismiss the Governor, and other top officials serve at the pleasure of the Minister of Finance, who also has veto or approval rights to many actions taken by the Bank. The Government has the right to maintain an overdraft account with the Bank and the Bank must purchase the volume of treasury bills not subscribed at the monthly auctions. This structure is modelled after institutional arrangements in Great Britain and in other countries, and should not in principle prevent the Central Bank from playing an independent role. Nonetheless, consideration should be given to increasing the autonomous role of the Bank of Guyana. That independence, however, must only be earned by establishing a reputation for quality of analysis and action so that the recommendations of the Bank of Guyana carry substantial weight within the 7/ The 15% rate is the final rate and not just counted towards the personal or individual tax assessment. 22 Government. Further, consideration should be given to potentially revising the Bank of Guyana Act to increase the Bank of Guyana's autonomy. Treasury Bill Auctions 4.10 Procedures, The Government introduced a system of competitive bidding for treasury bills in June 1991. Under this system, the Government offers 90-day treasury bills at monthly auctions, with the amount determined by a projection of the liquidity position of the financial system and the Treasury. The treasury bills are allocated by filling the orders starting from the lowest interest rate bid until the auctioned amount of treasury bills is exhausted if the auction is oversubscribed, or until all of the bids are filled if the auction is undersubscribed. If the latter occurs the Bank of Guyana retains the balance of the treasury bills at the average rate. On occasion, the Bank has rejected interest rate bids that exceeded the average bid by three percentage points, even if the auction is undersubscribed. 4.11 The procedure for participation at the auction is very simple. The auction dates are announced well in advance. The amount to be auctioned and the amount and average rate of the previous issue are announced in the Gazette, an official newspaper, one week in advance of the deadline for bid submissions. To participate, one has to go the Bank of Guyana and fill out a form stating the amount of funds offered and the desired rate. The minimum bid is only G$500, or about US$4. Multiple bids are allowed, and there are no fees or deposits required to submit bids for consideration at the auction. 4.12 A number of accounts are given automatic and guaranteed entry into the treasury bill auction at the average winning rate. Those accounts include those held by the Caribbean Development Bank, Export-Import Development Bank, MIGA, Debenture Sinking Fund, Cities Sinking Fund, Personnel Investment accounts and the Bank of Guyana Pension Plan. The amounts requested by those accounts are automatically deducted from the amount of the treasury bill issue, and a treasury bill amount equivalent is purchased at the average treasury bill rate. The total amount of those accounts has ranged from G$400 million to G$900 million, or between 15% and 25% of the value of the issue. What is left is auctioned to the public. 4.13 In the past, there was no penalty for refusing to collect on an awarded bid. At least two cases of failure to collect occurred. In one, a bank submitted three different bids, collected the two more favorable ones, and refused to collect on the third bid. The Government has stated that, in the future, institutions that fail to collect on awarded bids would be barred from further participation in the auction. The Government should impose this penalty at the next instance of failure to collect on an awarded bid, and should ensure that the policy is well understood by auction participants. Also, the Government should consider charging a premium for early redemption of treasury bills, which would help to promote a secondary market. 4.14 Impact on Interest Rates. The treasury bill auction serves as an anchor for interest rates in Guyana. The average discount rate applicable to the issue is established by the bids of successful participants in the auction. The Bank rate (a reference rate for interest rates in the system) is determined by adding 1.25% to the treasury bill rate (rounded to nearest 0.25%). The special deposit rate (the interest rates on funds deposited in short-term accounts at the Bank of Guyana) is determined by subtracting 2.5% from the Bank rate. These mark-ups are set by the Bank of Guyana in consultation with the Ministry of Finance. 4.15 As of October 1992, treasury bills paid about four percentage points above CDs offered by commercial banks, and even more compared to demand and savings deposits. This spread has contributed to the profitability of most of the banking institutions, which hold over 50% of their portfolio in treasury bills and in special deposit accounts at the Bank of Guyana. This differential between 23 instruments of similar risk (if anything, treasury bills are probably safer than bank deposits) is partially explained by the tax system. Interest for treasury bills is taxed at the corresponding income tax rates for individuals or corporations; the highest tax rate is 40% for individuals and 35% for corporations. Interest income from bank deposits is subject to a flat 15% withholding tax. The corresponding after-tax rates (as of October 1992) for individuals in the 40% bracket were 15% for treasury bills and 16-17% for CDs. There is some question, however, whether everyone who receives income from treasury bDls is taxed at 40% and pays all taxes owed, so that tax considerations alone would not necessarily explain all of the spread between treasury bills and bank deposits. As indicated above, in the medium term, consideration should be given to taxing interest as ordinary income and applying the 15% withholding tax against it. 4.16 Two factors may contribute to maintaining the spread between treasury bills and deposits, and may in general impair the efficiency of the auction. First, the close relationship between the treasury bill rate and the special deposit rate may reduce the tendency for competition to reduce the treasury bill rate. The Bank of Guyana accepts deposits at the special deposit rate, set at 1.25% below the average rate in the treasury bill auction. Thus, an institution which is not awarded at the treasury bIll auction can place the same funds in special accounts at only a small difference in rates and a shorter maturity. Further, since a high bid increases the average interest rate in the auction and thus increases the special deposit rate, a large player in the auction may have an incentive to enter relatively high bids, with little penalty if some bids are not accepted. 4.17 Second, the treasury bill auction is dominated by a small number of financial institutions. The five commercial banks account for over 90% of the bid value and allocation of treasury bills, with one bank being a dominant player in the market. By contrast, the value of bids by individuals is quite small, usually taking up less than 1 % of the total issue, although the number of individuals submitting bids at the treasury bill auctions has been slowly increasing and is relatively large in numbers (usually equalling over 50% of the submitted bids). 4.18 A reduction in the interest rate the Government pays on treasury bills is important to public sector finances. The outstanding value of treasury bills increased from G$6.2 billion in 1991 to G$11.5 billion by late-1992 (about 40% of GDP), a rise which far outpaced the rate of inflation (18% in 1992). Alternatives for reducing interest owed on treasury bills should be explored, and will become even more important if the stock of treasury bills continues to rise. Of course, such interest rate policy has to be weighted against monetary policy objectives. One approach to facilitating a reduction in the treasury bill rate would be to lower the special deposit rate, by increasing the difference between the special deposit rate and the average treasury bill rate. This would increase the monetary penalty for institutions which are not awarded treasury bills, thus encouraging greater competition in the auction. 4.19 It should be noted, however, that the close link between the special deposit rate and the treasury bill rate has not prevented a decline in the interest rate on treasury bills. The average treasury bill rate has fallen from 31 % in the last half of 1991 to 25% in late 1992 compared to estimated inflation of 18%MY It does not appear that the system in itself greatly impedes interest rate adjustment, so that changes in the system to reduce interest rates further are not urgent. The transition to a system that encourages greater flexibility in interest rates should only be taken when monetary conditions are sufficiently stable to avoid any precipitous fall in rates and commensurate pressure on the exchange rate. 4.20 Other measures might be taken to increase competition, for example by encouraging more bids by individuals and non-financial corporations. A campaign to educate and inform the general public 8/ See para. 3.3 for a discussion of why interest rates may remain well above estimated inflation. 24 about the auction could have some impact in expanding participation. The provision of greater information about the auction also would be of use to current participants. There appears to be significant confusion in the financial sector regarding the rules governing the auction. For example, some of the major players in the financial sector did not know that information on the quantity of treasury bills to be auctioned was provided by the Bank of Guyana and had various incorrect perceptions about the process used by the Bank of Guyana to accept bids. B. ANALYSIS OF THE FINANCIAL SYSTEM TABLE 1: STRUCTURE OF THE FINANCIAL SYSTEM (rotal Assets, June 1992) G$ Billion Percent Share Commercial Banks 30.9 62.4 Trust Companies 1.1 2.3 GAIBANK 6.0 12.1 Guyana Cooperative Mortgage Finance Bank 0.1 0.1 New Building Society 2.2 4.4 Domestic Life Insurance Companies 4.1 a/ 8.3 a/ Pension Schemes 1.8 3.7 National Insurance Scheme 3.2 / 6.6 g/ Credit Unions 0.1l/ 0.1 A/ ITtal 49.5 10. ,/ Estimated Note: Accounts have not been reconciled so some double counting may exist. Source: Central Bank of Guyana, IBRD staff estimates. Structure of the Financial Sector 4.21 The financial sector is made up of the following institutions (see Table 1): (a) the system is dominated by the five commercial banks (63% of financial system assets) which accept demand deposits (in addition to time and savings deposits) and perform traditional banking functions. The largest is the National Bank for Industry and Commerce (NBIC--53% State-owned), followed closely by the Guyana National Cooperative Bank (GNCB-97% State-owned). Smaller banks are the Guyana Bank for Trade and Industry (GBTI--30% State-owned) and branches of the Bank of Nova Scotia and the Bank of Baroda. In total, the State owns approximately 59% of the assets of the commercial banking sectors; 25 (b) four trust companies (2% of assets) undertake multiple functions, including mortgage financing, trade financing, trust management, pension fund investment and brokerage services. They can accept time deposits, but are prohibited from offering demand deposits. Currently these institutions are registered under the Companies Act and not subject to prudential supervision of the Bank of Guyana; (c) specialized State-owned development banks include the Guyana Agricultural and Industrial Development Bank (GAIBANK--12% of financial assets), which finances agricultural and industrial development projects, and the Guyana Cooperative Mortgage Finance Bank (GCMFB--0. 1 % of assets) which finances home mortgages for low income families; (d) the New Building Society (4% of assets) is a private institution under its own statutes which acts similar to a credit union--it provides mortgage financing for its members (depositors) at subsidized rates; (e) there are six life insurance companies (8% of assets), the largest being branches of foreign companies that operate throughout the Caribbean. Other sources of long-term funds for investment in treasury bills, debenture, mortgages and corporate finance include the National Insurance Scheme (Social Security System--7% of assets) and pension funds (4% of assets); (f) there are 43 credit unions (0.1% of assets), which mobilize funds through savings deposits and through "shares" purchased by each member, essentially a type of savings deposit. Credit unions are largely moribund, due to limits on lending and deposit rates; and (g) the informal credit system appears to be highly developed, including family provision of credit by input suppliers or buyers of output (particularly the private rice mills), credit from shopkeepers through a higher mark-up on goods, various types of consumer loans and pooling of funds. The monthly interest rate can be as high as 50%, but coercion or the threat of coercion securing repayment apparently is rare. Little information on the size of this market is available. Regulation and Supervision of the Financial System 4.22 Banking regulation is divided as follows: (a) commercial banks, which hold demand deposits, are subject to the Banking Act of 1965 (Chapter 85:01), as amended. The Banking Act mandates parameters for the operation of commercial banks, including the role of the Bank of Guyana and Minister of Finance in control and oversight; select prudential requirements, including minimum capital and capital adequacy levels and lending concentration limits; and licensing and financial reporting requirements; (b) the GNCB, State-owned trust companies and other select state-owned financial institutions are subject to the Cooperative Financial Institutions Act of 1976 (COFA Act-- Chapter 75:01). The COFA Act provides a framework for oversight and management of the institutions under its purview. It also provides select prudential requirements and requirements of management. GNCB is technically subject both to COFA and to the Bank of Guyana; 26 (c) the New Building Society is subject to the New Building Society Act of 1973 (Chapter 36:21). The Act specifies parameters for the operations of the New Building Society, select prudential limits, and licensing and minimum financial reporting requirements; (d) credit unions are subject to the Co-operative Societies Act; (e) financial cooperatives are regulated according to the Friendly Societies Act (Chapter 36:04); and (f) non-government owned, non-bank, deposit-taking institutions are entirely unregulated, subject only to the Companies Act. 4.23 The Banking Act has significant weaknesses, including an inadequate enforcement authority provided to the Bank of Guyana, archaic capital adequacy provisions, and insufficient specification of prudential requirements. The COFA Act provides inadequate enforcement authority and mixes regulation and management. The single most important defect of the regulatory framework is that a number of institutions which can put depositors' funds at risk are unregulated. 4.24 A revised Financial Institutions Act should be drafted and presented to Parliament as quickly as possible. The legislation should be relatively comprehensive in nature, whereby all deposit- taking institutions should be regulated by one piece of legislation and subject to the authority of the Bank of Guyana2'. The Act should strengthen the regulatory authority of the Bank of Guyana, should mandate minimum capital requirements, and should impose prudential standards, including inter alia capital adequacy requirements, limits on lending concentration, and limits on lending to related parities. Recommended elements of the Act are indicated in Annex 2.3. The drafting of such legislation should benefit from the report on financial institutions' legislation prepared by the IMF, the report of the CARICOM regional supervisors on Banking Regulation. 4.25 Prior to passage of comprehensive legislation, there are a few important provisions which should be changed as soon as possible. The minimum capital requirement for commercial banks is only G$1 million (US$8,000), as it has not been changed during the rapid depreciation of the currency over the past few years. This amount should be increased significantly to an amount which ensures adequate minimum capitalization. While the amount agreed upon by CARICOM regional Governors was US$2 million (G$250 million), the amount appropriate to Guyana might be specified to reflect local circumstances.A' Transitional arrangements for compliance by existing banks and provisions for periodic revision to reflect inflation or devaluation should also be reflected. Also, the definition of capital needs to be reviewed, and minimum assigned capital provisions for branches of foreign banks should be determined. The latter provision would have to be linked to measures to renegotiate the terms for a gradual repatriation of accumulated retained earnings that the commercial banks were not allowed to repatriate over the past decade. 4.26 Issuance of regulations governing new banking licenses is a high priority to permit greater competition in the financial system. New banks can be licensed under existing legislative authority, although the new minimum capital requirement (see last paragraph) should be determined prior to 9/ One exception to this is credit unions which will likely have to either be phased in to oversight by the BOG or supervised indirectly through the delegation of this authority to another entity. jQ/ The minimum capital requirement should be linked to the same requirement for trust companies as envisioned under yet to be drafted legislation. 27 admission of new banks. The Government should move as expeditiously as possible to permit entry of new banks, ensuring however that new institutions are founded only by reputable and solvent investors and that new entrants do not create "unfair competition", especially at the outset when the system would be fragile. 4.27 Supervision of the financial system has been limited, owing to a lack of resources. Prior to implementation of a restructuring and institutional strengthening program in the Banking Supervision Department of the Bank of Guyana in 1991, inspection had been infrequent and staff were largely untrained. Information reporting was limited, as was scrutiny of the information provided and reconciliation of accounts. Moreover, the supervisory capacity of COFA has been limited to exercising some input through its position in the management of individual institutions. COFA has been unable to scrutinize the financial position of institutions under its purview nor take remedial actions. 4.28 To date, some improvements have been noted in the quality of banking supervision by the Bank of Guyana. The accomplishments since July 1991 include: (a) development of improved information submission from commercial banks to the Bank of Guyana for purposes of tracking prudential variables; (b) development of a performance tracking system for offsite analysis; (c) review of the 20 largest borrowers in each institution; (d) initiation of partial portfolio inspections in each institution with loan classification in accordance with the criteria proposed by the Center for Economic Studies in Latin America and the Caribbean (CEMBLAC); (e) recruitment of approximately half of the staff needed for the Banking Supervision Department; and (f) on the job and external training of staff. 4.29 Continuation of the program for institutional strengthening of the Bank of Guyana's supervisory capacity and expansion of supervision to select non-bank financial institutions (in accordance with the proposed revised financial institutions act) are important. Annex 2.4 indicates a detailed, three- year program to strengthen supervision, including provisions for technical assistance, development of a computerized credit risk monitoring system, and preparation of implementing regulations and circulars consistent with a revised Financial Institution Act. This program would require the allocation of substantial resources to the Bank of Guyana for the purposes of supervision. Decisions on the speed of implementation of the program will need to be taken in light of the need to devote resources to other activities and the severe budgetary constraints facing the public sector. Analysis of the Commercial Banking System 4.30 The commercial banking system still suffers from many of the effects of past Government policies and the difficult economic environment. There is little competitive pressure or risk-taking due to the large share of State ownership, the weak legal enforcement of contracts (such as the failure to cover a check11' and capacity to adjudicate loan collateral), the attractiveness of low-risk financial instruments (treasury bills and special deposits in the Bank of Guyana), and structural factors in the economy that have made much of lending to commercial customers very risky or not profitable. Limited competitive pressure, along with a severe dearth of qualified personnel, has led to little financial innovation. 4.31 Sources of commercial bank funding are primarily deposits held by the public, which represented between 70% and 90% of total liabilities and equity at end-September 1992. The composition of each institution's deposit base varied considerably, with some institutions depending more on demand deposits (between 9% and 45% of liabilities and equity) while others depending on time deposits (between 8% and 36% of liabilities and equity). Savers in Guyana have historically been loyal to individual institutions, and transfer funds between banks little, in spite of recent interest rate differentials. 11/ Poor enforcement of check obligations and an interest in avoiding tax liabilities has made checks an instrument of limited use in Guyana. 28 4.32 Commercial banks generally have heavily invested in treasury bills and special deposits in the Bank of Guyana. While the GNCB as a matter of policy holds a relatively small portion of its assets in these instruments (see below), other institutions hold between 46% and 67% of their assets in these two accounts. Excluding GNCB, loans and advances represented between 8% and 29% of total commercial bank assets. 4.33 Most commercial bank lending in Guyana is through commercial overdraft facilities guaranteed by a mortgage on a house or commercial property. However, other forms of collateral are accepted, including moveable property. While most bankers said that the legal framework was adequate to enforce collection of collateral on loans in default, most also indicated an inadequate registry system and slow court procedures. While the threat of collection did appear to be effective in improving loan compliance, poor ability to rapidly seize collateral and guaranteed property rights clearly inhibited some potential commercial lending. A more thorough analysis would be useful to identify the range of collateral commonly accepted in lending contracts. It is possible that changes in laws or administrative procedures could expand the forms of acceptable collateral, and hence improve access to credit. 4.34 Without improved loan classification, provisioning and reporting procedures, it is difficult to render a judgement as to asset quality for individual institutions. Moreover, the criteria for loans in arrears have varied across institutions. Based on the preliminary loan reviews and initial inspections to date conducted by the Bank of Guyana, it appears that asset quality is strong in most institutions, although there are important exceptions. Very conservative credit policies and large holdings of government assets have to date limited potential exposure in most of the commercial banks. As the design of prudential regulations and the capacity to implement them improve, other asset quality indicators such as loan concentration will become more apparent. 4.35 As above, it is difficult to render a judgement as to capital adequacy for commercial banks until uniform standards for provisioning, income accrual and other policies (such as revaluation) are applied so that capital is uniform in composition. Nevertheless, preliminary estimates indicate that most institutions could satisfy an 8% standard of capital and reserves divided by risk-adjusted assetsU', owing to the large holdings of treasury bills and special deposits which would not require capital. It is also likely that existing commercial banks could meet the minimum capital requirement being proposed above, assuming that difficulties pertaining to the release of assigned capital for branches of foreign banks can be resolved. 4.36 It appears from published financial statement sheet data that most commercial banks have been profitable during the past few years, supported by the increasingly high spreads. However, because historical data on profitability have not been collected nor is interest accrual performed on a uniform basis, a systematic profitability assessment could not be undertaken. Further, it should be noted that because Guyana does not have inflationary accounting standards, historically high nominal returns on equity have been necessary in order to maintain an equity base in real terms (see para. 4.69). Trust Compani 4.37 The four trust companies in Guyana together comprised G$1 .1 billion (US$9 million) in assets end-June 1992. The largest is GNCB Trust (62% of assets), a government-owned mortgage finance institution that also manages pension funds and trust operations (see below). Globe Trust (16% of assets) was recently started in 1991 and engages in trade financing as well as some commercial financing for a 90-day period. Secure International Trust (13% of assets) primarily engages in equity 12/ This is the standard adopted by the Basle Committee on Banking Regulations and Supervisory Practices. 29 financing and underwriting, although does a small amount of commercial lending. Trust Company Guyana (9% of assets) is a trust institution which does not take public deposits. 4.38 Without a formal financial reporting system or regulatory body providing oversight, it is difficult to ascertain the financial position of individual trust institutions. Moreover, without a regulatory body scrutinizing asset quality, a judgement of capital adequacy is also difficult. Given these caveats, while most trust companies in Guyana tend to be thinly capitalized, the risk profile of their assets (some holding significant government securities or deposits in banks) may mitigate the need for a large capital base. Reform in the regulatory structure and improved oversight should result in improved information about these institutions. 4.39 The revised Financial Institutions Act should subject trust companies that take deposits to the oversight and regulatory authority of the Bank of Guyana, and require that trust companies meet adequate prudential standards. The Act should include a minimum capital requirement (presently there is no capital requirement for trust companies), which potentially could be set lower than those for commercial banks, provided that the trust companies continue to accept only time deposits, and not demand deposits. Further, the Act should specify the conditions under which banking and non-banking services (such as underwriting) can coexist in a financial institution. Provisions in a Securities Act (see below) could also specify conditions for underwriting, public listing, etc. so as to establish stronger rules for securities markets transactions. Credit Unions 4.40 There are currently 41 credit unions in Guyana which are members of the Credit Union League, an industry association that also provides for very limited self-regulation. These institutions have a combined membership of approximately 26,000. Most are organized at the work-place, although there are some church and community credit unions. Credit unions mobilize funds through savings deposits and "shares" purchased by their members which essentially are a type of savings deposit. 4.41 Credit union activities are largely inoperative, being severely limited by legislation that constrains the interest rate on deposits to 6% and on loans to 12%. In Guyana's inflationary environment, these limits have severely reduced the availability of deposits and the profitability of loans. While at one time credit unions served an important function as a savings vehicle for consumers, because of non-competitive rates individuals generally only save with credit unions if they have some likelihood of receiving a consumer loan at the below-market rate. Moreover, loans of credit unions are now generally limited to small personal loans used primarily for consumption, since the credit unions cannot generate larger savings volumes. 4.42 Under the Co-operative Societies Act, the relevant supervisory body is the Department of Cooperatives in the Ministry of Public Works, Communications and Regional Development. The Credit Union League assists in the preparation of the accounts of its individual members and advises on such matters as reserve levels, provision for losses and organizational questions. The Credit Union League has a full-time staff of five and its operating expenses are funded by a levy charged on the member credit unions as well as a funds from the Ministry of Public Works, Communications and Regional Development. The Credit Union League also arranges insurance facilities in case of a borrower's death through the Credit Unions National Association (CUNA), an international body. In spite of the statutory requirements and the assistance of the Credit Union League, there is actually little active supervision at present. There have, for example, been only a few instances of credit union restructurings. Some mergers, however, have been arranged between smaller credit unions. Without any available recent data on credit unions, no judgements could be made as to the financial health of these institutions. 30 4.43 The exact role and function of credit unions needs to be more clearly defined lest they become a vehicle for escaping the capital provisions of a revised Financial Institutions Act. Present limitations on interest rates should be removed, with the timing linked to measures to improve the regulation of these institutions, including development of the institutional capacity for effective supervision. The 15% withholding tax on interest income (withheld at source) should be applied to deposits or shares in credit unions as the rates paid are liberalized. Insurance Companies 4.44 There are currently 41 insurance companies in Guyana providing general and life Insurance. Life insurance companies have been dominated by large insurance companies operating throughout the Caribbean for much of this century. 4.45 The Insurance Act of 1970 is considered archaic and without sufficient specification of prudential guidelines. The institutional capacity of the Commissioner of Insurance is essentially non- existent. The existing Act is not being enforced nor does the foundation exist for implementing future legislation. Finally, information which could facilitate the effective operation of market forces in the sector is virtually non-existent - a consequence of the lack of longer-term financial instruments in the domestic economy. 4.46 While data sufficient to undertake an analysis of the financial position of insurance companies are not available (other than consolidated financial statements from individual institutions), the financial position of some companies appears to be extremely poor. Some insurance companies apparently are seriously decapitalized, but have not been forced to stop writing new business. Some institutions only have the resources to offer partial coverage of certain potential liabilities, such as limited automobile damage liability coverage. Most life insurance companies face difficulties of reverse ter transformation-assets are invested instruments of a much shorter maturity than liabilities. A consequence of the lack of long-term financial instruments in the domestic economy. 4.47 Measures to reform the insurance industry in Guyana should focus on improving the information base, strengthening existing regulations, and developing the institutional capacity to apply such regulations. The Insurance Act should be revised in the medium-term, taking into account revisions to similar legislation in other Caribbean countries. The institutional capacity of the Commissioner of Insurance should be developed in accordance with a planned program. Finally, the information collection, distillation and dissemination either by the Commissioner of Insurance or the Bank of Guyana should be improved so as to better inform both consumers and investors. Securities Market Development 4.48 While a formal stock exchange market does not exist in Guyana, stocks are traded over- the-counter through an informal market, indeed often through newspaper advertisements. No legislation other than the Companies Act regulates this trading. Secure Trust Company serves as a broker and underwriter for approximately 13 companies of which approximately 4-5 are actively traded. Share capital has been raised through public offerings, yet the nature of such offerings generally has resulted in placement with a small number of investors.2 The fixed income market consists primarily of the market for treasury bills, and occasionally debentures. While private corporate bonds have not been issued, long-term debentures of public companies have. _3/ An exception to these are the offerings of GBTI and NBIC shares which deliberately sought to attract widespread ownership. 31 4.49 There are a number of barriers to the development of securities markets in Guyana. Country, foreign exchange and project risks remain very high. There is resistance to financing through markets which require public disclosure of corporate financial statements for fear of scrutiny by tax authorities. Restrictions on the investment of pension funds in secondary trading of securities inhibits the development of this market. Information on existing trades and on the performance of companies is scarce or of limited reliability. Secondary markets for government securities do not exist. Investor fears of price fixing are considerable, given the limited transparency of public trading and the process of sale of public enterprises. Finally, the absence of a Securities Act or a regulatory authority such as a Securities and Exchange Commission restrains the development of uniform transactions as well as inhibits confidence in market mechanisms. 4.50 Securities market development is an important goal in the medium-term but should not be a major priority for the first stage of financial sector reform. However, preliminary legal work could begin on drafting a Securities Act, revising the Companies Act (if necessary) and formulating improved requirements for the disclosure of financial information. Development of a securities market would then require establishment of an agency to manage the process. C. ANALYSIS OF PRINCIPAL FINANCIAL INSTITIONS Guyana National Cooperative Bank (GNCB) 4.51 The GNCB was established to serve the commercial financing needs of Guyanese businesses, to support investment in new business areas, to extend financial services to unserved communities, and to serve de-facto as the government's bank. GNCB's financial difficulties began in the mid-1980's as the economy deteriorated, reflected primarily in the poor quality of its loan portfolio, poor credit control policies resulting in credit misallocation, and in the large disparity between the maturity of its assets and liabilities resulting in significant liquidity risk. 4.52 Recognizing the severity of its financial difficulties (including a negative equity position), in 1990 the Government installed new management at GNCB and began an analysis of the problem. Measures to financially and operationally restructure the institution were adopted, including issuance of debentures to cover provisions established for G$1L0 billion or 27% of the stock of its portfolio*. The principal is due at the end of the period and interest payable based on the government's 3-month treasury bill rate.!-" 4.53 The last few years have shown some positive results, largely owing to the restructuring process. Net income increased in 1991, and the tightening of credit procedures has addressed many of the worst abuses. During 1992, GNCB's deposit base grew both in real terms and at a rate faster than 14/ Actual losses were estimated to be higher and auditors commented that provisions were not sufficient for uncollected interest. Annex 2.2 indicates the measures taken during 1990, 1991 and the first half of 1992. 15/ Prompt payment of interest on this obligation will dramatically affect GNCB's income and cash flow. If payment is not forthcoming, GNCB's financial position will be significantly compromised. In addition, while charging losses to the Consolidated fund is consistent with Guyanese law, provision of a debenture (a fixed-income obligation) instead of cash to cover such losses results in an accounting convention which transfers a loss from one set of books to another. Provision of the debenture does not in itself capitalize GNCB until such time as the principal of the deferred receivable is received. 32 for the commercial banking system. GNCB did increase its administrative costs during 1991 and 1992, due to the large investments made in computerization and the upgrading of staff. Yet while GNCB's position has improved, significant financial and operational restructuring is still necessary to place GNCB on a viable footing. 4.54 It is recommended that a comprehensive plan for the financial and operational restructuring of GNCB be formulated, with the intent of privatizing the institution in the medium-term. This recommendation stems from the following assumptions: (a) while the intent of the founding of GNCB may have had some rationale in its time, currently there is no convincing rationale why the Government need be the owner of a commercial bank in order to ensure an efficient and competitive financial system. Further, equity in such an institution could better be placed in alternative uses; (b) GNCB potentially large debt overhang (deposits greater than recoverable assets) limits the option of privatization in the short-term since covering unprovisioned losses could prove more costly than could be supported immediately; (c) liquidation could have a negative effect on confidence in the financial system and would potentially result in a fiscal cost in any event; (d) uncertainty over the recoverability of GNCB's portfolio limits a judgement as to the potential fiscal cost of recapitalization to realize a profitable asset base and cover unprovisioned losses; and (e) if it proves feasible to financially restructure GNCB, operationally restructuring the institution will necessitate some time to obtain demonstrated results. Based on the observations above, it is recommended that: (i) a detailed financial assessment be done of GNCB from which the magnitude of losses would be more apparent and thus the range of policy options available; (ii) from such an assessment, a three-year restructuring program be developed and adopted by GNCB's Board; (iii) the Government indicate its intent to privatize the institution in the medium-term, ideally at the end of a three-year timeframe is such a goal proves justified based on the assessment; (iv) the institution should be registered under the Companies Act and its status as a Cooperative Society eliminated; and (v) an action plan for its financial and operational restructuring be developed, announced and implementation begun. National Bank for Industry and Commerce (NBIC) and the Guyana Bank for Trade and Industry (GBTI) 4.55 GBTI and NBIC were wholly State-owned banks prior to the sale of shares to the private sector. Presently, the public sector owns 30 % of GBTI and controls 51% of NBIC. In general, both institutions are optimistic about the Guyanese commercial banking market, having had their deposit and asset operations grow in real terms during 1991 and 1992. Both are considering expansion plans, with NBIC considering expanding its branch network, particularly in Georgetown and in other Guyanese cities. 4.56 While the mission could not perform an indepth analysis, GBTI's capital adequacy appears sound, providing that its portfolio is appropriately classified and provisioned-'. GBTI increased its holding of government securities from 20% of its assets at end-1990 to 38% at end-1991. GBTI's profitability has been relatively strong, with return on average assets of 17% in 1991 and an expected 16/ Actual provisions indicated in its portfolio are a very small proportion of its total portfolio. 33 increase in 1992. While GBTI's salary and other staff costs have increased significantly, to 3% of average assets in 1991, so to did its profitability. In 1991, GBTI increased its deposits and total assets in real terms by 9% and 8% respectively, while at the same time total commercial bank assets declined in real terms. 4.57 NBIC's capital also appears sufficient, providing that its portfolio is appropriately classified and provisioned. While NBIC holds a relatively small capital base, the large proportion of its assets held in government securities and deposits in the Bank of Guyana mitigate the risk posed against such capital. At end-September 1991, NBIC held only 12% of its assets in loans and advances. As with GBTI, NBIC increased its deposits and assets in real terms during 1991, while both declined for commercial banks as a whole. During January-September 1992, deposit and asset growth also outpaced that of the system as a whole. 4.58 Both institutions appear to have been highly profitably in nominal terms, although until 1991, return on equity was either limited or negative in real terms. Salary and administrative costs have increased for both institutions from 1990 to 1992, although costs are still low by regional standards when measured as a proportion of average assets. 4.59 The Government should sell the remaining public sector shares in both NBIC and GBTI, consistent with the principles established in Chapter III. As apparently solvent and profitable institutions, financial or operational restructuring probably is not necessary prior to sale and increasing their respective capital bases could better position them in Guyana's growing market. 4.60 The rationale for privatization of NBIC and GBTI is as follows: (a) the Government's capital invested in these institutions could better be placed in those investments which are more appropriate to the State's role such as in infrastructure or human services; (b) government revenues can be derived from these institutions from taxes instead of from dividends; (c) each institution needs additional capital for expansion which the Government cannot offer; (d) potential oligopolistic power by private sector owners in the financial sector can be controlled by other direct means; and (e) private sector ownership could result in improvement in management. New Building SocietY 4.61 The New Building Society is a private financial institution operating under the Guyana Building Society Act, which provides mortgage financing for its members (depositors) at subsidized rates by passing on net income from its other investments. The New Building Society pays 15% on its regular savings deposits and 18% on its "$5 Shares"; the latter is roughly in line with rates paid on similar deposits by commercial banks. The New Building Society's lending rate is 18%, a rate between seven and 16 points below the average mortgage lending rate in the system.O'. The institution is able to lend at essentially the same rate it borrows because it uses the revenues on its investments in treasury bills and other securities to cross-subsidize the rates on its loan portfolio. In addition, the New Building Society pays no taxes and thus is able to capitalize fully on the premium between treasury bill and time deposit rates. The New Building Society has, since 1988 invested on average between 70% and 75% of its assets in treasury bills and government debentures (see Annex Table 2.5). At June 30, 1992, only 7% of its assets were held in mortgage loans. 4.62 The New Building Society will lend up to a maximum loan size of G$2.5 million (US$20,000) for home mortgages or improvements on fully-owned property. The institution's 17/ Technically the New Building Society, as all other non-banks is in violation of the Rate of Interest Act of 1979 which stipulates a cap on mortgage interest rates which can be charged. 34 management estimates that between 80% and 90% of its loans are at the maximum amount. The institution will lend up to 75% of itS valuation of the property financed, which is believed to be approximately 60% of the market value of the property. Since it is believed that an average Georgetown home will sell for G$5 million, the New Building Society will therefore finance homes up to a slightly lower than average price range11. While the institution is not obligated to lend for housing, its loans must be secured by home mortgages. Loans are generally for 15 years, although can be for 10 years or seven years according to a client's needs. 4.63 While the New Building Society's heavily subsidized lending rate would appear to generate dramatic demand for its loans, some mitigating circumstances limit such demand. The New Building Society only lends against property with no other outstanding encumbrances against it (i.e. a first mortgage). As indicated, the institution will only effectively lend for 60% of a property's value which implies a relatively high down payment by the borrower. The institution is said to have strict creditworthiness criteria for the borrower, including strict requirements for financial information by the applicant. Finally, the institution only lends to "members", its depositors. In the latter case, while there is no actual or implied policy of compensatory balances, the New Building Society will use a member's deposit history as a criteria for its creditworthiness assessment. 4.64 The New Building Society appears as a solvent and profitable institution with apparently strong management. Profitability was buoyant during 1990 and 1991, increasing the New Building Society's reserve position to 7% of assets at end-1991 (See Annex Table 2.5). Were an 8% capital/risk- adjusted assets standard to be applied to the New Building Society, the institution would be easily overcapitalized (while the New Building Society does not have capital per se, for the purposes of capital adequacy guidelines, its reserves can serve as a proxy). The institution's administrative costs averaged less than 2% of average assets for 1988-1991. Such costs appear reasonable. This figure is in part due to the large share of assets in government securities, which require few resources to administer. 4.65 While the New Building Society does appear to have rather a large number of its loans in arrears (30% of mortgage loan accounts were past due at least one month at end-September 1992), its record of loan recovery has been very strong. After several months of loan recovery measures, the institution will seek a judgement against the client. The process of seeking a judgement most often has led the client to settle the outstanding amount, and thus actual foreclosures have been few. 4.66 While the New Building Society appears to be a profitable and solvent institution, it is necessary to ensure that it is properly supervised. The New Building Society should be brought under the umbrella of a revised Financial Institutions Act which specifies the authority of the Bank of Guyana to regulate this institution. To ensure a level playing field, the tax-exempt status of the New Building Society should also be removed. GNCB Trust Corporation (GNCB Trust) 4.67 GNCB Trust is primarily involved in mortgage financing. In November 1992, the institution charged 32% on domestic residential mortgages and 36% on commercial real estate financing. Mortgages tend to be for a maturity of 10-12 years (12-18 months for construction loans), although some loans have prepaid beforehand. GNCB Trust also manages 12 pension plans, largely invested in treasury bills, short-term deposits and in some equities. It charges a management administration fee and investment fee for pension fund management, which depends on the fund balance. 18/ 60% x G$5,000,000 = G$3,000,000 versus a maximum loan size of G$2,500,000. 35 4.68 GNCB Trust is believed to be a financially strong institution, with relatively low arrears and strong asset quality. Approximately 53% of GNCB's assets at end-June 1992 were mortgage loans, 8% commercial loans and 34% fixed-term deposits in the banking system. While GNCB Trust has periodically held large amounts of treasury bills, at end-June 1992 it held none. While precise data on asset quality (including arrears) was not available, it is important to note the widely held view that real estate prices in Guyana have more than outstripped inflation and that GNCB Trust's experience with measures to place borrowers in receivership has led in most cases to prompt cancellation of arrears. 4.69 Short of a full inspection, it is difficult to judge the adequacy of GNCB Trust's capital in relation to its risk assets. At end-December, 1991, GNCB Trust's equity represented 6% of its total assets, although its share capital represented only 1 %19'. Examining the composition of GNCB Trust's asset portfolio, it appears that its capital would be sufficient to cover the 8% standard against its risk- adjusted assets on a weighted basis (the standard proposed in Annex 2.1), provided that its portfolio is sufficiently provisioned. 4.70 While historical figures on profitability are not available, recent data suggest significant returns on average assets, of 2.2% and 3.5% for 1990 and 1991 respectively. However, as shown in Box I below, such returns may not have been sufficient to avoid the erosion of capital in relation to risk- assets. While in the 1980's declines in the levels of assets in real terms meant little pressure on earnings for maintaining GNCB Trust's capital base, growth in 1991 and 1992 required strong profitability. 4.71 There appears no convincing rationale for having a govermment-owned trust - UZ I company. No specific market failures have been c48( ofRAtlouiftd R8 OfRatMS Ot .. . . , , . . . . . ~~~~~~Average, Ab to Mttainti Conmnit Coverage of Risk-Aiwet identified that the institution is seeking to remedy, nor are clients attended to which otherwise would -9S9 -990 i991 not be. The Government should therefore -- - - develop a privatization strategy for GNCB Trust, a - 7 71 .s including both a dilution of the Government's 7 %b f Trc. Aaaet 11 7.0 12.3: 21.1 existing position through a new share offering(s) - Rcq. lncr, i* CU tfo ?. J) $5:.. $.7 as well as through the eventual sale of its I. inCapitalAAeta 3+9X a7% position. Such a privatization will enable the lt oa 718 la aaae of 'IM% *ttd I institution to grow in a manner to effectively of suta atl%. . compete with other trust companies as well as to -__ open up the possibility of a merger with a bank under a revised Financial Institutions Act. Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK) 4.72 The GAIBANK provides credit and related advisory services for agricultural and industrial projects. The Bank is administered by nine members of the Board of Directors appointed by the Chairman of COFA. The institution is prohibited from taking public deposits, and funds its lending primarily from donor funds, and to a lesser extent government resources and loan recoveries. Loan conditions generally have reflected the specified conditions mandated by the agency lending funds to GAIBANK. As a result, about 95% of the total portfolio has been for industry or agroindustry. With its 16 branches and 277 employees, GAIBANK is likely the most important financial institution servicing non-urban areas. 19/ It is expected that the offering of bonus shares could serve as a mechanism to convert retained earnings to capital. 36 4.73 As of November 1992, GAIBANK charged an interest rate of 25% for domestic currency loans, and 15% for loans denominated in US dollars. In addition, borrowers pay an appraisal fee of 1.25% of the loan amount. Its maximum loan size is currently G$10 million (US$80,000). Approximately 89 % of the amount of its loans are denominated in US dollars and 11 % in Guyana dollars. Loans are made for a period up to ten years, with up to two years grace and include all types of financing from working capital to capital investment. All loans have variable rate clauses. GAIBANK will finance up to 70% of the project cost. Generally GAIBANK seeks either real estate or real assets as collateral for loans. 4.74 GAIBANK's financial position has been extremely volatile in its recent history, due to fluctuations in the spread between its borrowing and lending rates, sharp changes in the valuation of assets and liabilities from exchange rate changes, and problem loans. GAIBANK sustained significant losses from 1988-1990 in large part due to losses from foreign exchange fluctuations (see Annex Table 2.8) M. In 1989 alone, exchanges losses amounted to 38% of the total average assets of the bank during the period. In 1991 however, GAIBANK enjoyed large foreign exchange gains. GAIBANK's net financial margin has gradually increased from below 7% of average assets in 1988 to 16% in 1991, but declined to 11 % in the first three quarters of 1992 (annualized). The magnitude of such financial margins however were more than offset by foreign exchange effects, provisions and write-offs. 4.75 During the second half of the 1980s, multilateral loans and capital injections from the Government enabled GAIBANK to increase the size of its asset base in real terms while most of the rest of the financial sector was in a process of disintermediation. From 1985 to 1992, GAIBANK's assets increased in size 131 % in real terms while the financial sector declined 30% in real terms, commercial banks 32% and trust companies 9%. 4.76 Of GAIBANK's portfolio of G$3.2 billion (US$25.6 million) at end-September 1992, 12% was indicated to be in arrears. Arrears are registered the first day after payment is not received and rollovers generally are not permitted. However, since the arrears figure represents only principal payments past due, the total amount affected by arrears would be much higher. Loans at GAIBANK accrue interest for up to two years, at which time the accumulated interest is reversed and the account is placed off balance sheet. No portfolio quality assessment is conducted in addition to arrears analysis. While GAIBANK charges a default fee is 15% over arrears, since this rate is the same as the US dollar rate, effectively simple interest accrues on the unpaid balance and no special penalty is applied. 4.77 Mitigating some of GAIBANK's asset-based risks is the relatively large amount of funds it holds in non-loan portfolio assets. At end-September 1992, 27% of GAIBANK's assets were held in fixed deposits in the GNCB (mostly counterpart funds earmarked for IDB loans) and 1 % of assets were held in the Bank of Guyana. The latter are earmarked funds which were derived from the 1989 recapitalization. They receive no remuneration, thus providing a subsidy from GAIBANK to the Bank of Guyana and impairing the transparency of both institutions. 4.78 GAIBANK's administrative costs have gradually been reduced since end-1987 as a percent of average assets. Salaries and benefits have fallen from 2.2% of average assets in 1988 to an average of 1 % of average assets during the first 9 months of 1992 (annualized). Albeit, reduction in wage and benefit costs has come about by real wage depression resulting in difficulties in retaining staff, as well as a staff reduction to the current 277 employees from the 375 at end-1990. Non-salary administrative costs have also been reduced since end-1987 in relation to average assets, having fallen from 5% in 1988 2Q/ The reasons for the foreign exchange losses stem from: (a) former loans made in Guyana dollars while the associated GAIBANK liability remained in US dollars; and (b) cross- currency exchange risk not fully reimbursed by the Government of Guyana. 37 to 3% for the first 9 months of 1992. GAIBANK has reduced its branch network from eight to seven branches and has reduced the size of selected branches. 4.79 GAIBANK has begun a process of restructuring since 1990, including staff reductions and improvements in operating procedures. A capital injection of G$100 million was provided to pull GAIBANK out of its negative equity position. However, the restructuring process has not gone far enough. A team of consultants was scheduled to begin development of a restructuring plan in early 1992, but to date this work has not started. 4.80 Improvements in GAIBANK's performance are necessary. The formula for the coverage by the Government of the cross-currency exchange risks between the US dollar and the currencies in which GAIBANK's liabilities are denominated should be revised so as to reduce the exchange risk the institution faces. Further, this risk should be transferred to an entity that is in a better position to hedge against foreign exchange losses. A workout and loan recovery program should be developed to improve GAIBANK's portfolio position, with strong sanctions enforced for non-repayment. More fundamentally, the rationale for directing development credit to specific sectors in Guyana is not clear, and the record has not been good. The Government should carefully review the credit conditions for GAIBANK's clientele in order to better determine what market failures exist and the best remedies to confront such market failures. Once identified, it is likely that GAIBANK could better serve small farmers and small businesses by channeling credits through the commercial banking system by acting as a second-tier institution. This approach to the allocation of donor funds would imply transforming GAIBANK into a significantly different institution (or alternatively to close it and replace it with another institutions). Guyana Cooperative Mortgage Finance Bank (GCMFB) 4.81 The GCMFB finances low income housing from government funds. GCMFB lends for home acquisition or improvements, up to a maximum loan size of G$150,000 (US$1,200), according to the interest rate structure indicated in Box II. Most loans are for a maturity of 20 years. As inflation has greatly eroded the real value of GCMFB's maximum loan size, most financing has been for small home improvements. In addition, since GCMFB will finance improvements only on homes in which there is no other leans (ie. first mortgages), its clientele has been severely circumscribed. 4.82 GCMFB has s iI radically decreased in size as I - i Sun - - - its asset base has eroded because of inflation. The s 1, 19*9 i: institution's assets declined 90% in real terms from 1985 - - vR k 4-upto IQ $3066(US$ 240-i - l . to June 1992, equalling only kwul, b e 0300 a G$ 75,0 (SS60)- 1$0 G$62 million (approximately - vi4ala ne Q75,0 4 0 S ; 0* US$500,000) at end-June. . .. .. GCMFB management has - . 1989 indicated that approximately ivid, up 03"0,000 ( 0 13. -i 2% of its loans are in -- W:,bsSS ,)-dS75 I0- US )- 0 arrears. However, this figure - -ivdu ,- bt 75,w0$000ad 0$ W.:-(U:: r 24;0% refers to the total payments in arrears and not loans affected - CMF. by afrears. Rollovers are -_ _ _ _ _ _ _ _ indicated to be minimal but no central policy exists with respect to rollovers nor is data kept on them. 38 4.83 GCMFB's most severe financial deficiency is that it is far too small to support its administrative infrastructure. GCMFB has had no new sources of additional funds since 1988 and thus has funded itself exclusively from loan recoveries, currently estimated at G$1 million (US$8,000) per month. With a staff of 51 and four branches, this is a very small revenue base to cover administrative costs, not to mention moderate interest costs on liabilities and funds for new lending. In 1991, salaries and benefits absorbed 9% of average assets (45% of total revenues) and other operating expenses absorbed 8% of average assets (37% of total revenues). When one considers that GCMFB does not incur the costs of mobilizing public deposits, these are very high costs in relation to its small earning asset base. While management has indicated that much of this cost structure relates to housing-related support provided to its clientele, the institution may be over-dimensioned relative to its lending volume. GCMFB is said to have the lowest salaries of all COFA institutions and, therefore has had the most difficulty and recruiting and keeping staff. 4.84 The Government should review its strategy for supporting low-income housing. Given the high cost and general ineffectiveness of GCFMB in financing low-income housing, the Government should consider liquidating this institution and finding more efficient means of providing this service. The first steps should be to improve the efficiency of the market for land and facilitate home ownership. The Government should accelerate the granting of titles and review the potential for allocating the large public sector holdings of unused land in and around Georgetown to housing. Resources permitting, the Government also might undertake targeted programs to assist low-income families to maintain and rehabilitate their homes. These measures have much greater potential for increasing the supply of low- income housing than maintaining an ineffective lending institution. Guyana Cooperative Insurance Service 4.85 The Guyana Cooperative Insurance Service (GCIS) was established to serve persons who did not have access to private sector insurance companies and to be the exclusive provider of accident, fire, casualty and liability insurance to government entities and public corporations. However, GCIS has been unable to fully provide this service largely because from 1985 to 1991, GCIS was unable to obtain foreign reinsurance due to difficulties in ensuring access to foreign exchange. GCIS's assets are held in direct loans (23% of assets), fixed deposits in the banking system (62% of assets), and fixed assets (11 % of assets). GCIS has not undertaken direct equity investment nor lent for mortgages. 4.86 In addition to lack of reinsurance, GCIS has been constrained in its operations because its share capital has been limited to G$9.8 million, the real value of which has dramatically eroded due to inflation. GCIS's share of the insurance market has fallen dramatically, with its assets declining by 34% in real terms from end-1989 to end-1991. GCIS currently has inadequate capital and reserves to cover new liabilities and therefore has been restricted in the writing of new business. 4.87 GCIS is currently undertaking an offering to increase its share capital by G$15 million (150,000 shares @$100/share). Such an offering, if fully subscribed, would increase its ordinary share capital by over 150%. The offering will be made to cooperative societies and credit unions under the Cooperative Societies Act, friendly societies, other State corporate bodies, and trade unions. The aim of the share offering is to diversify the ownership of the institution, to increase the institution's financial size and stability, to extend its coverage through the purchase of branches in three areas outside Georgetown, and to acquire additional office technology. 4.88 There is no convincing rationale for having a government-owned insurance company. No specific market failures have been identified which the institution is seeking to remedy nor are clients attended to which otherwise would not be. Privatization of GCIS would enable the Government to place its capital in alternative investments which are of a more pressing public interest. The Government 39 should therefore undertake a valuation of the institution and then develop and implement a privatization strategy. National Insurance Scheme 4.89 The National Insurance Scheme (NIS) is a system of contractual savings (Social Security) which provides long-term benefits (old-age pension, permanent disability benefits, survivors and funeral benefits), short-term (sickness, extended medical care and maternity), and industrial benefits (injury, disability and death). Contributions to the NIS are quite low, amounting to only 11% of insured earnings, 6.6% paid by the employer and 4.4% by the employee. Insurable earnings are supposed to amount to four times the minimum wage (according to the National Insurance Act) but are currently limited to G$10,000 (US$80) per month. This means that the maximum contribution is US$8.80 per months. The 11 % contribution is earmarked into three funds: 8% to the long-term branch for pensions, 1.45% for the industrial benefits branch, and 1.55% for the short-term branch. While the limits in the insurable earnings significantly constrains NIS's contribution base, so too are its expenses constrained through limits on benefits (see below). 4.90 Individuals who have contributed to the NIS for 15 years are entitled to a service retirement pension amounting to 40% of the average insurable earnings using the highest three of the last five years as a basis for the calculation. The minimum pension amounts to 50% of the minimum wage for public service employees. As pension benefits are not adjusted for inflation, most individuals receive the minimum pension; five years ago the proportion was much smaller. While the limit on pensions has helped to reduce losses, it is clear that many pensioners have experienced substantial declines in their standard of living. 4.91 Even a preliminary financial assessment of the NIS is extremely difficult because: (a) an actuarial audit of the system has not been conducted since 1985 and since that time most of the economic and demographic factors have changed considerably; (b) the Report of the Auditors for the 1990 financial statements indicated could not effectively reconcile the income accounts of the SchemeW'; and (c) existing internal financial information is inadequate to render a judgement as to the returns or asset quality of invested funds. 4.92 NIS's resources are invested primarily in Government of Guyana debentures (68% of assets) and deferred receivables (9% of assets), each of which in general have rates of interest significantly below market rates as well as below inflation (see Annex Table 2.11). Most debentures have a 14% interest rate (in G$) and a five-year moratorium on interest and capital payments (beginning in 1987). Such below market interest rates have decapitalized the funds of the NIS and resulted in effective subsidies from the NIS to its respective (Government) borrowers. Real wage depression and limitations in covered wages has also limited the flows of new contributions. 4.93 The NIS has a staff of 650 (90% clerks) and 13 branch offices. Administrative costs equal 23 % of collected contributed contributions verses the 11 % amount recommended by actuaries, in part due to the very low level of collected contributions because the ceiling on insurable earnings has 21/ The report to management by the auditors indicated that: "During the course of the audit it was discovered that benefit payment vouchers were recycled in fraudulent payments in 1989 and 1990. Attempts to quantify the amount involved in these fraudulent payments proved futile as a high percentage of the paid vouchers selected for investigation could not be produced. No provision was made in the accounts for the loss sustained. As a result, in the financial statements, unpaid benefits of $6,595,724 has been understated and the excess of income over expenditures of $206,310,653 has been overstated by an undetermined amount." 40 remained at G$10,000 per month (US$125). Some efforts have been made at computerization, including the purchase of a VAX 4000 minicomputer and six personal computers. While most processing is done manually, efforts are being made to computerize records. 4.94 Whatever the true financial position of the NIS, a few things are clear: the system provides little in the way of material benefits to retirees, even the minimum benefits obtained are provided at excessive administrative cost, and it has suffered severe losses due to fraud (see footnote 18). An actuarial valuation of the NIS should be undertaken immediately to establish a basis for policy decisions. Such an assessment could be reinforced by contracting an independent actuary to render a second opinion. Measures should be undertaken to improve the level of financial control in the institution through improved information processing and disbursement control procedures. Following receipt of the actuarial valuation and its recommendations, the contribution and benefit formulas could be revised both to ensure the solvency of the system as well as the sufficiency of the benefitm', and operational restructuring measures should be adopted. Future investments in government securities or securities of government entities should be at rates no less that the treasury bill auction rate and should reflect market rates. Finally, investment policy guidelines of the institution should be reviewed so as to facilitate investment in longer-term assets, subject to careful control. Institute for Private Enterprise Development aPED) 4.95 IPED is a private, non-profit and tax-exempt organization founded in 1986 to serve small and medium scale enterprises. Funding for the IPED comes largely from foreign official sources, including IDB, USAID, and the British and Canadian aid programs, often at concessionary rates. In 1991 it lent G$103 million in 540 projects, or an average loan of G$191,000. Interest charges are set to be slightly below the bank rate, and were 29% in March 1992. Although about five percent of its portfolio is in arrears, the IPED makes a profit since its funding is derived from grants or loans on concessionary terms. It has three branches outside of Georgetown. The IPED appears to be performing an important function, subject to the oversight of its donors. D. RECOMMENDATIONS Monetary Policy 4.96 The Government successfully implemented a liberalization of financial policies which freed interest rates, eased capital controls, and established a market-based exchange rate mechanism. Further policy changes to improve the framework for competition among financial institutions include the imposition of uniform reserve requirements on all deposit-taking institutions, elimination of remaining requirements for Bank of Guyana approval of deposits and loans in foreign currency and to non-residents, and, in the medium-term, unifying the rate of taxation imposed on different financial instruments. 4.97 Improvements to the treasury bill auction could be considered, for example ensuring that penalties are imposed for failure to collect on awarded bids, charging a premium for early redemption of treasury bills, and providing more information concerning the auction procedures. In the medium- term, consideration should be given to increasing the spread between the treasury bill rate and the special deposit rate, to encourage more competition in the auction. 22/ This would have a significant impact on several areas of the economy (including labor market effects) and should be evaluated carefully. 41 Supervision and Regulation 4.98 An overhaul of the Banking Act is essential to strengthen the enforcement powers of the Bank of Guyana, extend supervision by the Bank of Guyana to all deposit-taking institutions, and improve prudential standards including, jalj, capital adequacy, loan classification, provisioning, lending concentration, and financial reporting. An increase in the minimum capital requirement for commercial banks should be implemented as soon as possible followed by careful consideration of pending applications for banking services. Continuation of the Government's program to strengthen supervision and (resources permitting) extension of supervision to all deposit-taking institutions is important for the long-term health of the financial system. 4.99 Improvements in the supervision and regulation of non-bank financial institutions include: (a) for trust companies, the setting of minimum capital requirements and detaDling of conditions under which banking and non-banking services can coexist in one institution; (b) for credit unions, liberalization of interest rate limitations coupled with improvements in regulation, and application of the withholding tax on interest income; (c) for insurance companies, improvements in regulations, strengthening of regulatory institutions, better collection and dissemination of information, and, in the medium term, revisions to the Insurance Act. Specific recommendations for new legislation and a program to strengthen supervision are indicated in Annex 2.1. While securities market development is not an immediate priority, preliminary legal work could begin on drafting a Securities Act, revising the Companies Act (if necessary) and formulating improved requirements for the disclosure of financial information. The Role of the Public Sector 4.100 The Government should adopt a long-term program to increase regulated private sector participation in the financial system. This program should include the licensing of new commercial banks to increase competition and improve efficiency. A review of public sector institutions is required to determine which of these efficiently address problems that require public sector intervention and which could be liquidated or sold to the private sector. A strategy for the privatization of public sector financial institutions could include: (a) in the short term, the selling of all government shares in the GBTI, the NBIC, and the GNCB Trust Co.; (b) the restructuring of the GNCB, followed by its sale to the private sector; (c) implementation of a loan recovery program and measures to reduce exchange rate risk for the GAIBANK, followed by the development of alternative means of channeling donor funds through the financial system; (d) liquidation of the GCMFB, accompanied by the adoption of more efficient means of supporting low-income housing; (e) sale or liquidation of the CCIS; and (f) an independent actuarial evaluation of the NIS followed by revision of contribution and benefit formulas, as well as investment policy guidelines. 42 V. REGULATORY STRUCTURE IN MAJOR COMMERCIAL SECTORS 5.1 Apart from the urgent need to privatize and deal with the weaknesses in the financial system which have been dealt with above, the overall incentive regime in the country needs to be improved. The distortions caused by the current regulatory structure in the major sectors such as trade, mining, and agriculture are a serious obstacle to sustained economic growth. In the context of the resources available to the Government, the regulatory framework in each of these major areas need to systematically assessed and normalized. The purpose of this chapter is to highlight key issues in each of these major sectors and provide recommendations on possible remedies. A. THE TRADE REGIME A. I BARRIERS TO TRADE The Tariff Structure 5.2 The Common External Tariff. Guyana adopted the CARICOM Common External Tariff (CET) and rules of origin in the first quarter of 1991. The CET is a highly-differentiated tariff schedule ranging from 0% to 45%, with the following broad categories: (a) tariff rates from 5-10% on imported inputs and basic commodities (certain foodstuffs and other critical supplies) that do not compete with CARICOM production; (b) tariff rates from 20-30% on inputs and basic commodities that do compete with CARICOM production; (c) a 30% rate on final goods (excluding basic commodities) that do not compete with CARICOM production; and (d) a 45% tariff rate on final goods (excluding basic commodities) that compete with CARICOM production. 5.3 The October 1992 CARICOM Heads of Government meeting agreed on a revised tariff schedule, under which the tariff will be lowered in three phases to arrive at a range of 0-20% as early as January 1, 1997. The adjustment path will differ somewhat among countries, and some exceptions to the maximum rate of 20% will continue to permitted even after 1997. For the bulk of goods, the maximum rate will be lowered from 45% to either 30% or 35% from January 1, 1993; to 30% or 25% from January 1, 1995, and to 20% from January 1, 1997. Annex Table 3.1 shows the transition path for major categories of goods. The most important exception to the reduction in tariffs concerns agricultural goods, where a 40% rate will be applied in recognition of the wide range of producers subsidies and non-tariff barriers that are employed by the Region's major trading partners. 5.4 The Government should implement the fast track CET rates (5-30% in the first year) by July 1, 1993. At the next CARICOM review of progress under the CET reduction program, it would be to the Government's benefit to request faster implementation of the final CET rates (5-20% range) than set out in the recent agreement. Given Guyana's market exchange rate and relatively low wages, rapid implementation of the lower tariff schedule should bring substantial benefits with few costs. This process should be accompanied by the elimination of tariff exemptions, to avoid a decline in Government revenues (see below). 5.5 Tariff Exemptions. Guyana has a complex system of tariff exemptions which results in a highly-differentiated structure of effective protection. Guyana provides tariff exemptions either as part of a package of fiscal incentives or through separate approval by the Ministry of Finance, as provided under section 13 of the Customs Act. In 1990, over 50% of imports in value terms were exempt from duty. Of this amount, about half either were duty-free under international agreements (largely the 43 CARICOM agreement) or consisted of oil imports that paid only minimal duties in 1990. The issue of fiscal incentives is discussed later in this chapter. The Government should strongly consider eliminating other discretional duty exemptions in the interest of improving the transparency of administration. 5.6 The recent decision to revise the CET gives added urgency to the need to reduce exemptions. Simulations on the impact of the new tariff structure show that Guyana may experience a considerable fall in revenues as rates are reduced. Table 2 shows the impact on theoretical tariff revenues (that is, revenues if there were no duty exemptions) of applying the new tariff schedule to the imports in the first quarter of 1991. This time period is used because it was the only one for which data were available in the appropriate form and at the level of disaggregation necessary to perform the simulation. The simulations are performed using two assumptions for the impact of the change in duty rates in the volume of imports purchased: a) no change in the volume of imports (import elasticity equals zero); and b) a percentage rise in the volume of imports equal to the percentage fall in the tariff-inclusive price (import elasticity equals minus one). When the weighted mean tariff rate falls from 19% (as in the first quarter of 1991) to 13 % (with the new CET structure in 1993), the amount of theoretical tariff revenues (revenues that would have been collected if there were no exemptions) would fall by about 30%. The fall in revenues that actually will be experienced with the implementation of the new CET rates will be less than this, as a large portion of imports are covered by exemptions. The impact on actual revenues also will depend on other factors, including changes in GDP, in the exchange rate, in international prices and in market demand for Guyanese products. Table 2: IMPACT ON REVENUES OF THE NEW CET STRUCTURE CET Tariff Rates Change in Theoretical Revenues Implementation Date Import Elasticity Mean Tariff Rate Ze Minus One 1/91 19% 1/93 - 12/94 13% -31% -28% 1/95 - 12/96 12% -36% -32% 1/97 10% -44% -40% Note: 7hese figures include only the change in revenues due to falls in tariff rates, and do not reflect changes in exemptions or in other import taxes (for example, consumption taxes on imports). Source: IBRD staff estimates. 5.7 The expected fall in revenues could be reduced by eliminating tariff exemptions. In the first quarter of 1991, exemptions reduced actual duty collections to less than 40% of theoretical revenues. More interestingly, Table 3 compares the actual revenues collected (first quarter of 1991) with the revenues that would have been collected using the revised CET rates and eliminating all exemptions. Clearly, the removal of exemptions would lead to a substantial rise in revenues, even under the new tariff rates. After the new CET structure is fully in place and average tariff rates fall by almost half of the present structure, the removal of exemptions would still result in a revenue increase of almost 50%, 44 compared to the actual collections in the first quarter of 1991. Thus, Guyana can enjoy the benefits of lower tariff rates while avoiding a fall in fiscal revenues through a reduction or elimination of tariff exemptions.@/ Table 3: THE IMPACT OF TARIFF EXEMPTIONS CET Tariff Rates Percentage Change in Revenues With New CET Rates and Removal of Exemptions Elas O Elas, -1 1/93 - 12/94 82% 91% 1/95 - 12/96 71% 81% 1/97 48% 59% Source: IBRD staff estimates Trade Restrictions 5.8 Prior to 1988, the Government maintained an extensive list of import prohibitions and restrictions, and required licenses for most imports as a means of rationing scarce foreign exchange. Since that time, the Government has greatly reduced the list of restricted or prohibited imports. Restricted imports include flour, laundry soap, cigarettes manufactured outside of CARICOM and inputs for the manufacture of carbon dioxide. Prohibited imports include meats, poultry, jams, marmalades, fruit jellies, fruit punch, groundnuts, mangoes, pineapples, grapefruits and oranges. The adoption of a market-based exchange rate removed the need for quantitative restrictions to ration foreign exchange, so hat import licenses are now required only for prohibited or restricted imports.24/ Import licenses for all goods are supposed to be granted within 48 hours, although some established traders indicated that the approval process is subject to delays. 5.9 Export licenses are required for a variety of foods, hides and skins, gold and precious stones, and scrap metal. Licenses are required to ensure that products meet health and quality standards, to ensure that exporters have paid taxes on the product (particularly for minerals) and to guard against the export of stolen goods (the rationale provided for licenses on export of scrap metals). The Ministry of Trade, Tourism and Industry administers the licensing system. Some licenses can be processed within 48 hours, although licenses that require review by other ministries (for example licenses that must be approved for health reasons and licenses for agricultural products) may take longer. 21/ This discussion does not take into account the potential for improvements in customs administration to increase revenues (see below). 24/ Both "prohibited" and "restricted" imports are simply those that require a license. The license for prohibited imports must be approved by the Minister of Trade, and the license for restricted imports by the Permanent Secretary, Ministry of Trade. 45 5.10 The Government should reduce both import and export licenses to the minimum necessary to ensure that goods meet health and safety standards, to comply with international agreements, and to assist tax enforcement. Guyana is highly competitive in many of the products now controlled by import licenses, so that in many cases the system is not required to protect local industry. In the case of exports, licenses required for tax enforcement could be granted on the spot on presentation of proof of payment of taxes, and most other export licenses could be eliminated. A.2 PUBLIC SECTOR INSTITUTIONS Customs 5.11 Customs administration. A number of businessmen cited delays imposed by customs as a significant cost to their operations. Customs suffers from the problems afflicting other public sector institutions in Guyana: low pay and related difficulties in hiring or keeping qualified staff, plus lack of the capital goods needed to carry out responsibilities (particularly inadequate computer facilities and transport). Some improvements in administration are possible within the limited resources available, but any substantial progress will require the allocation of additional funds to customs. 5.12 To consider possible improvements, it is useful to provide some detail on customs procedures. First, import documentation, including the invoice, ship manifest, bill of lading and where necessary an import license are reviewed by customs. This appears to be a serious bottleneck in customs administration, with considerable delays reported by traders. For its part, Customs cites the frequent errors in invoices that require additional time to check, for example by comparing with previous invoices or by requesting further information from importers. 5.13 Second, the appropriate tariff classification is determined and the customs duty and consumption tax calculated. It appears that delays in payment by importers are frequent. One approach to speeding processing of goods and avoiding disputes is for the Government to accept a bond (redeemable at a commercial bank) from established traders for the estimated import duty. If payment is not made in the specified time period by the importer, then customs would redeem the bond. 5.14 Third, the consignment of goods is examined by the customs officer for consistency with documentation. If the duty is paid and the documentation is correct, the goods are released. In principle, this inspection should be done only against a sample of goods within a consignment or against a sample of consignments. However, both the Customs Department and private traders reported to the mission that a relatively high incidence of incorrect declarations had resulted in an increase in the number of inspections done by Customs, so that at times they inspect 90% of the submitted invoices. This practice has led to a considerable increase in the amount of time goods have waited in port. If customs procedures were computerized, then information on the record of past consignments could be used to determine which goods to inspect, which would help reduce the number of inspections required and allow importers with a good record to receive their goods more quickly. 5.15 Smugglinig. Smuggling appears to be widespread, encouraged by the high consumption tax and tariff rates coupled with poor enforcement. Guyana is a large country with long borders that are difficult to police, particularly given the lack of resources provided to Customs for enforcement. Transport of dry goods (such as cigarettes and groceries) from Suriname across the Courantyne River is perhaps the dominant source of illegal imports, but they also enter from Venezuela and through the ports in Georgetown. 46 5.16 Enforcement of the tax system is essential to domestic industry. Smuggled goods enjoy a large competitive advantage on many domestically-produced products due to the evasion of taxes. The recent decision to reduce tariff rates and measures to reduce the dispersion of consumption tax rates should reduce the benefits from smuggling, and further reductions in consumption tax rates, particularly of cigarettes and alcohol, would permit greater competition from domestic suppliers. However, it is unlikely that reducing some of the higher tax rates will have an appreciable impact on smuggling without more effective enforcement. Government Services to ExDorters 5.17 The New Guyana Marketing Corporation (GMCQ. The GMC provides support services to exporters of non-traditional agricultural products. Perhaps the most direct support provided by GMC is to assist exporters in meeting documentation requirements imposed by the Government. Exporters of non-traditional agricultural products, fish and crafts come to GMC offices with their shipping documentation. GMC then helps the exporter to prepare the appropriate documentation to meet Government requirements, clears the documents with Plant Quarantine, the Bank of Guyana and Customs, and then provides the clearances to the exporter. Thus, GMC handles all of the clearances necessary for most agricultural products. Any additional clearances, for example obtaining a health certificate for the export of fish, must be fulfilled by the exporter. It generally takes a maximum of two to three days to complete this process, for which GMC charges a fee of G$500 per transaction, which covers most of the costs involved. From reports by GMC staff and a few of their clients, it appears that GMC provides a valuable service. 5.18 GMC also provides information to exporters, including studies of market trends, reports on international wholesale and retail prices, advice to farmers on production and marketing (generally done through agricultural extension personnel in each region), and information on the price and volume of Guyanese exports by product and country. GMC also intervenes on occasion to assist exporters with particular problems. For example, GMC has assisted exporters in securing payments from overseas buyers. 5.19 The Export Promotion Council. The Export Promotion Council is under the Ministry of Trade, Tourism and Industry, and is charged with providing support to exporters of manufactures. The Council provides some information on market opportunities for manufactures, through regular publication of newsletters and by informing potential suppliers of market demands. The Council serves as Guyana's link with the CARICOM Export Development Project (based in Barbados), which does market research, provides technical assistance in some sectors, and promotes CARICOM exports abroad. The Council's budget is limited; it spent a little over G$5 million in 1992, or about US$41,000. It does not appear that the Council has been very successful in providing useful assistance to exporters, in part due their lack of interest in the Council's activities. Questionnaires on the Council's services sent to exporters elicit few responses, and a recent press conference was attended by only one of the twenty manufacturers invited. It also appears that the Government has not provided clear direction. The governing body that is supposed to oversee the Council has not met for the last three years, and management did not appear to understand clearly the role the Government expected the Council to play. 5.20 The Export Promotion Council does not appear to fulfill a usefl purpose. It's own activities have not been very successful, and it duplicates similar (also not very effective) operations of GUYMIDA and the Ministry of Trade, Tourism and Industry. The Govermnent needs to evaluate precisely what role public sector entities should play in providing information and other assistance to exporters, and determine how such assistance can be organized efficiently. The provision of market information and other export promotion activities has made an important contribution to the development 47 of the export sector in other countries. However, the record of such activities in Guyana is not very good, and care must be taken to ensure that the public sector does not waste its critically short supply of both financial resources and technical skills. A.3 RECOMMENDATIONS - Trade Regime 5.21 The Government has established an open regime governing international trade and payments, which should be furthered by the recent CARICOM decision to revise the CET. The remaining impediments to trade concern public sector administration and infrastructure. Improvements in customs administration and reductions in trade licensing requirements would reduce the costs imposed on private businesses which comply with the law, encourage tax compliance and help ensure a level playing field. Improvements in the infrastructure supporting trade also are necessary to reduce costs and facilitate access to external markets. Elimination of tariff exemptions is essential to reduce the erosion of customs revenues expected under lower CARICOM tariff rates. The Government should review services now provided exporters to reduce the duplication of services and eliminate those activities that are not cost effective. B. THE MINING SECTOR B.1 SECTORAL DESCRIPTION Background 5.22 Guyana lies on the margin of the great expanse of ancient crystalline rocks known as the Guiana Shield, one of about 20 large areas world-wide of ancient rocks which are denominated 'shields" or "cratons". The Guiana Shield is not well developed: parts of it have been geographically and geologically explored only during the post-War period. Even so, minerals from the Shield, including bauxite, gold, diamonds, iron ore, kaolin, and formerly manganese are an important component of the economy of the region. 5.23 Gold was discovered in quantity in Guyana about 1880, diamonds in 1887, and bauxite in 1906. These three minerals have been the mainstay of Guyana's mining activity during the past century. The peak year of gold production was 1893 (138,000 ounces) following which the annual yield fell slowly. The last important lode and dredge mines closed during the 1950's, in the wake of post-War inflation, and a low in officially-declared production was reached in 1972 (1400 ounces). Nearly 90% of historical gold production has come from small suction dredges and pork-knocker operations (small groups mining with hand tools), with the remainder from lode mining, bucket-line dredging, and hydraulicking. Since 1950 there have been no underground mines in the country. Officially-reported gold production in 1992 will be near 80,000 ounces (2.6 tons; excludes any late-1992 production from Omai), which will be a 60-year record. Guyana's actual gold production is undoubtedly much higher - perhaps as much as 200,000 or even 250,000 ounces per year. Most producers under-report their production to avoid payment of royalties and taxes, and because of the practical difficulties attached to selling gold legally in Georgetown. 5.24 Diamond production peaked at 214,000 carats in 1923, after which the richest and terrace gravels became more difficult to find and work, reaching a low of 15,000 carats in 1979. Reported diamond production will be about 30,000 carats in 1992. Production is under-reported for the same reasons as gold, but probably not to the same degree. Most comes from pork-knocker pick-and shovel operations in river gravels, with a smaller amount from dredging. The downstream economic benefit to Guyana of gold and diamond mining is relatively small; nearly all the gold and diamonds are exported 48 in ingot or uncut form. Very small gold-jewelry and diamond-cutting industries exist, employing only a few scores of people. 5.25 Bauxite is Guyana's major mining activity and its main industrial activity, and accounts for about 40% of merchandise exports and 30% of GDP. Bauxite reserves are widespread in Guyana in an inland belt which roughly parallels the shoreline. Iron and silicon impurity levels are quite low. This makes Guyana's bauxite (together with a few other countries) suitable for use in the refractory, abrasive and chemical markets, where tight chemical specifications for these impurities have to be met. Hence, Guyana's product enjoys a large premium over metallurgical bauxite. The two major bauxite operations, at Linden and Kwakwani, were nationalized with compensation in the 1970s. The state-owned company formed to manage these properties subsequently expanded to cover four operating subsidiaries, in construction, procurement, shipping and mineral extraction. The company also is responsible for the marketing of bauxite. 5.26 No other mineral production has been reported except sporadic and trivial amounts of soapstone, amethyst, topaz, kaolin, silica sand, and a few other minerals. Apart from gold and diamonds, significant potential exists in Guyana for large-scale production of kaolin and of high-purity silica sand from the coastal plain sediments. Bauxite Mining 2&I 5.27 Guyana's state-owned bauxite mines have suffered considerable reverses over the past decade. In part, this has come about through an a fall in Guyana's share of the high-value bauxite refractory market through increased production in competing countries. However, these problems have been exacerbated by the failure to reduce the very high structure of fixed costs, deteriorating mining and processing plant machinery and equipment, gradual depletion of existing mining deposits, labor conflicts due to overmanning and deteriorating compensation, and a dramatic erosion of managerial and technical capabilities. 5.28 The Government is committed to improving production and efficiency in bauxite mining through the involvement of the private sector. In pursuing the privatization of the bauxite sector, the Government invited ALCAN of Canada and Reynolds of the USA--the two companies that had their operations nationalized in the 1970s--to consider their return to Guyana by acquiring the Linden and Berbice operations, respectively. 5.29 ALCAN performed a study of the Linden operations in 1990, which concluded that the Linden company would be a viable and attractive economic and financial proposition if operated in accordance with appropriate industry standards. However, the study noted that the infrastructure, managerial, operational and financial capacity of the Linden facility were seriously deteriorated. A substantial effort would be needed to restore Linden to a commercially viable position. Despite the basic attractiveness of the Linden operation, negotiations to involve ALCAN as an equity investor failed, along with similar discussions with another major mining company. In the same way, discussions with Reynolds regarding their possible involvement in the Berbice operation have not yet produced a satisfactory outcome. Essentially, the barrier to increased private sector participation in the existing bauxite companies is the unusually high risk inherent in converting existing facilities into a commercially viable operation. On the other hand, Reynolds has agreed to a joint venture with Aroima, which is 25/ The discussion of bauxite mining is taken from available Bank documents. Since the bauxite industry is in Government hands, this paper places more emphasis on the gold and diamond sector, which is largely in private hands. 49 reportedly performing well. However, Reynolds was able to secure generous exemptions for this venture and operates the enterprise almost exclusively with overseas accounts. 5.30 The introduction of private capital and management into the bauxite industry is crucial to Guyana's development, given the importance of the industry, the opportunities afforded by Guyana's position in the bauxite market, and the severely deteriorated state of the existing capital stock. It is not feasible to rebuild the industry while maintaining public sector ownership, due to the Government's lack of capital resources and the difficulty in ensuring that public sector managers face incentives appropriate to a commercial industry. In the previous Government, progress towards the privatization of the bauxite industry was slow, even after the basic policy decision was made. It is imperative that the present Government move quickly in this area. Structure of Gold and Diamond Mining 5.31 Intdu There are three groups involved in gold and diamond mining: garimpeiros ("pork-knockers" in Guyana); dredge and small vein-mine operators; and foreign companies. The government is active in non-bauxite mining only as a minority carried partner in several projects. Each of the listed components is characterized briefly in Table 4, and each is discussed in turn below. Table 4: STRUCTURE OF GOLD AND DIAMOND MINING Pork- Foreign Foreign Ownership knockers Dredgers Corporations Entrepreneurs Number 7-8,000 300 5-10 10-15 E;ployment 15,000 3,000 1,000 25 Share of Gold Produced 30% 70% 0 1% Share of Diamonds Produced 50% 50% 0 1% Annual Capita Required (US$ mil) 1 3-10 10-50 1 Note: The table excludes projected 1993 gold production of 250,OO) ounces at Omai, which is eWected to be about 50% of total production in Guyana. Source: IBRD Staff estimates. 5.32 Pork-knockers, These people are classic garimpeiros - miners working in the jungle in groups of 3 to 15 men, using primitive hand tools and traditional methods to recover gold and diamonds from near-surface placer or soil deposits. Some hold their own claims, but many work as partners or 50 tributors (lessees) of claim-holders. The equipment necessary to mine a claim may include a large sluice-box or "tom",a water pump, a portable generator, and an outboard boat motor; possibly US$2000 worth of equipment. While yield data are difficult to come by, it is unlikely that a claim will continue to be worked if it does not yield 1/2 ounce of gold per man-month, or about US$200 in diamonds. 5.33 Dredge and small vein-mine operators. The Guyana Gold and Diamond Miners' Association has 235 members, representing over 90% of the dredged gold production. By far the largest lode mine (besides Omai, see next section) is at Nine-Mile, where US$1-2 million worth of mechanized equipment is installed at an open-cut vein-mining operation. About 440 dredges are currently licensed, of which about 350 are working at any one time. Some 70% of dredge owners have only one dredge, while a number have two to six. The largest two owners have seven and nine dredges. 5.34 The dredges used in Guyana are typically 10-15 meters long, floating on pontoons or oil drums, and containing basically a suction pump and hose, a large sluice table, and rudimentary living quarters for the crew of 5 to 8 men. Gold- and diarnond-bearing sand and gravel from the river bottom is vacuumed up through the hose and discharged across the sluice table, which has riffles to collect the heavy minerals. The heavy-mineral concentrate is then washed with mercury, to recover the gold and diamonds. Because the gravel-laden water is discharged across the sluice table at a very high rate, and because the discharged material consists of a mixture of rocks, gravel, sand, silt, and varying sizes and shapes of gold particles, the recovery of gold is very inefficient. Tests have suggested that recoveries of 30-40% are typical. In some operations, two or three dredges work in tandem, with the second and third dredges simply taking in tailings discharged from the dredge ahead. Typically, the second and third dredges will recover nearly as much gold as the first dredge, demonstrating the low efficiency of the recovery systems. Diamond recovery is even lower, probably averaging 5 to 15%. 5.35 With the increase in the world price of gold since 1975, a number of technologies have been devised to increase gold recovery in gravity-feed systems, and several entrepreneurs (mainly foreign individuals) have attempted to introduce high-tech recovery equipment to Guyana's dredging industry. They have been unsuccessful for several reasons: the high import duties on mining equipment; the difficulties in adapting the technology to conditions specific to each specific mineral deposit; the reluctance of dredge owners to submit to experimental down-time for their equipment, lacking any prior guarantee of increased return from an untested method; logistical difficulties in trying new methods under arduous and isolated field conditions; and legal and bureaucratic obstacles to joint ventures or other arrangements which would reimburse the foreigner for the technology provided. 5.36 A growing trend in the dredging business is the movement away from the long-worked and depleted river channels, into terrace gravels covering flats alongside the current rivers. These areas contain similar but older gravels, deposited during previous swings of the river course. The move toward terrace mining ("land mining") will likely engender significant changes in Guyana's dredging industry. Dredging on an active river is normally undertaken without exploration in advance; if dredging in one spot is not rewarding, the dredge is driven a few meters or a kilometer to another spot to try again. Terrace mining will require advance exploration, definition of reserves, clearing of forest, provision of water to work the dredge, a definite work plan, and a capital reserve for pre-production expenses and restoration. Dredging will be transformed into a programmed and managed activity with long-term goals. Work crews will have a better- defined division of labor (land clearing, dredging, water provision, etc) than now. Perhaps most importantly, a land-based operation will have the potential for proper recovery equipment, which in some cases cannot be fit onto a small river dredge, but can be installed on land beside a ponded dredge. 5.37 At the same time, the inefficient dredge operators will be driven out of business by declining returns from active river channels, some of which have been continuously dredged since the 51 1950's. If they cannot raise capital for exploration and clearing, and cannot efficiently manage a long-range work program, they will not be successful in terrace mining. This process has already begun, and Georgetown newspapers now carry advertisements offering dredges for sale. 5.38 Foreign companies. Foreign companies have been continuously involved in Guyana only since 1984, when Golden Star began exploration. By far the largest non-bauxite mining enterprise in Guyana is the Omai project. Omai is a large "greenstone" type gold deposit, located about 200 km from Georgetown. The ore reserve at Omai is 41 million tons grading 1.6 grams gold per ton; there are no by-products except very small amounts of silver. Omai is expected to produce 225,000 to 250,000 ounces of gold per year (about equal to current gold production in Guyana), employing about 700 workers will be on site. Equally important, it will offer a showcase of modern technology to other miners; it is the first sizeable, mechanized gold mine in the country since 1950. 5.39 There also a small group of foreign entrepreneurs that typically import new technology on a small scale, in association with Guyanese partners. The technology has included geological ideas, diving methods, gold and diamond recovery techniques, and other areas. Due to various legal and capital barriers (discussed later in this report), individuals entrepreneurs have tended to stay only a short time in Guyana. Those who are successful tend to keep a low profile because of the difficulties they face in operating legally in the country. B.2 INFRASTRUCTURE AND SERVICES Transportain 5.40 Guyana's location and climate dictate that the logistics of transportation, communication, and supply are paramount to the success of any endeavor in the country's interior. The lack of infrastructure in the interior is the most common complaint from the mining sector. Most of the gold- and diamond-mining areas are in roadless jungle where there are few airstrips and even finding a clearing to land a helicopter can be difficult. Guyana's rivers, while large and abundant, are suitable for navigation only by small boats which can be portaged around rapids. 5.41 Roads. The Government is unable to provide much in the way of infrastructure to large areas of the interior, where most mining occurs. The lack of roads and poor quality of existing roads are major obstacles to mining operations. Although there are two localities in Venezuela where paved roads reach the Guyana border, there are no roads on the Guyana side within 150 km of either location. A road from Georgetown to the Brazilian border at Lethem has been completed several times during the past 35 years, but each time has become impassible due to lack of maintenance. The road is being constructed again with Brazilian aid, but even when completed will be passable only to trucks much of the year. The other principal roads in the gold- and diamond-mining areas are unsurfaced. The roads have deteriorated significantly during the past 5 years. For example, in 1987 it was possible to drive from Georgetown to Nine-Mile by Land Rover or 4-wheel-drive pickup truck in about 9-10 hours. In 1992 the Issano Road portion of the route is impassible except to Bedford trucks, and the trip requires 20-22 hours. The natural deterioration of roads due to weather has been aggravated since 1985 by wear and tear from heavily-laden Bedford trucks carrying dredges and other mining equipment. Road maintenance is entirely in the hands of road users. 5.42 Air transpor.L The lack of adequate roads means that many mining operations must rely on costly air transport for food, fuel, personnel, and parts. A drum of fuel delivered by plane into the interior carries a transportation charge of about US$30. Given that construction and maintenance of roads to these areas would require prodigious investments of time and money, it is likely that air transport will continue to be a major component of gold and diamond mining economics for a number of years. 52 5.43 There appears to be a severe shortage of air transport. Some of the dredge operators operate their own aircraft, charter services are available, and the government's Civil Aviation Department (CAD) charters fixed-wing and helicopter aircraft, most of which belong to the military. However, the availability of helicopters and larger cargo aircraft is extremely limited. Miners report that the Government has refused to provide licenses for the this equipment, perhaps for security reasons. This has left the Civil Aviation Department as the monopoly supplier of such services, and presently the Department is unable to provide any helicopter service to the private sector, and only limited cargo service. The Government should consider whether it is possible to permit expanded use of helicopter and cargo aircraft by the mining sector, as the lack of sufficient air transport is a serious constraint on mining operations. 5.44 Other air-transport problems in Guyana relate to operating logistics: (a) there are no navigational beacons except in the Georgetown-Timehri area. Several additional automatic beacons could be installed at 3 or 4 additional localities, to allow for pilots to locate their positions while flying in the interior; (b) it is difficult to obtain aircraft fuel except near Georgetown, which means that planes must carry sufficient fuel for a round trip. This greatly reduces the effective cargo payload (thus increasing the cost per kilogram delivered) and increases the risk of flying. The Government should consider locating fuel deposits at Lethem, Mahdia, and Port Kaituma; and (c) airstrips are generally in poor condition. A number of airstrips exist in the interior of Guyana, but the only ones receiving any government maintenance at all are at Lethem and Port Kaituma. Users must maintain the others at their own initiative. Several operators stated that they would like the ability to restrict the use of airstrips which they have built themselves (with government permission) to service their mining areas. However, once an airstrip is certified by the government (after being constructed entirely at private expense) it is open to all users, including heavier aircraft than were originally intended, and including aircraft bearing unwanted visitors (unlicensed gold and diamond buyers, drug dealers, prostitutes, thieves). Telecommunications 5.45 Within the interior, telecommunications are almost entirely by private radio. The telephone system does not function west of the Essequibo River or south of Linden. Postal service is restricted to irregular service at Mahdia, Lethem, and one or two other points. Two-way radio permits may be obtained by private parties, but there is a certain amount of license fees, bureaucratic delay, and restrictions on the type of equipment permitted. Land and Survey Data 5.46 A considerable amount of information has been compiled about Guyana's geography and geology. This data base includes aerial photography of the entire country, 1:50,000-scale maps for most of the country, reconnaissance geologic mapping of the north half of the country, and airborne geophysical surveys of selected areas in the north. This information has been invaluable in its application to mining, as well as other activities. 5.47 Data-base information has traditionally been available to the public through sales of specific photos, sheets or quadrangles, by either the Lands and Surveys Department or the Geology and 53 Mines Commission (and their predecessor agencies). In recent years, however, the capability of the agencies to reproduce, or even to maintain, the materials has diminished to the point where the original data base is beginning to deteriorate. For example, the air-photo negatives originally produced in the 1950's are stored at the Lands and Surveys Department in Georgetown, where the uncertain power supply creates unstable storage conditions. The photo-enlargement camera at Lands and Surveys, used to make photo prints at various scales, has been broken for several years, and negatives must be taken to commercial photo labs in Georgetown whenever prints are needed. The combination of unsatisfactory storage conditions and excessive handling and transport of negatives has led to damage of the negatives by mildew, cracking, scratching, and bending. In addition, the images are now mostly 25 to 30 years old, and in some cases outdated by changes due to river meanders, timber operations, etc. Similar problems exist for the originals of topographic maps. 5.48 The amount of information readily available from the existing geophysical surveys has been largely extracted by past users. A new generation of geophysical coverage is needed, using modern technology, including refined EM (electro-magnetic) surveys, vertical-intensity magnetics, and SLAR (side-looking airborne radar). Recently, a SLAR survey was undertaken of a restricted area in central Guyana on an experimental basis, with very promising results. New geophysical surveys can be made available digitally (on computer disks) rather than only graphically, so that users can electronically manipulate the data for their own needs. Very little original geological investigation has been carried out in Guyana since the 1960's. Most geological work done since 1970 has been limited to either specific task-oriented investigations, usually of sites of immediate economic interest, or more general work carried by foreign researchers who lack continuous contact with affairs in Guyana. Educational Services 5.49 As elsewhere in Guyana, the supply of highly-trained and educated workers is limited. Local operators mentioned difficulty in finding and retaining skilled workers such as engine mechanics, welders, truck drivers, etc., and there is a dire shortage of competent engineers, geologists and other scientists. The only institution of higher learning in Guyana is the University of Guyana, located several km east of Georgetown near the coast. The Mining Engineering program started in 1977 but was interrupted, so that relatively few students have graduated, and only 2 have ever obtained a four-year degree. It is contemplated to start a two-year Geology curriculum, also within the Faculty of Technology. Guyana's population of 750,000 is rather small to support a fully-fledged engineering and geology program. A more cost-effective means of providing a quality education for Guyanese in these areas would be to finance their education elsewhere, especially after the first one or two years of university. B.3 LEGAL AND REGULATORY FRAMEWORK 5.50 The regulatory framework for mining in Guyana is composed of several elements: the Mining Act and its regulations, mineral agreements negotiated with large companies, the Income Tax Act, and the Gold Board Act. The Mining Act encompasses all minerals except those on certain lands granted to private parties prior to 1910 (mainly in coastal areas), and those in Amerindian reserves. Bauxite is covered by separate regulations. Petroleum and radioactive minerals also have separate legislation. Foreign Versus Local Miners 5.51 Backgroumn. A major source of controversy surrounding the Act is its reservation of "small and medium mining" to Guyanese nationals. This category is largely made up of porknockers and dredging operations, but is not clearly defined in the Act, which has created some ambiguity concerning 54 treatment of a few mining operations. Eligibility for the 'small and medium mining' category is made on a case-by-case basis, with considerable room for administrative discretion. Since this determination can have significant monetary implications for the miner, the decision needs to be governed by objective criteria. 5.52 Small and medium-scale miners essentially face a different tax regime from larger companies and are subject to separate restrictions: (a) small and medium-scale miners are subject to a 2% withholding tax on their gross revenue, but are not eligible for exceptions from import duties or consumption taxes. These miners can elect to enter into a mineral agreement (see below) and face a different tax system. In fact, over 98% of eligible miners choose the 2% withholding tax, perhaps because it results in a lower tax rate but certainly because the paperwork requirements are much less; and (b) small and medium-scale miners that elect the 2% tax are required to operate as individuals (sole proprietors), which impairs the efficiency of management, may interfere with obtaining financing, and makes it more difficult to deal with foreign companies. 5.53 Foreign companies are required to enter into separate mineral agreements with the Government, and two of the larger, national companies have elected to do so. Mineral agreements are documents which contain terms (negotiated within fixed limits) relating to taxes, royalties, gold sales, dividends repatriation, exploration expenditures, import duties, and other matters relating to a particular mineral property. The agreements are sanctioned by Presidential order. The major difference in treatment compared to the smaller mining companies is that the agreements usually subject companies to the standard corporate income tax (presently 35%), but provide for duty-free importation of equipment and inputs. Agreements have also changed other aspects of the tax regime. For example, the tax payable on dividends repatriated overseas is 15%, but some agreements have included a lower figure. 5.54 This discussion raises three difficult questions: (a) should the smaller, local mining companies be taxed differently from foreign companies; (b) should foreign companies be allowed to participate in small and medium-scale mining; and (c) should foreign companies be subject to individual agreements. 5.55 Taxes, The 2% tax rate for small and medium-scale miners reduces their incentive to improve their technology, as they have to pay significant duties on capital imports and they cannot take deductions for increased capital or operating expenses. On the other hand, most of these mining operations cannot maintain the records necessary to file income tax statements, and those that can have the option of signing an agreement to pay the normal tax. A special tax regime for the smaller mining outfits is therefore reasonable. 5.56 Foreign participation. The prohibition of foreign participation in the small and medium- scale mining sector effectively cuts off the local mining sector from the benefits of foreign technology and capital. Foreign companies cannot have an ownership interest in local mining operations, and it is extremely difficult for such operations to borrow (their only collateral being moveable equipment located outside of Georgetown, which are generally not accepted as guarantees by commercial banks). If the local operation cannot sell equity nor borrow, it is difficult to pay for the foreign technology and expertise they clearly need.M/ While the prohibition of foreign participation protects the access of 26/ See para. 5.33 for a discussion of the inadequate processing technology employed by local miners. 55 some local miners to sites in Guyana, the denial of foreign expertise ultimately erodes the ability of local miners to compete in international markets. The impact of obsolete technology and less-attractive sites for dredging (as the better properties are exploited) can already be seen in the failure of some mining operations. In addition, the present regime does not provide a clear place for individual entrepreneurs that are not Guyanese nationals, and those now operating in the country are extremely limited in the businesses they can undertake. The Government should eliminate the exclusion of foreign companies from small and medium-scale mining, provided that sufficient safeguards are in place to ensure that the larger companies do not use this as a way of gaining access to the simplified tax regime. 5.57 Mining agreements. The alternative to individual mineral agreements would be to fix the tax regime for all large-scale activities in the law. The major advantage of a mineral agreement is that it allows for flexibility to adapt to the special characteristics of a given mineral property. A negotiated agreement has a better chance of being satisfactory to both the government and the company. The major disadvantage is that it allows for considerable administrative discretion and reduces the transparency of the incentives regime facing foreign companies. To date, the mineral agreements may have served a useful function in a country which previously received almost no foreign mining investment, and which had a poor reputation among foreign companies as a place to do business. At this point, however, it may be useful to consider establishing a fixed incentives regime for large-scale mining, with appropriate grandfathering of existing agreements. The Gold Board 5.58 The Guyana Gold Board was established in 1982 as the sole buying agent for gold from miners, although some of the mineral agreements allow the sale of gold overseas directly. The requirement of selling gold to the Board at the official, overvalued exchange rate acted as a significant tax on gold mining, and declared gold production plummeted by 1983 to less than one-third of the 1981 level. Since 1983, a number of revisions of Gold Board policy, including calculation of sales at market exchange rates, have increased the proportion of production going to the Board, to the current level of perhaps 40-50% of all mined gold. The improvements in Gold Board policies have eliminated many of the complaints of dredge miners and pork-knockers, but some still remain. 5.59 Currently, the Gold Board buys gold from licensed miners at a price of 94% of the previous London afternoon fix in US dollars. The exchange rate used to Guyana dollars is 3 points less than the average of 5 bank selling rates the previous day. Miners are then paid 20% in US dollars, and 80% in Guyana dollars. The royalty of 5% and an income tax of 2% are deducted. 5.60 The major problems with Gold Board purchasing are: (a) miners must come to a single locality in Georgetown to sell their gold for cash.2/ Considering the attendant delays and risks for men working months at a time in remote interior locations who must travel to Georgetown over poor roads, this is a major inconvenience; (b) arranging a sale, waiting while it is smelted and assayed, and certifying the result can take an entire day; 27/ The Gold Board has licensed some shopkeepers to receive gold from miners on a barter basis (gold for supplies), but there are still relatively few shops in the mining areas, and the miner must accept the shopkeeper's price for supplies. 56 (c) the Gold Board often does not have sufficient cash on hand to cover its purchases, and thus pays by check, another complication in Guyana where checks are seldom used and may take considerable time to clear; (d) substantial resources are required to deal with retail-level purchases from over 8,000 licensed miners; and (e) the arrangements for selling the gold overseas under the previous administration did not appear to maximize revenues nor provide for the budgeting of gold receipts along with other revenues: sell orders were given by the President's office on the basis of immediate cash needs, without any apparent selling strategy. 5.61 The rationale for the Gold Board is to capture as much of the taxes and royalties from gold production as possible. The present system, however, appears to be too restrictive. There are two alternatives that the Government might consider in reforming the present arrangements. At a minimum, the Government should allow for licensed gold merchants who would purchase the gold from miners and sell it to the Gold Board. This system would allow for the same level of control of gold trading as the present one, while greatly easing administration and reducing the burden on individual miners. A more effective measure would be to eliminate the Gold Board and simply require the declaration of gold and payment of taxes prior to export. A system of licensed gold sellers could be established to control the export of gold for tax purposes. This approach would eliminate some of the inefficiencies in centralized Government sales, and a requirement of declaration, if appropriately administered, would provide as effective control as the present requirement of gold sales. This system is similar to that presently used for diamonds. Diamonds 5.62 Diamonds are declared at the GGMC and royalties and taxes are paid there. Because sales prices on diamonds are negotiated for each stone, and values are easily manipulated for fiscal reporting purposes, the GGMC fixes a per-carat royalty of G$150 per carat. The miner is free to sell to licensed diamond buyers, after paying the G$150 per carat and a 2% gross income tax. The actual value of stones and manner of payment are agreed between the buyer and seller. Few complaints are heard about this system. Although it is probable that there is considerable under-reporting of production by miners, in order to avoid payment of royalties and taxes, it is not clear whether there is greater under- reporting of diamonds as compared to gold. Environmental Considerations 5.63 Guyana's interior regions are sparsely populated and densely forested. The principal issues include: (a) contamination of soil and water by mercury is a hazard of present gold and diamond operations. Mercury is used to recover gold in both pork-knocker and dredge operations, particularly in the former, where mercury is used in larger quantities and with less control; (b) contamination of rivers by silt and disturbance of riverine habitat from dredging operations have not actually been documented, but could occur in some areas; and 57 (c) there is some evidence of microbial contamination of rivers near mining camps, which could be easily remedied or prevented. 5.64 Currently there are no legal guidelines for environmental control of mining, and therefore no enforcement of environmental standards. A draft Environmental Protection Act has been in circulation for some time, and legislative action is expected during 1993. The GGMC is working on the second draft of an environmental management agreement, which will be applied to every mining operation in the country. Environmental reclamation bonds have already been requested from all new permit applicants, but none have complied yet in the absence of a final agreement. The draft contains 3 pages of environmental guidelines about surface disturbances, hydrocarbon disposal, mercury usage, toxic discharges, soil retention, silting of river waters, and other matters. The draft is probably quite workable, most of the requirements are based on common sense and efficient operation as well as environmental considerations. The effectiveness of monitoring of the terms of the agreements, however, is not yet known. Companies signing Mining Agreements are subject to more stringent rules, including filing of an environmental impact statement. The Government should move as expeditiously as possible to present the Environmental Protection Act to the legislature and to issue the environmental management agreement. In addition to the need to strengthen protection of the environment, the lack of rules creates some uncertainty on the part of investors. Administation 5.65 The Act and regulations are administered by the Guyana Geological and Mines Commission (GGMC), under the supervision of the National Resources Agency. The technical capabilities of the GGMC have deteriorated: there is no longer in fact any geological survey, the mines inspection and arbitration mandate is essentially not exercised, and the GGMC is unable to maintain an accurate file of locations of mining properties. Settlements of mining disputes through the GGMC are slow, costly, and have been accompanied by accusations of favoritism. 5.66 Private sector representatives repeatedly noted the long delays in the processing of routine applications at the GGMC. Permits are required for dredgers and industrial-scale exploration and mining companies, whereas pork-knockers work under a simplified claim system. Prospecting license applications, which should be processed in a few weeks, typically take more than a year. While disputes or clouded title can result in processing delays, excessive delays are extremely common, even in what should be straightforward cases. 5.67 The bureaucratic delays within GGMC are apparently due to several factors: (a) a lack of clear-cut policies in some areas, such as the absence of a definition of medium-scale versus large-scale mining; (b) a lack of sufficient in-house legal and financial expertise at the GGMC and Natural Resources Agency; (c) the lengthy chain of command for decisions - from the Minister of Mines (until recently the President of Guyana) to the Natural Resources Agency, to the GGMC, all located on different premises in Georgetown; and (d) insufficient data-handling capability (e.g. computers) to manage effectively the large number of existing mineral titles. 5.68 Administration of the mining sector suffers from a serious lack of transparency. Many documents and procedures are not available to the public. For example, a map showing the location of prospecting licenses already issued has never been made available to the general public. Terms of mineral agreements already negotiated are not public. The lack of information is a serious deterrent to interested investors. The new Government should ensure that GGMC procedures are as open as possible. 58 Administrative decisions regarding large versus medium-scale status, resolution of claim disputes between miners, and other decisions, should be carried out with the right of open audience, and should be rendered with a written justification. B.4 RECOMMENDATIONS- Mining Legal and Regulatory Framework 5.69 Given the importance of the bauxite industry and the severely deteriorated state of the existing capital stock, the introduction of private sector capital and management is a high and urgent priority for Govermnent action. The previous administration moved slowly in this area. This Government should act quickly to privatize the bauxite industry, in conjunction with the proposed World Bank Group assistance. 5.70 The Government should eliminate the prohibition of foreign involvement in the small and medium-scale mining sector. While the introduction of foreign firms might erode the competitive position of some domestic operations, it would encourage efficiency and provide access by local miners to foreign capital and technology. The Government also should review the necessity for separate mineral agreements with each of the larger firms, with a view towards establishing a single regime governing all of the larger miners (with appropriate grandfathering of agreements now in force). Some easing of the present, overly-restrictive regime governing the sale of gold is necessary. At a minimum, traders should be licensed to purchase gold from miners. Ideally, the Gold Board should be eliminated and the requirement to sell gold replaced by the requirement to declare gold and pay taxes, with a system of licensed gold exporters to help enforce taxes and royalties. Effective environmental regulations need to be adopted as soon as possible, along with issuance of the environmental management agreements. Administration 5.71 A review of the structure of and procedures used by the Guyana Geology and Mines Commission (GGMC) is necessary to reduce delays in processing and improve transparency. Government supervision of the mining sector would be strengthened through freer provision of information, including mining titles and mineral agreements. Administrative decisions regarding large- versus medium-scale status, resolution of claim disputes between miners, and other decisions, should be carried out with the right of open audience, and accompanied by a written justification for the decision. Infrastructure and Services 5.72 The road network in the interior serving mining installations is urgently need of repair and maintenance. However, road improvements will require considerable resources, and should be considered in the context of the overall investment budget. Improvements in the regulatory framework governing air transport include the licensing of additional helicopters and cargo airplanes, permission for aviation fuel depots at interior locations, definition of a realistic policy on use and maintenance of privately-built airstrips, and easing of restrictions on two-way radio licensing. 5.73 A strengthening of the information base serving mining operations is extremely important. Measures should include the restoration and preservation of current geographic and geologic data base materials; preparation of a proposal for new multi-purpose aerial survey to produce air photos, SLAR 59 images, vertical-field magnetics, and electromagnetic coverage; training of technical field teams for GPS (Geo-Positioned Satellite) determination of ground control points in the interior; and the strengthening of the geological capabilities of the Geology and Mines Commission. C. AGRICULTURE, FORESTRY AND TOURISM 21/ C. 1 SECTORAL PERFORMANCE 5.74 Guyana has ample land area that is suitable for cultivation, and agriculture has traditionally been one of Guyana's key economic activities. In 1990, the sector's value added accounted for almost 38% of GDP, 45% of registered merchandise exports, and 35-40% of total employment. Agricultural production is heavily based in sugar and rice (31% and 6% of agricultural value added respectively), with other important crops produced mainly for the domestic market (plantains, pineapples, coconuts, cassava, coffee, and citrus). Livestock production contributes to about 7%, fishing activities another 34%, and forest activities about 5% of agricultural GDP. Livestock and crop production (with the exception of sugarcane), is characterized by the predominance of small farms. There are, however, several larger agricultural operations that include private rice growers, some medium- and large-sized forest and fishing operations, and large public-sector enterprises such as the Guyana Sugar Corporation (GUYSUCO) and the Livestock Development Company (LIDCO)--both in the process of being privatized. 5.75 As a consequence of interventionist and distortionary policies, the performance of the agricultural sector during the past ten years has been very poor. Value added in agriculture fell by 2.8% per year from 1980-91. The decline in agricultural output had a severe impact on the economy: the sugar industry alone (including sugarcane and sugar-milling activities) accounted for almost 60% of the decline in total GDP during the 1983-90 period. 5.76 The ERP has greatly improved the incentives framework facing the agricultural sector. Most price controls have been eliminated, most quantitative trade restrictions have been lifted and remaining import and export licenses are relatively easy to obtain for most crops, a unified exchange rate has been established, the monopoly of rice exports has been removed, and the Government is in the process of improving management in, and ultimately privatizing, many of the public enterprises which formerly dominated the sector (rice mills, livestock development, the sugar industry). These reforms have already had a significant impact in sharply increasing output, particularly in the sugar and rice sectors. 28/ This section except for tourism draws on the Guyana Agricultural Sector Review [10410- GUAI. 60 C.2 THE REGULATORY FRAMEWQOK 5.77 The domestic sugar market, dominated by the State-owned Guyana Sugar Corporation (GUYSUCO), remains subiec to cQnsiW&tcblecontrols: (a) GUYSUCO is allowed to retain only 17.5% of its foreign exchange earnings, which was a major reason for the decapitalization of the industry during the 1980s. Efficient operation of GUYSUCO will require elimination of restrictions on its use of foreign exchange; (b) the Government imposes a separate tax on GUYSUCO's sales to the protected European market.- -:This" 9tor sugartlevy, is equal to 70% of the difference between the preferential EEC price and 115% of the world price of sugar. The Government has in the past rebated a proportion of the levy in view of GUYSUCO's poor financial situation. While the Government should capture at least part of the subsidy granted by the European Community, the levy as structured is not efficient. The world price is not really a free market price owing to the prevalence of dumping, and the world market is extremely thin. Thus, the tax is higher and more volatile than it would be if the world sugar market were efficient. The Government should consider transforming the sugar levy in a fixed percentage of the EEC price; and (c) GUYSUCO has a monopoly on the production, import and sale of sugar in the domestic market, which has resulted in a relatively high price of domestic sugar. The Govermnent sets the domestic price of sugar equal to the border price (as shown by GUYSUCO's import costs) plus the 45% CARICOM tariff. The high tariff results in relatively high domestic sugar prices compared to the world market. The Government should eliminate GUYSUCO's import monopoly, which would remove the need for direct Government regulation of prices. The Government also should consider lobbying for a reduction in the CARICOM tariff on sugar, which simply acts as a tax on domestic consumers. 5.78 GUYSUCO suffers from serious management deficiencies that have resulted in a deterioration in infrastructure, a severe decline in output, and repeated failures to meet the EEC quota. These problems have been due to inappropriate government policies which drained resources from the company and limited its access to scarce foreign exchange, and the low level of wages which resulted in a loss of management personnel, declining labor participation, and industrial disputes. 5.79 The Government signed a management contract with Booker Tate in 1989 to take over daily operations of GUYSUCO, to prepare a feasibility study to rehabilitate and rationalize the industry, and to identify financing for the investment program proposed under the study. Bookers raised wages and introduced improved agricultural and processing practices. These measures, together with good weather, resulted in an increase in output in 1991 sufficient to meet the EEC quota, for the first time in four years. It is estimated that production increased even further in 1992, to about 8% below the desired level of 250,000 tons. However, it is clear that substantial investments, on the order of US$120-175 million, will be required if GUYSUCO is to maintain this performance in the future. As the Government lacks the financial resources necessary for investments on this scale and the benefits of private 61 management have been demonstrated, the Government's strategy should be to attract private investment with the goal of transforming GUYSUCO into a majority privately-owned and managed company. Rio 5.80 The rice subsector is subject to various controls, but their impact is limited. The Government (appropriately) captures part of the subsidy that is granted by the European Community to Guyana rice through a 15 % tax on the preferential tariff. The Government also requires that the domestic market be supplied before rice export licenses are granted. In practice this measure is non-distorting since the rice sold in the domestic market is of inferior quality and cannot be exported. More importantly, rice exports are still regulated by the Guyana Rice Export Board (GREB) who monitors that rice exports meet its contracted specifications. GREB charges 3% of the value of exports, which appears to be an excessive payment for the service provided. The Government should reduce this tax to a level sufficient to cover the administrative expenses of the GREB. Land Tenure 5.81 According to the most recent farm survey (1978) about 45% of the Guyana's farmland is the property of the State and is leased to farmers. The lease contracts are inefficient because they do not provide long-term security of land ownership. The contracts have a duration of only 20 to 25 years, cannot be renewed automatically, and the Governments' administrative difficulties have led to the granting of many lease contracts on a provisional basis. This insecurity discourages the demand for land-specific investments and has impeded access to credit because land cannot be used as collateral.22/ In addition, many of the leasing arrangements contain provisions that limit farm size, therefore constraining land consolidation into optimal-sized units: Further, land is leased at fees that are well below market values. The current average annual fee is less than US$0.05 per ha. The State does not collect the fees and obtains practically no revenue from these arrangements (roughly US$17,000 in 1990) which are an important source of rents for some lessees. 5.82 The former Government was planning to grant full titles to all lessees with landholdings of less than 15 acres. According to Government estimates this would cover at least 80% of all current leases. This policy could provide a significant boost to the sector and is a necessary complementary measure to the improvements in agricultural policy already achieved. Forestry 5.83 The tropical rainforest of Guyana covers about 161,000 square kilometers (approximately 75 percent of the land area) and is composed of hundreds of hardwood species. Guyana is one of the few countries in the world that still has the majority of its forest intact and is adopting policies to manage these resource in a sustainable manner. Only about 40 percent of the forest areas is presently accessible and only 10 percent is being exploited; a total of 3.7 million hectares have been allocated for commercial 29/ The same problems tend to apply for privately-owned land because of the lack of adequate titling services. According to the Ministry of Agriculture there are currently more than 5,000 ownership titles waiting to be regularized. This represents an exceedingly high number since according to the 1982 farm household survey, there were roughly 12,000 privately owned farms in Guyana. 62 use by ten large companies and 250 medium and small operators, which are supplying the domestic market and some CARICOM countries. Development of the wood processing industry has been hindered by financial constraints, the lack of basic infrastructure (principally the inadequate electricity supply but also a lack of kiln drying facilities), staff shortages at all levels, a lack of equipment and spares as well as high freight costs for exports outside CARICOM. 5.84 The liberalization and privatization process has triggered a rapid growth of foreign investment in forest and timber activities. The Government has welcomed the economic initiatives in this area and has been granting forest concessions based on the premise that forests will be harvested in a sustainable manner. The concept of sustainability has been defined as one that will not alter the tropical forests ecosystems and will provide a sustained yield of wood products. However, a sound scientific basis to determine what is required for such management does not exist. At present, the Government allows the harvesting of 20 m3 per ha. based on experiences of similar forests elsewhere in the world, but additional research is needed to determine the appropriate standard in Guyana. 5.85 Even if the rules governing forestry development were adequate, they are not effectively enforced. The Guyana Forestry Commission (GFC), is responsible for granting cutting rights, collecting royalties, enforcing environmental safeguards, controlling exports and collecting export fees, and conducting industry development activities. The agency is clearly unable to perform its functions, having- -among its 170 employees-only one professional forester (other than the expatriate commissioner whose tenure lasts two years). In fact, the GFC seems to be a perfect example of the "capture" theory of regulation (i.e., a regulatory agency controlled by the industry that it is supposed to regulate). The GFC is largely unable to collect the fees it is due and is unable to enforce planning requirements and environmental safeguards. Moreover, there seems to be a large amount of discretion on the treatment regarding taxes and royalties granted to different firms, and the most pertinent information on how GFC deals with individual timber operators is regarded as confidential and is not publicly available. An overhaul of the operations of the GFC is essential to strengthen staff qualifications, improve the transparency of the decision-making process and provide for more effective enforcement of regulations. Resech and Extension 5.86 Lack of appropriate technology is a significant constraint on the agricultural sector. The unavailability of quality seeds is a particular problem for the production of rice and of non-traditional crops. For more than ten years, technological improvements in agricultural activities have been extremely limited, as research and extension activities suffered from the public sector's severe budgetary and administrative problems. With the exception of sugar, technology generation is the responsibility of the National Agriculture Research Institute (NARI), a semi-autonomous public sector institution. Although NARI's effectiveness has been limited by lack of resources, it has made some advances in the development of new rice seeds and in seed multiplication. As NARI has focused the vast majority of its efforts in rice, responsibility for livestock research has been assumed by the Caribbean Agricultural Research and Development Institute with some assistance from the Inter-American Institute for Cooperation on Agriculture. Unlike research, in which a foundation exists for improvement, extension is in total disarray. Efforts have been initiated to re-activate the extension service. The proposed plan (sponsored by the Inter-American Development Bank) calls for the reunification of the entire system in the Ministry of Agriculture. However, the key question of how to attract quality staff within the public sector's salary scale has yet to be addressed. 63 5.87 Greater private sector participation is essential to improve research and extension services. For example, many large rice growers already have their own technical staff and have expressed interest in establishing a technical service to growers. An association of rice producers and millers could be established to oversee the collection of funds for research and extension. Under this proposal, NARI would have to present research projects for approval and financial support, to ensure that NARI's activities are indeed responsive to the needs of the industry. The Tourism Sector 5.88 Guyana has some potential for tourism, particularly what is now referred to as eco- tourism, due to the attractiveness of its tropical forests, birdlife, and water resources. The opening of the economy has encouraged a greater exploitation of tourism opportunities: a few Georgetown hotels have opened branches in the countryside for guests who wish to spend time in more rustic surroundings, and hotel investment in Georgetown is increasing, along with an expansion of the available trips to the interior. Tourist services are concentrating on low-volume, high yield activities such as small trips to the interior to meet specialized needs. While more room for growth remains, the opportunities for tourism in Guyana are limited. Since Guyana lacks sand beaches, the primary attraction for tourists is the relatively undisturbed rainforest. Any large-scale development of tourist facilities would destroy the principal attraction that tourists look for in Guyana. Operators of even small facilities in the rainforest said that they did not wish to expand further on current sites, to avoid damaging the peaceful atmosphere provided their guests. Thus, the development of tourism needs to be carefully managed to be sustainable. The Regulatory Framework 5.89 There are few restrictions on the development of tourist facilities, beyond those imposed by municipalities on hotels to ensure health and safety. However, the Tourism Association of Guyana, a private organization representing hotels and companies operating tourist attractions, is developing standards for the operation of tourist facilities. These standards would provide minimum operating guidelines and recommendations for best practice. Standards for boats, accommodation and aviation are now being completed; others may be developed in the future, if necessary. The Association also would organize regular inspections to ensure compliance with the agreed standards. While the standards would be voluntary, the Tourism Association would certify only those projects in compliance. The fear of bad publicity would provide considerable incentive for companies to meet the standards. Given the lack of Government resources and the importance of managed development of tourism in Guyana, the policing of tourism activities by a private organization makes sense. The Government should carefully monitor this process, however, to ensure that the Association does not unduly restrict competition. 5.90 As with other sectors, the lack of Government services is a serious impediment to tourism. Most importantly, the poor security situation in Georgetown acts as a considerable disincentive to visiting Guyana. The deterioration of law and order is remarked on by visitors and Guyanese alike, and needs to be addressed for reasons which go far beyond the impact on tourism. One thing the Government could do without committing additional resources is to ease visa requirements. The combination of the information requirements and the lack of Guyanese embassies makes the process more troublesome than usual for tourists. For example, the Guyana consulate has on occasion refused to fax a visa form to US applicants, resulting in a delay of 4-5 days to mail the form. There are only a few Guyanese embassies in Europe, requiring a prospective tourist to wait to receive forms or to undertake considerable travel just to apply. By contrast, many other Caribbean countries do not even require visas 64 for their principal market in North America. The Government should consider either eliminating the visa requirement altogether or providing for issuance of a visa at the airport. C.3 RECOMMENDATIONS - Agriculture. Forestry and Tourism 5.91 Improvements in the regulation and management of the sugar and rice sectors are necessary. Concerning sugar, the Government should press forward with the privatization of GUYSUCO to ensure that recent production gains are sustained. Complementary reforms would include elimination of restrictions on GUYSUCO's access to foreign exchange, transformation of the sugar levy into a fixed percentage of the EEC price, and elimination of GUYSUCO's import monopoly on sugar. The Government should continue to capture part of the subsidy granted rice exporters through the rice levy, but should reduce the 3 % export tax on rice used to finance the Guyana Rice Export Board. 5.92 A common form of land tenure in the agricultural sector is the leasehold, which impairs efficiency by not providing for long-term security of tenure. In addition, many of the leases have provisions which limit the size of farms, and in general the fees for leases are well below market values. The Government should consider plans by the former administration to grant full titles to all lessees with landholdings of less than 15 acres. 5.93 Better definition and improved enforcement of regulations governing forestry development is essential to ensure the sustainable exploitation of this important natural resource. An overhaul of the Guyana Forestry Commission is required to strengthen management and improve the transparency of operations. 5.94 The Government should promote greater private sector participation in the management of research and extension activities, to improve management and ensure that these efforts are more responsive to the needs of farmers. For example, producers' associations in the rice sector could be given responsibility for the management of funds devoted to research and extension. 5.95 The Government should continue to cooperate with the Tourism Association of Guyana to develop and monitor compliance with voluntary standards for the tourist industry. At the same time, the Government should ensure that the process is not used to unduly restrict competition. The Government also should ease visa requirements, which would encourage both tourists and foreign businessmen to come to Guyana. 65 ANNEX 1.1 RECOMMENDATIONS FOR THE PRIVATIZATION PROGRAM Issue Major Concerns Timing I. Schedule Define list of companies Immediately eligible for privatization and timetable for sales Begin sales of profitable Over next six months enterprises with clean accounts (e.g. Guyana Stores, Guyana Pharmaceutical, GNEC, and Guyana National Printers)_ Initiate efforts to evaluate enterprises, clean up accounts Privatizr Guyana Oil and Post Office once adequate regulatory framework for sector is established II. Preparation Use external valuation to the Throughout program extent possible Begin program to organize Immediately accounts of enterprises III. Policy issues Primary objective should be sale at the highest price Do not retain any Government ownership Avoid imposing either special benefits or conditions for operation of privatized company or that do not apply to other companies in sector Ensure that employees dismissed as a result of privatization receive fair compensation, but do not impose conditions for retention of workforce on new owners IV. Process Publicize widely as possible 66 ANNEX 1.1 Where possible, sell through Throughout program open outcry auction Where sealed bids necessary, Throughout program open bids in public Ensure equal access to Throughout program information for all potential investors V. Management Establish inter-ministerial Immediately committee to manage program, supported by PCS 67 *ANNEX 1.2 Page 1 of 2 PUBLIC CORPORATIONS DASTES 1989-92 1. Guyana Timbers Limited 2. Guyana Telecommunications Corporation 3. Guyana Nichimo Limited 4. Guyana National Trading Corporation Limited 5. Guyana Leather Craft Limited 6. Livestock Development Company Limited (partially) 7. National Paint Company Limited 8. Demerara Woods Limited 9. Guyana Transport Services Limited 10. Quality Foods (Guayana) Limited 11. Sijan Place Restaurant 12. Guyana Fisheries Limited 13. Guyana Rice Milling & Marketing Authority 14. Guyana Stockfeeds Limited (partially) CORPORATIONS W1TH GOVERNMEN PARTICIEPATO 1. National Edible Oil Company Limited 2. Guyana Stockfeeds Limited - Farm Processing Unit 3. Guyana National Engineering Corporation 4. Hope Coconut Industries Limited 5. Mards Workshop 6. Guayana Airways Corporation 7. Guyana Pharmaceutical Corporation 8. Guyana Fisheries Limited 9. Sanata Textiles Limited 10. Guyana Electricity Corporation 11. National Padi & Rice Grading Centre 12. Guyana Rice Export Board 13. Guyana Stores Limited 14. Guyana National Shipping Corporation 15. Guyana National Printers Limited 16. Guyana Oil Company Limited 17. Guyana Soap & Detergent Company 18. Guyana Post Office Corporation 19. Guyana Glass Works 20. Guyana Liquor 21. Guyana Sugar Corporation 22. LINMINE 23. BERMINE 24. National Bank for Industry and Commerce 68 ANNEX 1.2 Page 2 of 2 25. Guyana National Cooperative Bank 26. Guyana Bank for Trade and Industry 27. Guyana Agricultural and Industrial Development Bank 28. GNCB Trust 29. Guyana Cooperative Mortgage Finance Bank 30. Guyana Cooperative Insurance Society GUYANA Saleat Fiancial Statistis of Public Corporatlm Remainig to be Privatized NeT ASSETS PROFIT BEFORE TAX PROFIT BEFORE TAX asat 12/31/91 12/31/91 1990- 12/1991 STAFF EARNINGS CORPORATIONS/ GSM GSM GSM LEVELS PER SHARE COMPANIES AudiLed Unaudited Audited Unaudiled Audited Unaudited Ut31/92 USS NATIONAL PADI AND RICE GRADING CENTRE GUYANA RICE EXPORT 9.331 - . 9.041 - 24 N.A. BOARD (as of 1990) GUYAYA S USTORES IMAITED 292.43 - 222.300 109.900 1180 12.38 GUYANA NATIONAL SHIPPING CORPORAT7ON 107.963 121.038 - F 52.001 - 216 23.93 GUYANA NATIONAL PRINTERS LIMTE 62.595 - 34.357 16.290 - 331 66.91 GUlllYAiNAk OIL COMPANY 136.352 - 228.986 90.134 149 190.85 GUYANA SOAP & DETERGENT COMPANY 1.613 (3.817) 0.718 - 39 -254.46 GUYANA POST OFFICE CORPORATION N.A. - 71.823 - 22.785 538 N.A. (as of July) NATIONA EDIBLE OIL COMANY LTD N.A. - 21.599 - 3,U42000 219 N.A- I .a3 m GUYANA Salient Financial Statistics of Public Corporations Remaining to be Privatized NET ASSETS PROFIT BEFORE TAX PROFIT BEFORE TAX asat 12/31/91 12/31/91 1990-12/1991 STAFF EARNINGS CORPORATIONS/ GSM GSM GSM LEVELS PER SHARE COMPANIES Audited nUaudited Audited Unaudited Audited I Unaudited 8/31/92 USS GUYANA NATIONAL ENGINEERING CORPORATION LDMED 288.330 145.244 - 93.479 1296 0.23 HOPE ESTATE N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. MARDS N.A. - (1.350) - (868.000) 16 N.A. GUYANA AIRWAYS CORPORATION LIMIED (1989) N.A. - 536.429 - 74.505 422 N.A. GUYANA PHARMACEUTICAL CORPORATION LIMIED 282.681 102.000 - 82.300 - 149 265.93 GUYANAFISHERIESL VMID (1988) N.A. - - 18.151 - (6.733) 14 N.A. SANATA TEXUILES LIMIrT 139.268 7.074 - 14.782 - 440 N.A. GUYANA ELECRIuCITY CORPORATION (1989) N.A. - 1,335.469 - (309.818) 1499 N.A. .__~~~~~~~~~~~~~~~~~~~~~~ Recommended Action Program for Financial Sector Reform Annex 2.1 Meamurm Fust 6 Months Second 6 Months Third 6 Months Tbird Year and Beyond 1. Inprovemnent in Reulation and Supervion of Deposit-aking institutions (Commnercial Banks nd Trust Companies) A. Modification to the o Draft revised Fancial Intitution Act. o Put Fancial Institutions Act into Review Trust Law and reviwe a Remulatory Framewort o Undertake revision of minimum capiul Law. necesary. requirements. o Begin iniplemenution of o Esablisb by Ministerial Oder certain regulatory regulations of the Act. authority of BOG on intctios of COFA Board to uperie Statewnd institutions (GAIBANK), and rescind other regulatory authority of COFA. o Begin drfting of implementing regulations for the Act. B. Improvements in o Continue and enhance the program for Continue progrm, including taining Continue Program. Continue Program. Supervision of Deposit- improvement in the insiutionl capacity of the of staff and development of taking Institutions Bank Supervision Depatment of the Bank of procedure nd norms, and Guyana (BOG - See Annex 1.4). broadening the breadth of supervision o Begin consideration of Commercial Bank license to include credit unions and the New applications following revision of minimum Building Society. capital requirements. H 11. Improvement in Regulation and o Eliminate the interest rate cap on Credit Unions o Pass and Implement Credit Union Continue program of supervision. Supervision of Credit Unions, through Ministeral Order (timeframe linked to aDd New Building Society New Building Society increase in institutional capacity at BOG). Legislation. o Draft Credit Union and New Building Society o Begin process of supervision of Lgiblation esablishing BOG as regulatory credit unions and New Building authority (or in Fimncial Intaitutions Act) Society. m. Improvement in Monetary Policy o Undertake reconunended improvements in the o Evaluate delinking the pecial o Continue technical assistance Manaeement procedures for the treaury bill actions, deposit rate and the treasury bill prograom o Coninue nd ,cxpad progrm of technical rate and, if warranted implement o Enact and implement assisance to the BOG Resarch Department. such a detinking. acmndmentu to the Bank of o Review Bank of Guyam Act and Guyana Act. draft amendments which provide for geter autonomy for the BOG. IV. Taxation of Fatncial Inatrumeots o Eliminate tax-free satus of New Building Review stamp duty on financial Begin progrm of gradual Review taxes on ecurities Society. trnsactions nd revise as warrnted, application of corporate and trnctions in accordance with individual tax rates to financial Securities Act. assets. 0* M-i Recommended Action Program for Financial Sector Reform V. Modificatio to lb Roicof Establish Cowunittee repoetng to dhe Mi_s of Review cmpliane with get. Stat. an as Ower of Frt Tier Fnane responsible for revising dbe role of die _wAstios and IlrovemeAt in State io te Fnanl Sector and carying out d Selveacy and Efficiky of policy reform measues. Frm Tier Inliutiom. o Undertake comprehensive review of State-owned fincial inion and develop aconpl- for the restutring, privatiation and/or liquida of eac. o Develop oversight of State-owned i (GAIBAN14. A. GNCB o Coisiae restrctuig measur begun in 1990. Conue and stenify rsucturing If propitious, begin privatization o Review mewaue to dat and develop strtgy mer_. procer. for dke further fiacial rrctuing, opeationl resttctuuun and evenal pivatiration. o Appoiat exuenl conduat to spearhead restr uturing proces . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ B. GBTI and NBIC Esablish privatizetion rategy and begin new Continue and conclde pnivatiztion shae offensga and sae of exiting holdip measue. C. GNCB Trut Design and develop Privatiti Strategy Conionue Nd conclude pnvatizaton rne. D. GAIBANK o Wth Technical Asistance sppored by IDB, o Begin restructuring or liquidation Contime restructuring meames redefine dhe fAion and purpose of GBANK mneauea, inchuding staff trining, or liquidation and estblishment eading either to is rebirth as a second-tier o Establis paranuten retricting of econd-tier window, incudig iniutions or ha liquidation and replacement future development lending for staff training. wh a second-tier window, commercial purposes to only on a o Accelerte loan recovery measures, econd-tie basi. E. Guyan Coopentive o Undetake valuation Undertke privatization or Imnurance Service o Develop privatization or liquidation tntegy. liquidation. F. Guyana Coopentive o Underlake evaution of medium-tenrn srategy Complete liquidation and transference Morgae Finance Bank for low income housing and nechanisms for of remnaining assets to other support. institutions. o Develop liquidation strategy and begin process of liquidtion. 0° O - Recommended Action Program for Financial Sector Reform VI. Improvement in the Regulation and o Develop program to improvc the o Draft revised Insance Act. o Continme program to improve Superviaion of Insurance institutional capacity of the o Draft Pension Act uperviaion of insurance and Conwamnie and Pension Funds Conunisioner of Ineurance. o Develop regulation for revised penaiona. o Draft and pas amendments to the Insuance Act. o Implement regulationa and Capital Irsues Act of 1962 which o Design infrstructure for norma adopted. preveuia purchases by pension pension regulation (potentially funds of atock shares. linkod to the Conuniesioner of Inurnce) o Develop improved norms for insurance regulation. o hnpitnent prgran to improve the institutional capacity of the Commsiaioner of lInrance. VI. Improvement in the Design and o Undertake actuarial study of scheme by the ELO. o Reinforced actuarial study by o Etabliah and begin to Financial Management of the o Initiate measures to improve internal financial contracting an independent actuary implement revised investment National Insurance Scheme control through improved information procesing to render a econd opinion. policy guidelines and and disbursement control procedure. o Following receipt of the actuarial invesment procedures (nv. in valuation and its recommendations, Govt. ecurities of Government revise plan design, contribution and entities should be at no less benefit formuas. tht the Treasury Bill auction o Adopt operationsl restructuring rate and reflect market rates). measure in accordance with the o Implment revised plan design, recommendations of the actuarial contribution and benefit report. formulas. o Review investment policy o Continue to implement guidelines and investmnt operational restructuring procedures. measures. VIII. Capital Markets Development Establish mecasues to facilitate secondary market o Implement measures to facilitate o Review tax treatment of o Draft Securities Act. for Treasury Billa and Debentures. econdary market for Treasury finencial instruments. o Etablish institutional Bills and Debentures, foundations for a Securities o Draft regulations by Ministerial and Exchange Commision Order of Securities transctions. (SEC) o Put Securities Act into Law. o Draft implementing egultions. o Develop institutional capacity of SEC. IX. Rlmove Additionl Barrien to Review nd potentially rescind Review lega treatmnt of non- Pdivte Sector Credit the 1979 Rate of Interest Act. momge baed colateral in financial contas and, if necesary, drft legisation to improve the use of receivables nd chatelr as collateral. O 0* 74 ANNEX 2.1 Page 4 o f 4 XII i di! 00E1 § GNCB Redraduring Program MAeuir to DdeY b614m e T.m k S- h H.9 Of 1990 h6a- To1 i 1991 Um T In 1 2 Ih WimiH im-a- e Nl- G-C limp. d- MC_ o DmPA aoI IUt mdqdo9i9 o- Od t owmd 111 of Domim pode. . 04.mi o Di... C. A&Wo4wk, OpmAAl ml Fm o-mo d. -l me1AhIk co mmd lobe be M ed iris. asok. a_o Dmbh Opm.l mehhlm ebibdgo geifa poi_ , opee r -d w. o°-I M Wo i NO dhim. o Mai* dW _ - _e .dopeed. o C alC Skmahm lmubd& House Co . C _ed C-ame -d hmml C_. I Mm _ie. bm yd - P m of do Himd OX Acemeeu t2Mm1m. OF. Ad WtCW0 ho S -g ofW* a H O , liPe Mil E * io <- arS meim.z ~ m'ek.md memmd _~ - oi lime ofc. V. im orwil _ below. -o hl Ail DiW.k ha eboWM depo e 10 BMa OW C;i,._ ,. J. eddim t0 - I I - pmeadk il b mb NalitMod Offi &m. CAdl F_mm d humbo -0Wc;orNaIm pdl: o C,d Py oo-plud md q,oe. ! Rapdar b vklsm vied em fno limed 0H .- by Poey med I. FEI Cfho ob,eCy Of _ ood ardd &1m; by B-i Mmmmo. (a) Cl_iffime Of mdo d pMeo E. br t. Co1d Dopem. Fb1 2. Reqopemlme t mmId_Wb ICm mCmmm ml dh be b_me_m. ) Ibm , ht B br p._m C: 1-m m-d edim Cmid 3. Plaodutualm Of o I-h aPed ic meY d_m _l obe ..qAemmf. (C) UM_ i..kiy r u.p of oe4r pd- m* SoPaM 4. Eamb&km Cd Id b lo _ - dm" m w d c f ot omeemli. S.Riioy. t,d) 1himewa mino d mrdii Of on" for 1- mud ed 5. E " ON AP tui . _o rrrlilam me _.aO (I ) U bdh..Dejy peed foe ' pr Wm IOWA. (bms MdnW-W Aic Prq_C (-S l) **- .1pmOff t_ 7. E_-mi. eeCd do p odew b . Pdlo W-4edoo d ml ooqeo of k I_ 1 m'M ad o imekop km ad edv . l_ b- p_Am. gm ock eII wmM Mm.. ho k -dk vpoil by (h) P.OCCee p_Ro __ km ml ed_. Brm M mU_ md Cem Offime.. (i) Sed c of md qpm-e I.oi fo o vdm Of ind._ MUVp, S. SpYomN1 mil meinbg _o hod momi ho eft-oe ICW __. Hed Officf o od ofd C_Dide. C GNCB Fmm-mI rogu fi-ocd f. &. wgolme of. mkm of 6 a-,e - of wmolme a j.oP F t mi Co. m Doom (PCFD), _ bmb indw cof h.o _Bk _ed. Foamd - o dq qpomeisnppmad _ (appllcmlos fag h w mmimg of pejec kmmd me deo io_ shabm olmb , md - emehoce'm-WbW fo do o. of m} p bh_Bimem. A- E_ oe. memd 10 apeow p_rfkm hom meopea Im. 1t oeedJ ho C. o A_b doib of do IC&N pwAo6 bmfd aMoniig of doc pmmncwig CWo pad io oouAmd _ Ml p_rtiO kmi ml 1 d lonas a ad laf m- a _O f peiiW d _ md dI h, m eppbei o .Im pocokei oC alemjmd ad _xL epece. 1kuk. 1o d_m. pedm b_ mmewpmkg km. o Ne goq df km b_ t do pmpumd d. oommk h oM ddkingumd 0 ldee Actoim Peop "MAP) ICANwd by BD h. kg of Tdom _aqAm. M liaat A 1m_ Prou, - *i behMo o L a&d _: (a) Pe DA, Low (b) Anea 1d (a) LAW . MUWmbosoh ad kmlHyb% eowoo edkb sho ofdm a bmc adeihaye leeMeam of O'dML 5wojo WO4 f_r p }) o CAN= 'PM P ' wi wmlo _0meym doy OC cminto miLAW 2. - ldtmLu d _ _ mio h _ d o.d ho debL LAId ibe m o _i dlme. AM W km ham la 10mS_ 1o C Legel p d wee b_ed ogbm Co o1 abe lind 1o ag.hho m ia ONi2%No1 aknma of coma Woum a"d me froyini chdo mepam.ce M id PMold ea1c*bbt .o 10 Mqkm mm"o h(nk ow e hom of AI.. mi aft i ho mmO for PeyN bke ho ol dek. Wake mmmd me dNaC imiunmo mih d. mmwA Wo d o mmep ml No w JANA of gomm.m. 04w aCdom 1010. hobded ho Coelm. Sana 0"Caa jh..B tomebo. ftAM big, KMO-icmemo a"b md meWplomimg ho pneemUil of debe/mydmy a o i Tb mm d ovCfiA Ammom. cofd wkM ho Vddmlia commi. emlbimbed be ho mioxmmhgf indm a N4w Swim.. w qppobed ho *g at Cemu e*.id Dmebho Opoatin Diedekm - pehipe mppmliby lot M"P deod 10 0* J/ lb. ponioa of *Ais imtdix on mv-airem taken to date iS drawn from a report from Dr. A.K. Applea,, CF1rC Expert to the G3NCB, maimec, July 31, 1992. - _ _ lo _ d~~~~~~~~~~ ^ Z e1 <~~~~~~~~ _, otdit _ tol~~~~~~~~~~1. PM1ih- Foflolm& . 5-lb.iioa1 - mi f. 1w 1 pding Iof ad & m, . m.*a Thai o 215 ael of wpraal" aWl o1e omea pledsed So 1w 1mb _____ ea-fia maind ow pply a- iafmd bWoe i- 1- poi.~ 1.. Al -.0 my sop ale, dba.maw w ka1 chu ma m.-v d a. Am&l 2waM*ed AMdI Mw.1W- lb. 1w thaam.&-d B-4 CoWDaw booyaln m1w.wlm p, WA do pbo1wm, kw do kMmakxadm mI 1 _o,at of opeamal lmas. Th6 md Fiel piumn et ~m hgo mI ocowd wo wvd by acsomm'.W *ad..k le 1w Basch &W- - d at Haw1d Gm- alf 014(3 mUf va eajalega -1 of M.~I nmb a1w soi pam leaIn mw mi Eawh. mIsata mldo pupemtim ct Staff 1-ausm mimwd, ammedwams nmUli as. CSndhim Bomb nme*g h bow to eaMk si a gh emai 0. I.A jabmdm a of S o Cmhg A bmuM p d af _p pada 1 G lGCI staff d adawl 2. A dcualed jb dwiny&m of adl ' i 1w o Ba _ abw 1mdus W.y jab d..dm md laff _a_aim .aca .. Sm. 3. .A proqmim _ a- _abod mam i pa__q f a,ddsi o.. mI Jllm P.md bdi. 1 4. R ad Ax - d alad ofk wAm pakkm In M w1M ad m .' Nd 6& weL_ op-dam -d _ __, Oq- 5. Faim at * amff o _ W p A/si.fi_ a maws W" of q.Mfaaedmm _1 dwem Pam. ba lw KsW sea briw Rd.b.a .MWm may poha 1w amam lewl of s.A -d pfibaalmea eemlhasi Fow Jad dcm act _mw ma- um.oii o Gnmi1g of m i. a.ff I-bor p_ J l. Ihnw pdmmau laa4eimd iusm .. n_ es .m asgalms. o hD Im a aad pd_ _1y fsa, .N1 goamdIg sm _lom lak fd asparaby of sead ms binSl md -_ . . d chmachode of beao eageAskm 1w F.e.d 1w cata.6 pub. F_I Ai _Im Nkdkg 1wb 1- fIm p- d ns d Wa w md e . 1lmsica Fvfid keboe: RPe. Rd.h mm Im admmd by _amWd bm-I AMall Syes 1. A-1 Bfi. 2. ER a _ w _ _d y hAkg anm bos1 o a.l -ambo".ly 3. P-6- i K.* qAW mal d .mosa psaaa, 4. Tkr p_m-l d -1 d of mae. 5. Sop -d fidk o Imodl mam. Pm-asa. Meing -I din wish 6. RaIm muAbfiabn Ml,ba s -dam 'A _ eff. 7 RaIm *mmaebbleg amaamon s sdom& io p-diee of amodWi moo 00 71 tl d ow Iambt &h. b- dk i d s S. la1w 1w ~pinaI of fimI mad. od meo.W masb"Md " i in kw kolmaoi CapIa e WIb obelmo of do mnsadle i m lamw pootlak 1w 1993 Ada y awl omfinimk. at 1991 maIm, l991 If -plla Uw 1qn_ pw deanda ambD Wr 11 m1. A_wma * - o Fbnsy. 1992I d da copkdam pbmFl p6md hahI t1 Blamd d lB-ao* asmeod 11w 1Wo. Peleb ba l.A o P.O.4 Fi_ d C o-a DIMvela OCFDM) do mat Smar a Med. am lto &m w md inew h.ris ltmbo w Gsm. aid kpd.Wli a bokg wal of Ia_ ashk dbfilud. Out-aab Qepwmas _ e .os m_ dc wc m,1_ (mmd a_m hw oahaaio.qvw of apumlm 1w P g oF aW AW ma Peaelm Pi. 1w_ s 1 L naaes_g at pjm d* me d of Ik ad tI .W..amg km aw .a..Sim ad o W-imaw_mtwo.bbwp 1 11 Pseabus. o GINCB Gold Casal, ~mo wild. me _sauleGad So dew as b a_amm hap omm ah ' . ofWn ldl &m1e. o( dw DIao Basc. o t1i. ley ablHd i. asb ha m . fDM N X 0. >t f'3 77 ANNEX 2.3 Page 1 of 3 Matrix of Reconmnended Provisions in a Revised ]inancial Institutions Act Provision Existing Legislation Recommended Provision in Revised Financial Inatitutions Act 1. Scope of Under Banking Act, BOG All institutions which habitually receive deposits from the public should be subject to the Regulation authority extends only to authority of the Act. The Act should provide the authority of the BOG to prohibit companies who receive demand unregulated deposit-taking. The Act should cover existing Tmuat Companies, New deposits. Building Society, and, provide for BOG Authority over credit unions. H. Regulatory Authority of the Bank of Guyana A. Sanctionine o Minister grans license or Ban Smuervision Depurimaet Sbould Have FbD Aitonomous AUtority as FolL Authoritv grnts alternation to place of business. I. Power to enforce and sanction prudential criteria, including isuance of Cease o Fine specified in Act, have and Desist orders; not been revised to reflect 2. Power to impose civil money penaIties against directors, managers, officers; inflation, agents or auditors of financial institutions for breach of the Act of Regulations; 3. Power to object to controling interets and ensure compliance with regulations on ownership of financial institutiona; 4. Power to enforce restrictions on, the role of Directors of Finacial Institutions; 5. Power to regulate lending and other activities between finanial institution and related parties; 6. Power to ensure that unlicensed institutions do not accept deposits; and 7. Power to supervise Financial Institution Holding Companie. B. nformation o BOG may periodicafly inspect BOG nbould bave: Acceu/ a bank and banks nwst o Power to require public disclosure of finanial information; ection provide all books and o Right of acceu to documents and to call upon any director, offices, auditor or accounts, employee, of financial institutions to provide information nd explanations; o BOG may ibsue orders o Power of entry by the Supervisor to a financial institution as well as to investigate requiring a bank to take suspected contraventions; corrective action if 'affairs of o Power to demand information and documents; the Bank are being conducted o Power to require infortnation on loans to Director and Officers of financial in a manner detrimental to the institutions; interests of the depositors or o Power to ensure that false or mnileading information is not provided by financial prejudicial to the interest of institutions; and the bank'. o Power to regulate External Audits and to request information as necessry. C. Normative o BOG should have authority to issue regulations within paameters of Act or Minister Authoritv (upon recommendation of the BOG). o Banking Supervisor should have the authority to autonomously isue guidelines in accordance with the parameters of the Act. D. Other BOG hiould have: Authority o Power to regulate hours of operations of operation of a finanial institution. o Power to probibit the opening of branhes. o Power to prohibit offshore banking activities or ervices. o Power to approve Automatic Teller Machines, prohibit electronic finds tranfers or other banking ervices. 78 ANNEX 2.3 Page 2 of 3 E. Mazenuz o Minister nmy, after consultant o BOG should have the Power to apply to a Judge in Chambers for the appointment of a 2f with the BOO, revoke a Receiver/Manager of a threatened institution and power to appoint people to effect iMaftion licenae if subject failc to inveatigations. in Crici comply with Act. o A Statmem of P,ridpks should be isued with the Act which links remedial measure o BOG wiUl be liquidator for required by institutiona facing difficulties with fincial upport provided by the any winding up of a Bank. Central Dank. While management of Ititutions in Crisis involves considerable discretion, the Statemet should cearly indicate: (i) How failure to comply with specific recuperation measures outlined by the Supervisor wil ultismtely lad to a eries of sanction; (ii) Tbat Central Bank solvency suppo wi be provided only when cerin specified conditions are observed; (iii) lat uch support wil be linked to rehabilitative measure including financial and managerial resructuring as required; (iv) That dividends nd equity retirement wiU be restricted or prohibited if Ceral Bank support is provided; and (v) That Central Bank liquidity upport should be for short-erm liquidity needs only, and eparate solvency support wiU be provided for institutions only under the conditios specified above. m. Prudential Regulations A. Minimum GS 1,000,000 for domesically At least GS 125,000,000 revised periodicatly to reflect either domestic inflation or Capital incorporated, GS 10,000,000 of exchange rate depreciation. Require- capital for foreign institutions ments (parent company) nd Gs 1,000,000 of assigned capital. B. Capital o 10% of demnd and time o rier I nd Tier 2 Capital should be at leat 8% of risk-adjusted aseu and Adequcy liabilities, 7% for foreign contingencies in accordance with the Bale Guidelines. Require- institutions. o Capital ould be defined in a manner consisent with the Bask Guidelin. mentb o 1986 amendments allow o Aset weights ould be determined by regulation. reserve balance. held with BOO to be counted as capital. C. Reserve o Banks must trmnsfer 15% of o Provision appear adequate. Fund profits into reserve fund until fund equals paid-up capital. D. Limits on o Cannot lend > 25 % of o Secured loan < 25 % of paid-up capitl and reserves. Lending capitl and published reserves o Unsecured loan < 10% of paid-up capital nd reserves. Concen- to any one person. trations E. Limits on o Banks cannot lend more than o Aggreg felimit of 100% of capital and reservesrhould be applied for the sum of aU Lending to 2% of capital and reserve to credits to related parties. Related one director, to any firm o Additional limits should be applied to employees (% of emoluments for unsecured Parties which a Director paticipates credits). o Canot grant unecured o LAw should clearly qecify criteria for determining related parties and presumed related credits greater than two years parties. emoluments. F. Umits on o Cannot fiance againat o Should not be able to finance gainst ecurity of their own shares or via third parties to other security of its own shares. effect a similar transotion. financing by o Cannot engage in wholesal o Should not be able to ernage in non-financial ervice buinesse (except insurance). financil or retail trade, cannot acquire o Investments in any finncial service subsidiary company sould be deducted from institutions any part of any commercial, capital for purpoee of ptudential regulation ratio calculations. agriculul or indusral o Fixed aset holding restrictions should be specified by regulations. undertaking. o Catn purchase or hold immovable property up to 25 % of capital and reserve. 79 ANNEX 2.3 Page 3 of 3 G. Regulations None. o Investments in subsidiary companies should be reduced from 7ier I capital for capital of Bank adequacy purpoes. Holding o Restrictions on the reationships between subsidiaries of the patent company hould be Corpanies indicated as well as required capital relationships between the subsidiary and the parent. o Relationship between regulation by the BOG nd future regulation by a Securitie and Exchange Commission under a future Securities Act hould be speified in the Act. o Reguadoe sould specify restrictions on the relationship between the operations of tmast companies, tock brokers, pension fund nagers, everance funds and invedment banks and both the parent nd other subsidiaries. H. Prudential Minimum penaIties for specific non-compliance with prudential criteria should be Regulations indicated in the Act, including a device to ensure that such penaIties re adjusted to reflect - General inflation. Penalties should be sufficiently large to provide sufficient incentives for full compliance. 1. Other Must be according to the o Criteria for application and election for banking license should be explicit in the law requirements Minister to be 'in the public and fully traparent. for receiving interest. o Criteria for fit nd proper persons (owners) should be clear. a banking license. J. Audit Annual audit required, which BOO should have the power to determine the format and timing of audits. must be publisbed publicly within 4 months after end of bank's financial year. IV Econormic Banks must hold reserve Neither the Finanial Institutions Act nor the Bank of Guyan Act sould speify levels of Regulations requirements and liquid assets: reerve requiremen nor liquid asst holding requirents. Rther, the Act should says 5 %-30% of demnd indicate the authority of the BOG to establish such requirements. liabilities and 1O%-20% of time liabilities. Actual percent fixed by BOG. 80 Annex 2.4 Recommended Technical Assistance Program for the Bank of Guyana Banking Supervision Department M"-lre MC"fe_ Takek First 6 MO_ Seond 6 Mool Tjikd 6 MoDu FI urth 6 M&nU Fii 6 1.Inqpecos - Pelialasay Begi Speclied Tr11n11g o Begi conmp_umarve portfolio Begin fixed - et Undarake off On-Ike Special of Inspectors. (icluding rview d balace shee Examinato Examinheona of c e). administrative L Receivabls d o Begio asnalsy of foreig. cost review. Lam Portfolio exae risk exposu. Co_p_C ed. _ n. Off-site Finail o De_pe peformance Begin Specialized TraNUng of Cotinue anlt Px.mination Trcking Sype Uoking yb o. Fmnncial Anslyst. Urinisg incbinag established. rato analysis. traking of .lding conematrtion. _ _ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~etc. m. Informstion o Revisiou o Draft fiutLberrevision to Eablis o Drft d Reporting made to manual for la deposit- procedurs for impL-t Manual Of takig istiton in acoonldce off-ose dat rvisinom to accounts. with revisd prudcntial reoncilia d st o Improved regulabto SWd norm. snuiy. bulletin. reprting on o Begi Impplenaittio of revised o le top 20 account manual. imprved Borroeran and o Conduct minara for fancial requ p;nl Credit inasuotion staff on revised for audit Porfolio accountmanl. diaclors. rn-. IV. Developinatof o Lan o Fonnalize baa clasifirwim o Isse circuir Imas circular on I_su Regulios. C sifiostion guidelines sooidindg to on aual of fixed _a cirulan on Circum end guidelin Financial Insiutions AcL accounts, valuation. Kw iquidity risk Guidelines _mud foreign exchbage exposure (icuding o lass regulaons on relsed o Establish exposure limits. limit. iLtereat pat kY ding rsuiction. rgisty eocual. write- loding concfsfoo limibts system for ofhs, etc. interest accrual. ad write-off auditora and o Oveiraft procedures. appisers. Guidelines ima (40% of saw loom). V. Devebopmatof Credit risk system o DefIn systn hardware, o lsue cicular defining credit Begin yatm ume Undertake Credit Risk works informally sof.are .rk rating sna. for finacial developm Rating Syden end imperfectly. o Defie format and o Begin sytem use for BOO. inuoos. of a contest of daba n si dibution ouq-IL rlstam for o Purle computer aNd non-Bank software Uses.. o Begintra bnngataff in Co_pute ue. o Drft circulr defiing credh rik rating system. 81 Table 2.1 05 -H^y-9 3 GUYANA. Accounts of the Banking System (December 31. G$ in Million.) Percent of Not Doestic Credit June 30 June 30 1987 1988 1989 1990 1991 1992 1987 1988 1989 1990 1991 1992 Net International Reserves (6,10) (6,313) (21193) (27.891)(74,035)(74,522) Net Domestic Credit 6,577 8,613 11,609 14,191 27,174 59,131 100.0 100.0 100.0 100.0 100.0 100.0 Public Sector (Net) 6,351 7,681 9,162 9,034 5.736 6,710 96.6 89.2 78.9 63.7 21.1 11.3 Central Government 6,515 7,777 9,848 10,020 9,889 11.399 99.1 90.3 84.8 70.6 36.4 19.3 Social Security, Public Pension Funds (63) (41) (184) (280) (1,931) (2,080) (1.0) (0.5) (1.6) (2.0) (7.1) (3.5) Public Enterprises/Other (Net) (102) (55) (502) (706) (2,222) (2,609) (1.6) (0.6) (4.3) (5.0) (8.2) (4.4) Private Sector 987 1,591 2,566 4,160 6,672 7,893 15.0 18.5 22.1 29.3 24.6 13.3 Contingency R*esrve (Gross) (4,256) (4,494) (17,540) (25,926)(52,092)(54,978) (64.7)(52.2) (151) (183) (192) (93.0) Unclassified/Other 3,496 3,835 17,422 26,924 66,858 99,506 53.2 44.5 150.1 189.7 246.0 168.3 Counterpart Unrequited Foreign Exchange (3,822) (3,716) (19,034) (27,030)(70,670)(44,092) Liabilities to Rest of fin. Sys. 350 671 968 1,435 2.778 3,310 Percent of Liabilitise to the Private Sector External Paymnt Deposits 679 789 958 916 746 512 June 30 Medium-Term Liabilities 93 203 945 767 1,969 1,791 1987 1988 1989 1990 1991 1992 Liabilities to the Private Sector 3,170 4.354 6,580 10,211 18,316 23,089 100.0 100.0 100 0 100.0 100.0 100.0 Hl 1,141 1,657 2,383 3,432 6,009 6,101 36.0 38.1 36.2 33.6 32.8 26.4 H2 1,860 2,463 3,809 5.983 10.257 14,153 58.7 56.6 57.9 58.6 56.0 61.3 Private Capital Surplus 170 234 388 797 2,051 2,836 5.3 5.4 5.9 7.8 11.2 12.3 Constant end-June 1992 GS in Millions Percont Change Year-to-Year 1987- June 30 June 30Jun 30 1987 1988 1989 1990 1991 1992 1988 1989 1990 1991 1992 1992 Net International Reserves (64,898)(44.265) (72,600) (54,318)(79.440)(74,522) 32 (64) 25 (46) 6 (15) Not Domestic Credit 69,887 60.393 39,769 27,638 29,158 59,131 (14) (34) (31) 6 103 (15) Public Sector (Not) 67,485 53,859 31,384 17,594 6,155 6,710 (20) (42) (44) (65) 9 (90) Central Government 69,235 54,535 33.734 19,515 10,611 11,399 (21) (38) (42) (46) 7 (84) Social Security, Public Pension Funds (664) (288) (631) (545) (2,072) (2,080) 57 (119) 14 (280) (0) (213) Public Enterprisee/Other (Not) (1,085) (388) (1,719) (1,376) (2,384) (2,609) 64 (342) 20 (73) (9) (140) Private Sector 10,485 11,156 8,791 8,101 7,159 7,893 6 (21) (8) (12) 10 (25) Contingency Reserve (Gross) (45,230)(31,516) (60,086) (50,491)(55,895)(54,978) 30 (91) 16 (11) 2 (22) Unclassified/Other 37,147 26,895 59,681 52.434 71,738 99,506 (28) 122 (12) 37 39 168 Counterpart Unrequited Foreign Exchange (40,616)(26,057) (65,204) (52,640)(75,829)(44,092) 36 (150) 19 (44) 42 (9) Liabiliti*e to Rest of Fin. Sys. 3,722 4,705 3,315 2,795 2,981 3,310 26 (30) (16) 7 11 (11) External Payment Doposits 7,213 5,532 3,280 1,784 800 512 (23) (41) (46) (55) (36) (93) Medius-Ters Liabilities 988 1,426 3,237 1,494 2,112 1,791 44 127 (54) 41 (15) 81 Liabilities to the Private Sector 33,688 30,529 22,541 19,886 19,653 23,089 (9) (26) (12) (1) 17 (31) Hi 12,122 11,621 8,162 6,683 6,447 6,101 (4) (30) (18) (4) (5) (50) M2 19,764 17,268 13,049 11,652 11,006 14,153 (13) (24) (11) (6) 29 (28) Private Capital Surplus 1,802 1,640 1,330 1,552 2,200 2,836 (9) (19) 17 42 29 57 Jun 1987 1988 1989 1990 1991 1992 CPI Index 93o,1 ,0 5,11 9.258 9,934 Annual Pecent Change 51.5Z 104.71 75.92 81.5Z 7.3X Cumulative Percent Change 962.61 601.21 242.6X 94.72 7.32 Source IUIF 82 Table 2.2 05-May-93 GUYANA: Monetary Survey (G$ in Million) Quasi- Ml Money M2 GDP 1983 443.1 873.8 1,316.9 1,200 1984 556.9 975.7 1,532.6 1,410 1985 669.3 1,215.4 1,884.7 1,630 1986 780.2 1,453.6 2,233.8 1,821 1987 1,140.7 1,859.9 3,000.6 2,851 1988 1,657.3 2,462.6 4,119.9 3,599 1989 2,382.7 3,809.3 6,192.0 9,074 1990 3,431.4 5,982.9 9,414.3 13,815 1991 6,008.6 10,256.9 16,265.5 33,399 June 1992 1 5,806.8 14,152.7 19,959.5 37,407 Percent of GDP 2/ Quasi- ml Money M2 1984 35.5 65.6 101.0 1985 37.6 67.2 104.8 1986 39.8 73.3 113.1 1987 33.7 58.1 91.8 1988 38.9 60.1 98.9 1989 22.3 34.6 56.8 1990 21.0 35.4 56.5 1991 14.1 24.3 38.4 June 1992 15.8 32.6 48.4 1/ 1992 GDP estimated based on Bank of Guyana projections. 2/ Average Stock/GDP of Period. Source: Bank of Guyana Statistical Bulletin, Bank of Guyana estimates. 83 Table 2.3 Interest Rates and Spreads (In Percent, End of Period) 05-May-93 Nominal Rates Conmn Three Special Bank Month Deposit Wghtd YEAR Savings Time Treas. in Prime Avg Consumer Deposit Deposit Bill BOG Lending Lending Price Rate Rate Rate Rate Rate Rate Index 1/ 1980_1._ -11. 11.6 n.a. 13.5 n.e. 14.1 1980 10.5 11.0 11.6 n.a. 13.5 n.a. 14.1 1981 10.5 11.0 11.6 n.a. 13.5 n.a. 22.2 1982 11.5 12.0 12.8 n.a. 15.0 n.a. 20.9 1983 11.5 12.0 12.8 n.a. 15.0 n.a. 14.9 1984 11.5 12.0 12.8 n.a. 15.0 n.a. 25.2 1985 11.5 12.0 12.8 n.a. 15.0 n.a. 15.0 1986 11.5 12.0 12.8 n.a. 15.0 n.a. 6.6 1987 11.5 12.0 10.4 n.a. 15.0 n.a. 34.6 1988 10.5 12.0 10.8 n.a. 14.8 15.0 51.5 1989 31.5 32.3 33.8 n.a. 36.0 37.6 104.7 1990 27.5 28.1 28.7 n.a. 31.0 32.4 75.9 1991 - June 30 25.1 29.1 30.8 n.a. 34.7 35.8 81.5 1991 - December 31 26.2 29.2 30.9 30.0 33.5 35.2 81.5 1992 June 30 19.9 21.2 23.4 24.8 27.5 33.0 14.6 1992 - December 31 0.0 0.0 0.0 0.0 0.0 0.0 13.8 Spreads Comm Bank Wghtd Comm Three Treas. Treas. Prime Avg Bank Month Bill Bill Lending Lending Wghtd Time Rate Rate Prime Rate Rate Avg Deposit Minus Minus Lending Minus Minus Lending Rate Three Special Rate Three Three Rate Minus Month Deposit Minus Month Month Minus Savings Time in Treas. Time Time Prime Deposit Deposit BOG Bill Deposit Deposit Lending Rate Rate Rate Rate Rate Rate Rate 190, . 0.6 n. 19 2.5 n-e. n.e. 1980 0.5 0.6 n.a. 1.9 2.5 n.a. n.a. 1981 0.5 0.6 n.a. 1.9 2.5 n.a. n.a. 1982 0.5 0.8 n.a. 2.3 3.0 n.a. n.a. 1983 0.5 0.8 n.a. 2.3 3.0 n.a. n.a. 1984 0.5 0.8 n.a. 2.3 3.0 n.a. n.a. 1985 0.5 0.8 n.a. 2.3 3.0 n.a. n.a. 1986 0.5 0.8 n.a. 2.3 3.0 n.a. n.a. 1987 0.5 (1.6) n.a. 4.6 3.0 n.a. n.a. 1988 1.5 (1.2) n.e. 4.0 2.8 3.0 0.2 1989 0.8 1.4 n.a. 2.3 3.7 5.3 1.6 1990 0.6 0.6 n.a. 2.3 2.9 4.3 1.4 1991 - June 30 4.00 1.73 n.a. 3.87 5.60 6.7 1.1 1991 - December 31 3.00 1.69 0.9 2.61 4.30 6.0 1.7 1992 June 30 1.30 2.23 (1.3) 4.07 6.30 11.8 5.5 Source: Bank of Guyana Statistical Bulletin. 1/ Through 1986, indices are period averages; 1992 inflation assumed to be 18 Real rate determined by (i - r)/(1 + r), where i is the interest rate and inflation rate in the subsequent period. 84 Table 2.4 GUYANIAt Structure of the Finsncial System 05-May-93 (GS in Millions) PERCENT June June 1980 1985 1988 1989 1990 1991 1992 1980 1985 1988 1989 1990 1991 1992 Bank of Guyana 889 3.755 10.826 30.187 40.862 84.465 119.018 Cosweercial Banks 924 3.076 5,963 9.316 14.303 24.720 30,948 54.7 63.0 63.8 62.6 61.0 59.7 62.6 Trust Companien 23 84 240 325 499 900 1,135 1.4 1.7 2.6 2.2 2.1 2.2 2.3 Now Building Society 77 241 530 687 1.043 1,658 2,162 4.3 4.9 5.7 4.6 4.4 4.0 4.4 GAIB4ANK I1/ 71 174 463 1.176 2,032 4,602 5.975 4.2 3.6 5.0 7.9 8,7 11.1 12.1 Guy Coop Mort. Piu. Bank 28 41 61 60 57 58 62 1.7 0.8 0.7 0.4 0.2 0.1 0.1 Don. Life Ine. Cosmps. 131 297 588 1,394 2,131 4,5938 4,097 7.7 6.1 6.3 10.7 12.4 11.9 8. Pension Schemes 128 146 249 327 92 154 .88 75 3.0 2.7 2.2 3.9 3.6 37 National Ina. Scheme 2/ 303 807 1.213 1,358 1.640 2,977 3,194 17.9 16.5 13.0 9.1 7.0 7.2 6.5 Credit Unions 3/ 7 16 35 42 42 50 s0 0.4 0.3 0.4 0.3 0.2 0.1 0.1 TOTAL (W/O BOG) 1,691 4.883 9,342 14,885 23,454 41.406 49.431 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Constant End-June 1992 GS in '000 Peal Percent Change190 95 98 Jun June June June June 1980 1985 1988 1989 1990 1991 1992 1985 1988 1989 1990 1991 1992 1992 1992 1992 Bank of Guyana3347 57,75 75,915 103.410 79,579 90.631 119.018 72.6 31.4 36.2 (23.0) 13.8 31.3 236 106 57 Conmercial Banks 34,789 47.324 41,814 31,913 27,855 26,325 30.948 36.0 (12)(23.7)(12.7) (4.8) 16.7 (11) (35) (26) Trust Companies 869 1.295 1,683 1,113 972 966 1.135 49.0 29.9 (33.81(12.7) (0.6) 17.5 31 (12) (33) Nev Building Society 2.883 3,704 3,717 2,353 2,031 1,779 2.162 28.5 0.3 (36.7)(13.7)(12.4) 21.5 (23) (42) (42) GAIBANK It 2.680 2,680 3,247 4,029 3,957 4,938 5,975 21.2 24.1 (1.8) 24.8 21.0 123 123 84 Guy Coop Mart. Fin, lank 1.054 629 428 206 III 62 62 (40.3)(32.0)(51.9)(46.0)(43.9) (0.4) (94) (90) (86) Don. Life Ins. Coops. 4,916 4,372 4,123 5,460 5.677 5.298 4,087 (7.0) (9.8) 32.4 4.0 (6.7)(22.7) (17) 110) (I.) Penelion Scemases 4,803 2,231 1.746 1,120 1.798 1,614 1,808 (53.1)(22.4)(35.8) 60.5 (10.2) 12.0 162) (20) 4 NatiLonal Ins. Scheme 21 11,410 12,413 8.506 4,652 3.194 3,194 3.194 8.8 (31.51(45.31(31.3) (0.0) (72) (74) (62) Credit Unione 3/ 245 245 245 145 81 53 50 (0.0) (40.71(44.41(34.1) (6.8) (80) (80) TOTAL 1W/C BOG) 63,648 75.113 65.509 50,992 45,676 44,429 49,431 18.0 (12.8)(22.2)(10.4) (2.7) 11.3 (22) (34) (25) CPI Index 264 646 1,417 2,901 5,102 9.260 9,936 Annual Change 144.72 119.42 104.72 75.92 81.52 7.32 Cumulative Change 36642 14382 601.22 242.62 94.71 7.32 1/ 1985 figure derived from 1986 figure.reduced by 1986 intflation (consumer price index). 1980 figure derived from 1986 figure reduced by inflation from 1980 to 1986 (consumer price index). 2/ 1980 data sources ILO Actuerial Report; 1985 data estimated from 1984 figure increased by 1983 inflation (Urban Consumer Price Index. 1990 NIS Figure assumed to remain constant in real terms for 1991 and 1992. 3/ 1980 and 1985 figures assumed to be equal in real terms to 1988 figure. 1992 figure assumed to be equal in nominal terms to 1991 fig Sources Bank of Guyana Statistical Bulletin, Guyana National Insurance Scheme and Credit Union League. 85 Table 2.5 05-May-93 New Building Society Financial Statements (GS in MilLions) Percent of Total Assets June June 1988 1989 1990 1991 1992 1/ 1988 1989 1990 1991 1992 Assets Cash 29.4 22.2 61.1 96.8 229.4 5.5 3.2 5.8 5.8 10.6 Accrued Interest 37.0 74.0 106.1 146.4 7.0 10.8 10.1 8.8 Loans 80.2 85.3 95.5 115.4 147.3 15.2 12.4 9.1 6.9 6.8 Mortgage 80.0 85.1 95.4 115.4 147.1 15.1 12.4 9.1 6.9 6.8 Other 0.2 0.2 0.1 0.0 0.2 0.0 0.0 0.0 0.0 0.0 Investments 380.7 501.6 784.4 1,290.0 1,648.5 71.9 73.1 74.6 77.6 76.3 Foreign 4.0 4.0 5.6 20.9 36.3 0.8 0.6 0.5 1.3 1.7 Domestic - Under 6 Months 141.2 262.5 634.6 1,157.7 1,529.0 26.7 38.2 60.4 69.7 70.7 Domestic - Over 6 Months 235.5 235.1 144.2 111.4 83.2 44.5 34.3 13.7 6.7 3.8 Debtors and Prepayments 0.4 0.1 0.1 0.6 0.1 0.0 0.0 0.0 Other 136.3 6.3 Fixed Assets 1.9 3.1 4.2 12.2 0.4 0.5 0.4 0.7 TOTAL 529.5 686.3 1,051.4 1,661.4 2,161.5 100.0 100.0 100.0 100.0 100.0 LiabiLities/Reserves Deposits/Shares 445.5 603.4 922.6 1,409.7 1,811.9 84.1 87.9 87.7 84.8 83.8 ReguLar Deposits 44.1 54.2 69.7 102.6 132.5 8.3 7.9 6.6 6.2 6.1 MisceLLaneous Creditors 0.5 0.9 1.2 33.3 0.1 0.1 0.1 2.0 Reserves 39.4 27.9 58.0 115.9 217.1 7.4 4.1 5.5 7.0 10.0 TOTAL 529.5 686.4 1,051.5 1,661.5 2,161.5 100.0 100.0 100.0 100.0 100.0 Check 0.0 (0.1) (0.1) (0.1) Percent of Average Assets 2/ Revenues ----------------------------- Interest 3/ 65.1 119.0 222.7 375.9 n.a. 16.5 19.6 25.6 27.7 n.a. Fees 0.2 0.2 0.2 0.5 n.a. 0.0 0.0 0.0 0.0 n.a. Foreign Exchange Gains 1.2 3.6 2.6 n.a. 0.2 0.4 0.2 n.e. TOTAL 65.2 120.4 226.5 379.0 n.a. 16.6 19.8 26.1 27.9 n.a. Expenses Interest 48.4 123.4 184.4 293.8 n.a. 12.3 20.3 21.2 21.7 n.a. Administrative Costs 4.4 8.5 12.0 27.3 n.a. 1.1 1.4 1.4 2.0 n.a. TOTAL 52.8 131.9 196.4 321.1 n.a. 13.4 21.7 22.6 23.7 n.a. Net Income Transferred to Revenu 12.4 (11.5) 30.1 57.9 n.a. 3.2 (1.9) 3.5 4.3 n.a. Source: NBS AnnuaL Report, Bank of Guyana Statistical Bulletin. 1/ Source: Bank of Guyana Statistical Bulletin, June 1992. Format is slightly different from annual report. 2/ Asset Data was not available for end-December 1987. Therefore, to arrive at an income/average asset figure, assets for end-1988 were deflated at the 1988 inflation rate to arrive at the end-1987 figure. 3/ IncLudes profits on sales of investments and fixed assets. 86 Table 2.6 Financial Statements Summary -- GNCB 05-May-93 (GS in Millions) Percent of Assets Sept Sept 1989 1990 1991 1992 1989 1990 1991 1992 ASSETS _ _ ..... .. . --- - - ..... Cash and Deposits in BOG 92.2 420.7 788.2 2.7 8.7 10.0 Other Short-term funds 342.8 67.5 742.4 9.9 1.4 9.4 Balance with and checks in Cotlectfon 273.6 578.3 1,050.9 7.9 11.9 13.3 from other GOvernment Institutions Tim Deposits with Foreign Banks 122.4 185.6 250.2 3.5 3.8 3.2 Deposits in Ext. Payments Arrears Scheme 110.1 108.2 105.3 3.2 2.2 1.3 Recievable from Consolidated Fund 1,000.0 1,000.0 20.6 12.6 Investments 100.6 370.2 1,251.0 2.9 7.6 15.8 LOANS AND ADVANCES Gross Loans and Advances 2,589.7 3,777.3 4,756.1 74.7 77.9 60.1 Provisions for Loan Losses (154.0) (1,272) (1,268) (4.4) (26.2) (16.0) Provisions for Uncollected Interest (105.5) (564) (1,278) (3.0) (11.6) (16.1) Net Loans wnd Advances 2,330.1 1,940.8 2,210.1 67.2 40.0 27.9 Taxation recoverable 3.0 0.1 Fixed Assets 36.2 44.5 330.1 1.0 0.9 4.2 Other Assets 58.9 129.3 190.8 1.7 2.7 2.4 TOTAL ASSETS 3,466.9 4,848.0 7,919.0 11,867 167.2 140.0 127.9 100.0 LIABILITIES Deposits - Demand 448.6 506.2 1,115.1 12.9 10.4 14.1 Savings 1,164.9 1,855.4 3,215.4 33.6 38.3 40.6 Time 1,456.1 2,049.6 2,474.0 42.0 42.3 31.2 Subtotal 3,069.6 4,411.2 6,804.5 8,406.3 88.5 91.0 85.9 70.8 Taxation 19.6 90.1 0.6 1.1 DIvidends 5.6 5.6 0.2 0.1 Other Liabilities 264.0 350.1 581.9 2,848.9 7.6 7.2 7.3 24.0 TOTAL LIABILITIES 3,358.8 4,766.9 7,476.4 11,255 96.9 98.3 94.4 94.8 E-WITY 108.1 81.1 442.7 611.4 3.1 1.7 5.6 5.2 Income Statement Percent of Average Assets 1989 1990 1991 REVEN-UES Interest on loans 536.6 555.6 620.6 15.3 13.4 9.7 Income from Call Money 111.8 109.4 93.0 3.2 2.6 1.5 Commssons and service charges 16.7 33.8 262.6 0.5 0.8 4.1 Income from securities 20.0 40.9 231.1 0.6 1.0 3.6 Income from deposits with foriegn banks 9.3 44.4 64.0 0.3 1.1 1.0 Foreign Exchange Gains 86.7 210.7 554.3 2.5 5.1 8.7 Total Revenues 781.2 994.7 1,825.5 22.2 23.9 28.6 EXPENSES Interest on deposits 507.9 776.5 1,164.5 14.5 18.7 18.2 Salaries and Benefits 33.7 53.6 118.1 1.0 1.3 1.9 Operating Expenses 38.0 61.9 136.6 1.1 1.5 2.1 Dereciation 2.8 5.4 14.4 0.1 0.1 0.2 Other 1.2 4.5 5.2 0.0 0.1 0.1 Subtotal 75.6 125.4 274.3 2.2 3.0 4.3 Total Expenses 583.5 901.9 1,438.9 16.6 21.7 22.5 Net Income Before Provisions and Taxation 197.6 92.8 386.6 5.6 2.2 6.1 Provision for Loan Losses 117.2 1,119.8 129.3 3.3 26.9 2.0 Net Profit Before Tax 80.4 (1,027) 257.3 2.3 (24.7) 4.0 Tax 45.3 141.5 1.3 2.2 Net Proflt After Tax 35.1 (1,027) 115.8 1.0 (24.7) 1.8 Transfer to Statutory Fund (15.8) 27.0 (52.1) (0.5) 0.7 (0.8) Charge to Consolidated Fund 1,000.0 24.1 Retained Esrnings 19.3 0.0 63.7 0.55 0.00 1.00 Average Assets 3,513.3 4,157.4 6,383.5 1988 Assets 3,559.7 Source: GNCS FinanciaL Statements. 87 Table 2.7 05Hay-93 GCNC Trust (GS in Millions) June Percnt of Total Ast Jun 1988 1989 1990 1991 1992 1988 199 1990 1991 1992 ASSETS ----- ----- ----- ----- ----- --- ----- ----- ----- ---_ Cash 0.1 0.3 1.7 1.8 1.0 0.1 0.1 0.4 0.2 0.1 Investments 204.6 265.6 360.5 539.0 511.9 93.0 94.S 79.8 74.1 61.0 Mortga LO PJ 174.5 221.1 300.8 380.5 445.7 79.3 73.4 66.6 52.3 53.1 LooUS to Public *nd Privets 24.7 39.0 52.4 57.3 66.1 11.2 12.9 11.6 7.9 7.9 Small Loane 0.1 0.0 0.0 0.0 Provisions (0.9) (1.1) (0.2) (0.2) Investment in URIC 0.0 0.0 0.0 0.0 Treasury Bills 5.3 25.5 *.0 101.8 2.4 8.5 1.$ 14.0 Pized Term Deposits 4.9 2.1 69.1 146.3 267.6 2.2 0.7 15.3 20.1 34.3 Debtors and Prepayment. 8.1 23.1 1.8 3.2 Tax Rcoverable 4.4 0.6 Properties 4.0 3.7 0.9 0.5 Fixed Aosett 4.3 5.8 6.0 8.7 11.1 1.9 1.9 1.6 1.2 1.3 Other Assets 6.1 7.4 27.2 2.6 2.5 3.2 Total 220.0 301.2 451.4 727.0 638.9 100.0 100.0 100.0 100.0 100.0 LIAILITIn Deposit 163.3 240 365.7 630 0 725. 83 3 79 9 61 0 66 7 66 5 Creditors and Accruals 4.0 3.9 53.2 46 5 3.6 1.8 1.3 11.6 6.4 0.4 Taxation 1.9 1.5 0.4 0.2 Otber 26.3 49.9 3.6 3.4 103.0 11.9 16.6 0.8 0.5 12.3 Total 213.6 294.7 424.3 681.3 832.4 97.1 97.8 94.0 93.7 99.2 EQUITY 6.6 6.6 27.1 45.7 6.6 3.0 2.2 6.0 6.3 0.6 Share Capital 6.6 6.6 6.6 6.6 6.6 3.0 2.2 1.5 0.9 0.6 Retained larnings 16.9 35.9 3.7 4.9 Losu Ragistered as Capital 3.6 3.3 0.6 0.5 Constant Guyana Dollars in Millions Rsal Percent Change June June 1986 1989 1990 1991 1992 1988 1989 1990 1991 1992 CASS 0.7 1.0 3.2 1.9 1.0 36.1 214.9 (39.7) (4.9) Invsstments 1,351.8 921.9 661.4 576.4 511.9 (31.6) (28.3) (12.6) (11.5) Mortgage Loaus 1,153.2 713.7 551.9 408.3 445.7 (36.1) (22.7) (26.0) 9.2 Loans to Public and Private 163.5 125.9 96.1 62.0 66.1 (23.0) (23.7) (35.5) 6.7 Small Losns 0.2 0.0 (80.7) (100.0) Provisions (1.6) (1.2) Investment in UIC 0.1 0.0 (41.5) (100.0) Treasury Billo 35.2 82.3 14.7 109.2 134.1 (82.2) 644.3 (100.0) lied Term Deposits 32.4 6.7 126.8 156.9 267.6 (79.4)1,804.6 23.5 83.4 Debtors and Prepayments 14.9 24.8 66.2 (100.0) Tax Recoverable 4.8 (100.0) Properties 7.4 4.0 (46.0) (100.0) fied Assets 28.1 18.7 14.7 9.3 11.1 (33.5) (21.4) (36.5) 19.0 Otber Assets 40.3 24.0 27.2 (40.5) (100.0) Total 1,453.3 972.2 628.3 760.1 636.9 (33.1) (14.8) (5.6) 7.5 LIABILITIES Deposits 1,211.1 777.2 671.0 676.0 725.6 (35.8) (13.7) 0.7 7.4 Creditors and Accruals 26.4 12.6 97.6 49.8 3.6 (52.2) 672.1 (48.9) (92.8) Taxtion 3.4 1.6 (53.2) (100.0) Other 173.5 161.2 6.6 3.6 103.0 (7.1) (95.9) (44.6)2.737.1 Totel 1,411.0 951.1 778.6 731.1 832.4 (32.6) (16.1) (6.1) 13.9 EQUITY 43.3 21.1 49.7 49.0 6.6 (51.1) 135.1 (1.4) (86.6) Share Capital 43.3 21.1 12.0 7.0 6.6 (51.1) (43.1) (41.5) (6.6) Retained Earnings 31.0 38.5 23.9 (100.0) Loan Registered as Capital 6.6 3.5 (46.9) (100.0) Check (0.9) 0.0 (0.0) (0.0) (0.0) Percent of Average Assets Incone Statemnt-Ravenues Interest 107.1 185.1 28.5 31.4 Fees 7.6 15.8 2.1 2.7 Other 0.0 0.0 0.0 0.0 Total 114.9 201.0 30.5 34.1 Expenses Interest 83.1 148.7 22.1 25.2 Salaries antd eonefits 4.5 10.0 1.2 1.7 Administration 7.2 13.6 1.9 2.3 Doereciation 1.1 1.6 0.3 0.3 Total 95.9 173.8 25.5 29.5 Not Incoe Before Tax and Provisions 19.0 27.1 5.0 4.6 Provisions 0.2 0.4 0.1 0.1 Tax 10.7 5.9 2.8 1.0 Net Incone 8.1 20.9 2.2 3.5 June 1988 1989 1990 1991 1992 CPI Index 1,416.6 28 99.8 5,100.7 8,722.2 9,358.9 Aieal Cbase 104.72 75.92 71.0S 7.31 Cumulativ Chang 560.7Z 222.7Z 63.52 7.32 Sources 19BB. 1989 and June, 1992 data, Central Ronk; 1990 and 1991 data Annuel &sports. 88 Table 2.8 Page 1 of 2 Financial Statement Summary - GAIBANK 05-May-93 (GS in MiLLions) PERCENT OF TOTAL Sept Sept 1988 1989 1990 1991 1992 1988 1989 1990 1991 1992 ASSETS ---- - Cash 36.3 56.3 109.4 1,407.2 0.2 7.9 4.8 5.2 26.4 0.0 Loans 210.4 503.6 976.4 2,835.0 3,194.3 45.7 42.6 46.3 53.2 55.8 Interest Receivable 6.1 36.4 100.4 308.8 661.4 1.3 3.1 4.8 5.8 11.6 Accounts Receivable 19.3 15.1 18.2 57.4 219.6 4.2 1.3 0.9 1.1 3.8 Fixed Deposits in Banks 179.1 422.4 799.5 531.6 1,549.4 38.9 35.7 37.9 10.0 27.1 Deposits in BOG 139.0 89.0 169.0 69.0 11.7 4.2 3.2 1.2 Other 1.7 2.0 2.0 2.8 10.5 0.4 0.2 0.1 0.1 0.2 Fixed Assets 7.9 8.5 14.6 15.0 20.5 1.7 0.7 0.7 0.3 0.4 TOTAL 460.8 1,183.3 2,109.6 5,326.7 5,724.8 100.0 100.0 100.0 100.0 100.0 LIABILITIES Percent of Liabilities Loans/Accounts Payable in 1 Year 161.0 456.9 957.1 1,315.7 974.6 36.4 35.3 42.3 30.8 23.4 Foreign Borrowings 280.6 836.0 1,299.6 2,948.0 3,123.4 63.4 64.5 57.4 69.0 75.1 IDB 124.1 452.1 846.1 1,942.7 1,552.8 28.0 34.9 37.4 45.5 37.3 CDB 57.8 151.7 101.0 246.5 201.2 13.1 11.7 4.5 5.8 4.8 EEC/EIB 61.8 195.7 293.7 776.1 1,350.8 14.0 15.1 13.0 18.2 32.5 CIDA 36.9 36.4 52.2 51.8 12.1 8.3 2.8 2.3 1.2 0.3 IDA 6.5 6.5 6.5 0.3 0.2 0.2 Misc 1/ (75.5) (1.8) Local Borrowings 0.9 0.9 0.6 0.6 0.5 0.2 0.1 0.0 0.0 0.0 CIDA Fishing Counterpart Fund 0.1 1.4 6.2 7.5 0.0 0.1 0.3 0.2 Other 59.8 1.4 TOTAL Liabilities 442.5 1,295.2 2,263.6 4,271.9 4,158.3 100.0 100.0 100.0 100.0 100.0 Percent of Assets EQUITY 18.3 (111.9) (154.0)1,054.9 1,566.5 4.0 (9.5) (7.3) 19.8 27.4 Source: GAIBANK Audited and unaudited financiaL statements. i/ Reconciling account. 2/ Annualized. 89 Table 2.8 Page 2 of 2 Financial Statement Summary - GAIBANK 05-May-93 (GS In MiLLions) INCOME STATEMENT Percent of Average Assets Sept Sept 1988 1989 1990 1991 1992 1988 1989 1990 1991 1992 2/ Operational Revenues ----- ----- ----- ----- ----- ..... ..... ..... ..... ..... Interest on Loans 25.6 62.4 191.4 720.4 424.4 6.8 7.6 11.6 19.4 10.2 Investment Income 9.4 41.7 57.9 143.8 169.8 2.5 5.1 3.5 3.9 4.1 Fee Income 3.9 7.9 13.6 41.1 22.2 1.0 1.0 0.8 1.1 0.5 Other Income 1.0 3.8 12.7 9.9 68.2 0.3 0.5 0.8 0.3 1.6 Total Operational Revenues 39.9 115.7 275.5 915.3 684.6 10.6 14.1 16.7 24.6 16.5 Operational Expenses Interest 15.4 56.1 78.4 317.8 219.7 4.1 6.8 4.8 8.5 5.3 Net Financial Margin 24.5 59.6 197.1 597.5 464.9 6.5 7.3 12.0 16.1 11.2 Administrative Costs 20.0 31.7 50.3 66.4 113.8 5.3 3.9 3.1 1.8 2.7 Other Operating Expenses 10.7 19.4 34.6 33.8 77.6 2.8 2.4 2.1 0.9 1.9 Salaries and Benefits 8.4 11.2 14.2 29.7 34.5 | 2.2 1.4 0.9 0.8 0.8 Depreciation and Audit 1.0 1.1 1.5 2.8 1.7 0.3 0.1 0.1 0.1 0.0 Subtotal 4.5 27.9 146.8 531.1 351.1 1.2 3.4 8.9 14.3 8.5 Exceptional Items (19.5) (217.4) (244.4) 613.3 1.3 (5.2)(26.4)(14.8) 16.5 0.03 Foreign Exchange Gains (15.4) (309.9) (202.0) 713.0 1.2 (4.1)(37.7)(12.3) 19.2 0.03 Contribution from Govt of Guyana 139.0 100.0 16.9 2.7 Other Gains 0.0 0.3 0.1 0.3 0.1 0.0 0.0 0.0 0.0 0.00 Provisions and Bad Debts (2.9) (46.9) (40.2) (155.9) (0.8) (5.7) (2.4) (4.2) Other Reserves and Provisions (1.3) (2.3) (44.1) (0.3) (0.1) (1.2) Net Income (15.0) (189.5) (97.6)1,144.4 352.4 (4.0)(23.0) (5.9) 30.8 8.5 (Constant end-September 1992 GS In Millions) Real Percent Change September September 1988 1989 1990 1991 1992 1989 1990 1991 1992 ~~~~~~~~~. . .. ....... ...... ------. . ....... ------.... --- -- --- -- --- -- -- Loans 1,517.3 1,774.1 1,955.4 3,136.9 3,194.3 16.9 10.2 60.4 1.8 Total Assets 3,323.1 4,168.6 4,225.1 5,894.0 5,724.8 25.4 1.4 39.5 (2.9) Liabilities 3,191.0 4,562.8 4,533.4 4,726.9 4,158.3 43.0 (0.6) 4.3 (12.0) Equity 132.1 (394.2) (308.4)1,167.2 1,566.5 (398)(21.8) (478) 34.2 September 1988 1989 1990 1991 1992 ------ ...... ...... . . .. . . . CPI 104.7X 75.9X 81.0X 10.6X Index 1,417 2,899.8 5,100.7 9,232.3 10,216 Cumulative Increase 621X 252.3X 100.3X 10.7K Average Assets 378.1 822.1 1,646.5 3,718.2 5,525.8 Source: GAIBANK Audited and unaudited financial statements. 1/ Reconciling account. 2/ Annualized. 90 Table 2.9 Financial Statement Summary -- Guyana Cooperative Mortgage Finance Bank 06-Jan-93 (GS in Millions) Percent of Total Assets June June 1980 1985 1988 1989 1990 1991 1992 1980 1985 1988 1989 1990 1991 1992 Assets . ... Deposits in the Banking System 0.6 9.7 11.6 11.1 11.6 12.5 1.5 15.7 19.3 19.4 19.9 20.1 Goverrment Treasury Bills 2.4 5.9 Mortgage Loans 24.7 34.6 47.6 42.3 40.0 37.1 40.6 88.2 84.6 77.1 70.4 70.1 63.6 65.4 Other Loans 3.3 3.3 4.4 6.2 6.0 9.6 9.0 11.8 8.1 7.1 10.3 10.5 16.5 14.5 TOTAL 28.0 40.9 61.7 60.1 57.1 58.3 62.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Liabilities CDB 2.2 1.6 1.0 0.9 0.7 0.6 0.5 7.9 3.9 1.6 1.5 1.2 1.0 0.8 Govt Share Capital 12.8 24.7 28.2 30.0 30.0 30.0 30.0 45.7 60.4 45.7 49.9 52.5 51.5 48.3 Debentures 10.9 9.8 19.8 20.5 13.6 13.6 13.6 38.9 24.0 32.1 34.1 23.8 23.3 21.9 Other (Debt and Equity) 2.1 4.8 12.7 8.7 12.8 14.1 18.0 7.5 11.7 20.6 14.5 22.4 24.2 29.0 TOTAL 28.0 40.9 61.7 60.1 57.1 58.3 62.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Incom Percent of Average Assets Revenues Interest 5.4 7.6 8.3 8.9 12.9 14.4 Investment Income 2.8 3.3 3.3 4.6 5.5 5.6 Fees 0.1 0.1 0.1 0.1 0.1 0.1 Other Income 0.2 0.4 0.5 0.4 0.6 0.8 TOTAL 8.5 11.3 12.09 14.0 19.2 21.0 Expenses Interest 1.9 1.9 1.9 3.1 3.2 3.2 Salaries and Benefits 2.4 2.8 5.4 3.9 4.8 9.4 Other Operating Expenses 1.7 3.2 4.5 2.7 5.5 7.8 Provisions 0.3 0.1 0.1 0.4 0.1 0.1 TOTAL 6.2 8.0 11.8 10.2 13.6 20.5 Met Income 2.3 3.3 0.3 3.8 5.6 0.5 Average Assets 34.5 51.3 60.9 58.6 57.7 60.2 Income Percent of Total Revenues Revenues Interest 63.5 67.2 68.7 Investment Income 33.2 28.9 26.9 Fees 0.6 0.5 0.5 Other Income 2.7 3.4 4.0 TOTAL 100.0 100.0 100.0 Expenses Interest 22.3 16.8 15.5 Salaries and Benefits 27.9 24.9 44.8 Other Operating Expenses 19.5 28.8 37.1 Provisions 3.2 0.4 0.4 TOTAL 72.8 70.9 97.8 Net Income 27.2 29.1 2.2 Source: Bank of Guyana Statistical Bulletin, June 1992; Audited and unaudited financial statements. 91 Table 2.10 Financial Statement Summary - Guyana Cooperative Insurance Service (G$ in Millions) 06-Jan-93 Percent of Total Assets 1989 1990 1991 1989 1990 1991 Assets ----- ----- ----- ----- ----- ----- Cash and Bank Balances 9.7 1.0 7.9 8.1 0.7 3.1 Miscellaneous Debtors 31.8 41.3 59.0 26.5 28.3 23.3 Treasury Bills 8.0 6.7 0.0 0.0 Fixed Deposits 46.6 75.4 156.0 38.8 51.8 61.6 Other Deposits 3.5 3.5 3.5 2.9 2.4 1.4 Lont-term Investments 0.5 0.3 0.3 0.4 0.2 0.1 Work-in-Progress 2.0 0.0 1.4 0.0 Fixed Assets 19.9 22.2 26.6 16.6 15.2 10.5 TOTAL 120.0 145.7 253.3 100.0 100.0 100.0 Liabilities/Reserves Claims 27.2 33.0 41.0 22.7 22.6 16.2 Taxation 11.7 11.0 7.8 9.8 7.5 3.1 Dividends 1.8 2.4 4.4 1.5 1.6 1.7 Creditors 8.5 8.3 60.8 7.1 5.7 24.0 Total Liabilities 49.2 54.7 114.0 41.0 37.5 45.0 0.0 0.0 0.0 Share Capital 9.2 9.8 9.8 7.7 6.7 3.9 Reserves 42.2 50.1 86.5 35.2 34.4 34.1 Accum Surplus and Life Ass. Fund 8.3 12.0 17.9 6.9 8.2 7.1 Reserve for Unexp Risk 11.0 19.2 25.4 9.2 13.2 10.0 Total Equity 70.7 91.1 139.6 58.9 62.5 55.1 Total Liabilities and Equity 119.9 145.8 253.6 99.9 100.1 100.1 Source: GCIS Financial Statements. 1991 data is unaudited. 92 Table 2.11 Financial Statement Summary -- National Insurance Scheme (G$ in Millions) 03-Jun-93 Percent of Total Assets 1984 1989 1990 1984 1989 1990 Assets ----- ----- ----- ----- ----- ----- Investments 663.1 1,170.1 1,234.6 97.6 85.1 74.5 Government of Guyana Debentures 1,054.8 1,119.3 76.8 67.6 Georgetown 10% Bonds 4.0 4.0 0.3 0.2 NBIC Shares 3.5 3.5 0.3 0.2 Other 0.3 0.3 0.0 0.0 Fixed Deposit 107.5 107.5 7.8 6.5 Deferred Receivable 74.2 144.7 5.4 8.7 Fixed Assets 5.6 32.0 129.1 0.8 2.3 7.8 Current Assets 10.9 97.9 148.0 1.6 7.1 8.9 TOTAL 679.6 1,374.2 1,656.4 100.0 100.0 100.0 Current Liabilities 1.5 16.0 16.4 0.2 1.2 1.0 Reserves 678.1 1,358.2 1,640.0 99.8 98.8 99.0 TOTAL 679.6 1,374.2 1,656.4 100.0 100.0 100.0 Source: NIS Annual Reports, ILO Actuarial Valuation. 93 ANNEX 3.1 RECOMMENDED PROGRAM FOR IMPROVING THE TRADE REGIME Issue Short Term Long Term I. Tariffs Implement new CET rates in Work with CARICOM to further 1993 rationalize tariffs (including a lowering of the tariff on sugar) and quicken pace of tariff reform Complete implementation of new CET schedule Eliminate tariff exemptions II. Customs Implement program for strengthening customs, including computerization of procedures, and more effective policing of borders HI. Trade licenses Eliminate all trade licenses, except those necessary to comply with international agreements, enforce tax collection, and ensure health and safety Study procedures for remaining licenses to determine how they might be simplified IV. Trade services Eliminate ineffective services and duplication of services CARICOH EXISTINC AND NEWLY APPROVED CET RATES Existing For the Period for the Period For the Period Categories Rates 111/93-12/31194 1/1/95-12/31/96 111/197-2131191 From 1l119 Non-Competing Primar Inputs 0-10(LDCG 0) 1/ 5 (LDCs 0-5) 1 5 (LDC 0-5) 1/ 5 (LDCe 0-5) U 5 (LDCa 0-5) Hon-Competing Intenrediste Inputs 0-10(LDC. 0) IL 5 (LDCs 0-5) jJ 5 (LDCs 0-5) 5 (LDCe 0-5) 1/ 5 (LDCa 0-5) 1 Hon-Competing Capital Inputs O 10) (0 5 (LDCe 0-5) 1/ 5 (LDC 0-5) II 5 (LDCs 0-5) 1/ (LDCe 0-5) Compoting Primary Inputc 30 20 15 10 10 Competing Capital Good# 30 20 15 10 10 Selected Ezports 30 20 1S 10 10 Cometing lntarmdiata Inputs 30 25 20 15 15 Non-Competing Final Coode 30 25 20 15 IS Agro-Industry 45 30/352 25/30 2/ 20/25 3. 20 3 raoere 4S 30/3S 2/ 25/30 2/ 20/25 22 21. eoneral Manufactures 4S 30/35 2f 25230 iL 20/25 i 20 - Sensitiwe Coodr List A Suspended Retes Suspended Rates Deleted Deleted List L Suspended Rote. (LDCs) Suspended Rates (LDC.) Deleted Deleted List C Hinimn Rates Hinimim Retes Hinimum Ratee Hinimum Rates List D - Parts I and 11 Suspended Rates (LDC.) Suspended Rates (LDCs) Deleted Deleted Safety 0 0 Deleted Deleted Coet of Living 0-20 0-20 Deleted Deletod Social Econmic and social Cultural 0-20 0-20 Deleted Deleted Agriculture 40 40 A0 40 Agriculturo Inputs 0 0 0 o 1/ Itee not In pareatheeIe refer to those applying to MWCe. 2 The lower of the two rates refers to countries Implementing the trade refors on a fast track basis i.e., Jamaica, St. Lucia, St. Vincent and the Croenadines, Atigua and Barbuda, and Cuyana. H- F' TABLE 3.2 Explanation of CET Suspended Rates List B The goods in List B reflect mainly the cost of living concerns of the LDCs. List C The goods in List C include those which trad.tionally are signifi- cant revenue earners, such as wines and spirits, jewellery, and clocks and watches, and tobacco products. Member States are free to apply national rates of duty in excess of the agreed CET rates. List D Part I of List D provides for suspension of the CET on electric and non-electric stoves and electric refrigerators in favour of Belize. Part II of List D provides for suspension of the CET on certain pharmaceutical products in favour of the LDCs. Reduction of the Items in the Several Lists The reduction of the levels-,of -the rates of duty in the period 1993-98 will lead to a reducp1on of the items in the Lists as the CET rates and the suspended rates applied by Member States converge. It is anticipated that on January 1, 1998, there would be no items In Lists A, B and D. In addition, the items in the categories cost of living, socio-economic and aocio-cultural should be included in the other categories with the reduction In the levels of rates of duty in the latter. 96 ANNEX 4.1 ______SblrShorm M_dium T I. Bauxite Establish program for Complete privadzation of involvement of private capital and bauxite industry management of bauxite industry II. Regulatory Eliminate prohibition of foreign Establish single legal regime for framework participation in small and the larger miners medium-scale mining License traders to purchase gold Replace Gold Board with from miners system of licensed gold exporters Adopt effective environmental regulations Issue draft of environmental management agreements 111. Administration Simplify chain of coqvnaird for Strengthen technical and decisions on mining managerial capacity of the Geology and Mines Commission Make available information on location of prospecting licenses and terms of mineral agreements Provide open hearngs and wntten justifications for administrative decisions IV. Improve access to Eliminate Civil Aviation Study feasibility of installing the interior Department's monopoly of navigational beacons and fuel helicopters and large cargo deposits in interior aircraft Ease restrictions on two-way radio permits Study means of improving maintenance of interior air strips V. Improve supply of Improve maintenance of existing Take advantage of new data data base techniques for generating I__ _ _ _ _ _ _ _ _ _ _ _ _. _ g e o l o g i c a l i n f o r m a t i o n 97 TABLE 4.1 Paage 1 oa 2 PRINCIPAL NON-BAUXITE MINERAL PROPERTIES (listed generally from north to south) name of source of mineral deposit property title* holder capital (D-diam) type# status North of Cuyuni River 1. Shell Beach ML TGM, Ltd. mixed carbonate S study 2. Tassawini PL Kretschmar foreign Au L,A dormant 3. Arakaka ? G. Phillips local Au A na 4. Matthews Ridge GR govt reserve -- Mn L idle 5. Five Star PL Golden StarQ foreign Au L idle 6. Ianna PL Roraima Mines local Au L pr--expl. 7. Imotal PL Roraima Mines local Au L pre-expl. 8. W. Fork Aranka PL Roraima Mines local Au L,A pre-expl. 9. Sir Walter PL Roraima Mines local Au L,A pre-expl. 10. Mariwa-Sardine PL 0. Lumumba local Au L pre-expl. 11. Groete Creek na W. Chan local Au-Cu L na 12. Groete Creek na CAMDECO mixed Au-Cu L na South of Cuyuni River 13. Aurora PL Golden Star@ foreign Au L expl. 14. Akaiwong PL Golden Star@ foreign Au L expl. 15. Oko PL Golden Star foreign Au L expl. 16. Aremu PL Golden Star foreign Au L expl. 17. Quartzatonc PL Roraima Mines local Au L pre-expl. 18. Wariri PL Roraima Mines local Au L pre-expl. 19. Peters Mine PL Golden Star@ foreign Au L idle Along Mazaruni River, east to west 20. Arimai QP Essequibo foreign stone I producing 21. Kaburi ML Hicks Mining local Au L producing 22. Honey Camp ML P. Pereira local Au L idle 23. Nine Mil CL P. Pereira local Au L producing 24. Tikwah PL Cambior foreign Au L pre-expl. 25. Tamakay PL Cambior foreign Au L pre-expl. 26. Middle Mazaruni EP Brex Guyana foreign Au-D A pre-expl. 27. Red Hill Loop PL Golden Star foreign D A idle 28. Saganan PL Golden Star foreign D A idle 29. Eping PL Golden Star foreign D A idle 30. Bumbumparu PL White Sand foreign D A pre-expl. 31. Illoma P1 White Sands foreign Au-D A pre-expl. 32. Apaiqua PL Golden Star foreign D A idle 33. Wenamu PL Rretschmar foreign Au A dormant 98 TABLE 4.1 Page 2 of 2 West of Essequibo River 34. Omai ML Omal Gold Mines foreign Au L start-up 35. Quartz Hill PL Golden Star a/ foreign Au L expl. 36. Proto-Mahdia FL Golden Star foreign Au A study 37. Tiger Creek PL Golden Star foreign Au L expl. 38. Eagle Mtn. PL Golden Star foreign Au L *xpl. 39. Konawaruk ML Mazda Mining local Au A producing 40. Tappa Creek ML W. Philippe local Au-D A producing 41. Arnik PL Goldfield Ltd. local Au A *xpl. 42. Arnik GR govt reserve local Au A producing 43. Muribang ML Trans-Guyana local Au A producing East of Essequibo River, north to south 44. Bonasika PL Hexagon Minls, foreign uand S study 45. Makouria QP Essequibo foreign stone I producing 46. Sand Hills priv White Sands foreign sand S study 47. Topira baux Linmines govt kaolin S study 48. Winters-Swift PL Plaza 1 foreign Au L pre-expl. 49. Appaparu na P. Bond local Au L na 50. Akaiwanna na Giddings Co. foreign Au L pre-expl. Far south of Guyana 51. Marudi Mtn. PL Romanex foreign Au L expl. 52. Muri-Muri GR govt reserve govt carbonatite I dormant Symbol Definitions Titles: PL = Prospecting License (formerly EP, or Exclusive Permission); ML = Mining License; QP - Quarry Permit; CL - Claim License; GR = Government Reserve; priv = private mineral rights baux = bauxite concession Deposit Type: L - lode, A - alluvial, S sedimentary formation, I = igneous formation Status: study: feasibility study; pre-expl: pre-exploration na means not available a/ held in name of South American Goldfields, which is now wholly-owned by Golden Star Resources Ltd. 99 ANNEX 5.1 Recommendations to Improve Regulatory Framework Governing Agriculture. Forestry and Tourism Issue Short Term Medium Term I. Sugar Privatize GUYSUCO _ Eliminate restriction on GUYSUCO's access to foreign exchange Transform sugar levy into fixed percentage of EC price Eliminate GUYSUCO's import _____________________ monopoly II. Rice Reduce tax imposed by Guyana Rice Export Board to level sufficient finance GREB ____________________ operations III. Land tenure Grant full title to farmers holding leases to small farms IV. Forestry Undertake research to define sustainable harvest of tropical forests Strengthen management of Guyana Forestry Commission V. Tourism Ease visa requirements for Monitor implementation of tourists Tourism Association standards to ensure that they do not unduly restrict competition I B R D 11683 RI / 2 f \ GUYAN A 3A P EN>|T Wio ln / < ( ~~~~~~~~SuPENAAy L g-o .1-ndO ZzF CA b n--_ 1~~~~~~~~~~~~~~~~~~~~HAC > 12 SAV \ f ff'Y 4~~~~~" b. S- / ORINDU K l < J gls 4~~~~~~A. NDI 'eon Tr RkAidA N NAI,< Q 0 Aluoci Coost ArOeaS . Fr este Aes AJ tomn0 40 50 ' RRH cad SUANARu Q-A> 04 R20 iL0od PO°° IH1TN! ER$ t\ 9 R,omvers L1 In oVsD {eVtIVD p er p na ti onal st; J \ L ves, m;vzArk?., t/CLM \ CFA or-e< UNS SX/ -'yC $ t -j R -I X -9