I was asked by someone about inflation and the concern raised by economists that the cash grant could be inflationary. Here’s my response:
The economists’ concern is valid and correct in theory. However, we are not experiencing hyperinflation or significant inflationary pressures because the marginal propensity to consume (MPC) is about 60%, and the velocity of money is approximately 2.4—down from 5x in the pre-oil era, when the economy was smaller. If the velocity of money had remained at 5x or higher, and MPC was ≥1, we would indeed see much higher inflation rates. That’s not the case. The excess liquidity and savings are sitting in the banks, which is why our loan to deposit ratio is less than 30%, the lowest in the region and many other developed and developing economies. Typically, this ratio is between 60-80% in other markets. In the case of Guyana, the lower than usual ratio is observed because the savings rate is growing faster than the lending rate.
Simply put: For every additional dollar earned, people are spending 60 cents and saving 40 cents; they’re not spending it all. This behavior is helping to keep the inflation rate stable and under control.
It is also the reason we need to create investment vehicles and instruments to channel these excess savings, so people have opportunities to invest and earn higher returns. Currently, the savings interest rate is lower than the inflation rate, meaning that bank savings are losing value over time. This underscores the importance of capital market development and reform, so that excess savings can be invested into the economy to earn a better return—instead of being spent on consumption, which would lead to higher inflation or even hyperinflation.
A more detailed macroeconomic and budget analysis will follow shortly.