The International Monetary Fund (IMF) has a most critical role in being one of the forecasters of economic growth or depression and helping to provide needed funds to its members to prevent a fiscal crisis or keep it at bay.
This organization consists of 188 countries. They all work to promote global financial cooperation, secure monetary stability, assist international trade, encourage high employment and sustainable economic growth and reduce poverty around the world.
But the IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
The Fund, as it is usually referred to, had its mandate updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
Created in 1945, the IMF conducts missions, usually on an annual basis, in its member states. The consultations which are done during this period fall under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
Such missions have been conducted in Guyana, with the last report being in 2013. However, it’s most recent Mission here led by Mr. Marcos Chamon lasted from February 24 to March 7and provided a most insightful overview of Guyana’s economic standing.
The team met with Finance Minister Winston Jordan, Public Infrastructure Minister David Patterson, Natural Resources Minister Raphael Trotman, Central Bank Governor Gobind Ganga, and other senior officials, as well as representatives from the private sector, opposition party, labor unions, and other stakeholders.
The IMF team noted that Guyana’s economy remains resilient and continues to grow despite significant global headwinds.
It recalled that in 2015, real Gross Domestic Product (GDP) grew at 3.0 percent notwithstanding lower commodity export prices, delays in budget implementation, and political uncertainty in the run-up to general elections which was held in May last year.
The members agreed that developments in the global economy remain a drag on growth, particularly for commodity exporters. On the other hand, it stressed that growth is projected to increase this year, supported by an increase in gold production and public investment.
It noted that the Guyana Government projects a 4.4 percent growth in 2016 but based on its findings, a 4.0 percent growth rate should be expected.
The Mission members noted that boosting private sector confidence is key for growth momentum and commended the authorities for maintaining macroeconomic stability.
It was documented in their report that the steep decline in international oil prices narrowed the current account deficit. They said that lower prices reduced the cost of fuel imports, which more than offset the impact of lower commodity export prices, reducing the current account deficit to 4.6 percent of GDP in 2015 from 10.8 percent in 2014.
The team observed that reserves stood at 3.6 months of imports at end-2015 and is projected to increase over the medium-term, bolstered by foreign investment and donor support for public investment.
Meanwhile, the exchange rate, they noted, remained broadly stable due to offsetting positive and negative external shocks.
But in spite of the aforementioned, the IMF warned that Guyana remains vulnerable to movements in commodity prices due to dependence on imported oil and the concentration of exports on a few commodities.
The mission noted that exchange rate flexibility would continue to facilitate adjustment to external developments, mitigate their effect on growth, and safeguard reserves.
It was noted too, that the fiscal balance improved in 2015, reflecting one-off factors. It said that the overall non-financial public sector deficit narrowed to 0.2 percent of GDP in 2015 from 5.7 percent in 2014.
The Mission Members expressed that Capital expenditure declined by nearly 30 percent, reflecting the late start of the public investment program. Going forward, it said that the deficit is expected to remain between five and six percent of GDP.
The IMF staff said that the authorities have an ambitious investment strategy for environmentally sustainable and socially inclusive growth.
They asserted that improvements in transportation and telecommunication infrastructure and renewable energy projects will boost productivity, integrate remote regions, facilitate economic diversification, and ease key impediments to growth.
These investments they stated, should stimulate economic activity, provide a durable increase in competitiveness, and ensure that the benefits of growth are more broadly distributed.
The IMF team said that discussions with authorities centered on strategies to maintain fiscal and debt sustainability while boosting growth. They said that increasing current expenditure will crowd out space for public investment, despite significant donor support.
The mission suggested moderating the growth of wages, as well as reforming public enterprises with a view to reduce their reliance on government support.
In that regard, the improved financial performance of the Guyana Power and Light and the reforms proposed by the Commission of Inquiry for the Guyana Sugar Corporation are welcomed by the IMF.
The team stressed that the scope and pace of reform should take into account social implications. They said, too, that containing current expenditure would provide additional space for public investment while preserving debt sustainability.
It was found that the magnitude and sources of financing of the deficit have implications for growth. Statistics also indicate that domestic financing may crowd out credit to the private sector and raise interest rates.
Regarding external financing, the mission welcomed the authorities’ intentions to continue to refrain from non-concessional external borrowing that would raise the interest rate burden and adversely affect debt sustainability.
The group said that Government’s exclusion of possible future hydrocarbon export income from their medium-term plans was also deemed to be commendable.
The IMF Mission commented that the monetary policy stance should remain accommodating. It said that lower prices for imported goods, including fuel, continue to restrain inflation. Meanwhile, credit to the private sector had expanded at a rapid pace over the past decade, but broadly in line with economic activity and financial deepening.
The IMF team said that credit growth has moderated since 2015, mainly on account of reduced lending to businesses. Members agreed that as long as inflationary pressures remain contained, a more accommodating monetary policy stance, with base and broad money growing more rapidly than nominal GDP, remains appropriate.
Banks were found to be well capitalized, but heightened vigilance is warranted due to increases in non-performing loans, they asserted.
It was noted that recent changes to credit reporting legislation are welcomed and the authorities are encouraged to continue to strengthen financial sector supervision.
The mission suggested tightening provisioning requirements; limitations on related lending and loan classification rules.
In addition, the stress testing toolkit it said could be expanded to include shocks to loan collateral values and also take into account inter-linkages among economic sectors, borrowers, and financial entities.
A Financial Sector Assessment Program mission will also visit Guyana in May to provide a more granular analysis of financial sector challenges and assist the authorities with strengthening the prudential toolkit.
While recent steps towards strengthening the Anti-Money Laundering and Countering the Financing of Terrorism framework are welcomed, however, the Mission emphasized that the authorities should address remaining deficiencies promptly. It also urged the authorities to accelerate the implementation of the action plan agreed with the Financial Action Task Force.
The IMF Executive Board is expected to discuss Guyana’s Article IV consultation in May.
(To be continued next week)