underground economy has flourished over the past three decades for a
number of reasons, including excessive government regulations during
the Forbes Burnham years and lax regulations thereafter, poor
governance, high levels of illegal activity, conscious efforts to
evade taxes, and the institutionalization of corruption, among others.
Its significant presence has undermined government revenue collection,
increased the cost of providing public service and hindered the
formulation and implementation of effective economic and social
policies. On a more superficial level, it has led to a widening of the
Between 1970 and 1985, the
underground economy gained impetus as Guyanese circumvented the late
Forbes Burnham’s draconian import substitution policies which
restricted the importation of essential food items. This led to a
flood of officially "illegal" goods from unofficial sources to meet
consumer demand, creating a new breed of "brave" entrepreneurs who
were willing to take the risk of breaking the law to supply the
underground market with banned goods. In many cases, law enforcement
officials who were also affected by import restrictions turned a blind
eye to the illegal trade in banned goods, and in some cases were
willing participants in the underground economy. The short supply of
certain permitted goods was exacerbated by the unavailability of
official foreign currency to purchase these items, providing
opportunity to underground traders to fill the gap between official
supply and consumer demand.
High tariffs and licensing
requirements, plus state control of the distribution chain added to
the complexities of the official economy, making the underground
economy an attractive source of business. The easing of import and
foreign exchange restrictions under the leadership of the late Desmond
Hoyte should have curtailed the growth of the underground economy but
the entrepreneurs who participated in it saw an ideal opportunity to
legalize their activities under new liberalized rules. For this
reason, the size of the underground economy surpassed the real economy
in 1989. It was not until official sources, mostly private enterprise,
began to fulfill consumer demand for traditionally banned goods that
the underground economy softened.
The conscious effort to evade
taxes is probably the next major reason for a vibrant underground
economy. In its working paper, WP/03/7, the IMF classifies tax evasion
activities into two broad categories. The first includes entities that
engage in value-added activities in producing goods and services,
ranging "from the small entrepreneur – such as vendors, craftsmen, and
tradesmen – and professionals – such as lawyers and doctors – to large
family owned companies." Their participation in the underground
economy says the IMF, "usually reflects a desire to evade high
corporate and personal tax payments."
"The second group includes
entities/persons who areinvolved in clandestine activities." These
individuals/entities use cash as a preferred mode of conducting
business. The IMF notes that "like the first group, participants in
the second group engage in the underground economy in search of
greater disposable incomes and are driven there mainly for
institutional, legal and economic reasons." Some of the clandestine
activities may include cross-border smuggling, drug dealing and
manufacturing, gambling and racketeering, bribery and theft.
Although the size of the
underground economy relative to the real economy has declined during
the 1990s, the maximum amount of tax revenues estimated by the IMF to
have been lost between 1990 and 2000 is a staggering G$80.6 billion.
This is equivalent to 14 times more than the previous two decades
combined. In fact, in 2000 alone more tax revenues were lost than in
the 20-year period between 1970 and 1989. The Chart, Tax Evasion in
the Underground Economy, quantifies the maximum amount of taxes
that could have been collected between 1970 and 2000.
The amount of taxes evaded are
equivalent to an average of 16% of GDP between 1970 and 2000, peaking
at 43% in 1986 and falling to 12% in 2000. The Chart, Tax Evasion
and Economic Growth, shows tax evasion as a percentage of GDP.
Lost tax revenues are largely
due to poor governance and inefficient collection methods. In reality,
it will not be possible to collect taxes on all underground activities
but appropriate regulations and controls could lead to an improvement
in tax revenues.
Corruption, which appears to
be an accepted norm among Guyanese, has certainly contributed to tax
evasion. Inefficient customs procedures, bribery, kickbacks from
contractors, businesses and suppliers – whether in the form of cash,
hard goods or free services – each contribute to the growth of the
When taxes are not collected,
the burden of financing development and public services is placed on
actual revenues collected, creating an unfair advantage for those who
benefit from the underground economy and limiting the scope of
activities that could be undertaken by the government. As a result
social and economic programs suffer, shortchanging the rest of the
population that actually pay their fair share of taxes. For instance,
the government’s efforts to reduce poverty are significantly hurt by
tax evasion, contributing to a widening of the rich-poor gap. The
country could also experience an improvement in its fiscal deficit, as
well as reduced debt levels with better revenue collection.
The IMF recommends a
comprehensive reform of the current tax system and its administration
and an improved provision of government services, such as land
titling, domestic security and judicial services, to help reduce the
size of the underground economy. It is doubtful that the government
has the wherewithal, commitment and resources to tackle this
Georgetown — The state
owned Guyana National Cooperative Bank (GNCB) has been taken over by
the National Bank of Industry and Commerce (NBIC) on March 15, 2003.
This acquisition by NBIC represents the last privatisation in Guyana’s
financial sector following those of GBTI, NBIC itself, GCIS, GNCB
Trust the merger of GAIBANK and GNCB and the winding up of the Guyana
Cooperative Mortgage Finance Bank (GCMFB).
The completion of the deal
with NBIC was announced in a statement from the Privatisation Unit (PU)
and GNCB. Details indicate that NBIC paid GNCB G$2.72B for a
guaranteed net asset position of G$2B. The net asset position would be
confirmed by the audit firm Deloitte & Touche and the Office of the
A Memorandum of Agreement was
earlier signed by GNCB with its employees providing for the terms of
their severance which, according to the statement, would be calculated
at the date of privatisation.
According to reports, about
100 of the retrenched GNCB staff have been rehired by NBIC while
another 40 would be retained by GNCB to help in monitoring the
collection of the bank’s outstanding loan portfolio. The privatisation
agreements exclude the loan portfolio and some real estate "not
related to the branch network," according to the statement.
The agreements were executed
by Finance Minister Saisnarine Kowlessar who is also Chairman of the
Privatisation Board, Managing Director of NBIC Michael Archibald,
Executive Secretary and PU Head Winston Brassington and General
Manager of the GNCB John Flanagan.
Brassington opined that the
deal was a good one in the sense that GNCB would cease to be a
loss-making entity and a drain on the treasury. This, he said, would
result in considerable savings to government which would consequently
have achieved a structural benchmark as part of its HIPC arrangements.