The International Monetary Fund, the IMF, has concluded that Guyana’s medium-term prospects are very favourable.
It said the commencement of oil production in 2020 presents an opportunity to scale-up capital and current spending at a measured pace over the medium term to address infrastructure gaps and human development needs while attenuating debt sustainability concerns at the same time.
The statement follows an IMF mission visit to Guyana. The mission welcomed the passage of the Natural Resource Fund (NRF) legislation for managing the country’s natural resource wealth and recommended a fiscal framework that constrains borrowing and achieves a balanced budget in the near- to medium-term.
See full statement below:
A Staff team from the International Monetary Fund (IMF), led by Mr. Arnold McIntyre, visited Georgetown during June 3–14 to hold discussions for the 2019 Article IV Consultation. The team met with Prime Minister Moses Nagamootoo, Finance Minister Winston Jordan, Minister of Legal Affairs and Attorney General Basil Williams, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, banks, the opposition party, labor unions, and other stakeholders.
Economic growth strengthened in 2018 with broad-based expansion across all major sectors. Real GDP grew by 4.1 percent in 2018, up from 2.1 percent in 2017, led by construction and services sectors. Inflation remained steady at 1.6 percent at end-2018, on the back of stable food prices and exchange rate. For 2019, the mission projects real economic growth of 4.4 percent, driven by continued strength in the construction and services sectors ahead of oil production in 2020, and strong recovery in mining. The authorities do not foresee any significant spillovers from the crisis in Venezuela at present. However, the influx of migrants into the hinterland and rural areas could put socio-economic pressures on the local communities.
Weaker export performance and higher imports driven by high value imports related to oil production contributed to a weaker current account balance. In 2018, the current account deficit rose to 17.5 percent of GDP, from 6.8 percent in 2017. The deficit was largely financed by FDI related to the petroleum sector. Reserves stood at US$528 million in December 2018.
Public finances improved in 2018. The central government’s deficit was 3.5 percent of GDP, lower than the budgeted 5.4 percent of GDP. The better-than-expected outturn was largely supported by stronger revenues arising from the pick up in economic activity, as well as continued improvements in tax administration and the tax amnesty program which relaxed interest and penalties on payments of outstanding taxes. In addition, expenditure grew at a weaker pace due to slower capital spending as a result of capacity issues in both the public and private sector. In 2019, the fiscal stance is projected to be appropriately expansionary, at 5 percent of GDP, driven by significant need for infrastructure development and capacity building ahead of oil production.
Guyana’s medium-term prospects are very favorable. The commencement of oil production in 2020 presents an opportunity to scale-up capital and current spending at a measured pace over the medium term to address infrastructure gaps and human development needs, while attenuating debt sustainability concerns at the same time. The mission welcomes the passage of the Natural Resource Fund (NRF) legislation for managing the country’s natural resource wealth; it underscores the authorities’ commitment to fiscal responsibility. To ensure fiscal responsibility is achieved, the mission recommends complementing the NRF legislation with a fiscal framework that constrains borrowing and achieves a balanced budget in the near- to medium-term. To achieve this target, the annual non-oil deficit should not exceed the expected transfer from the NRF. This would ensure that excessive public expenditure will not lead to debt growing at the same time as the NRF accumulates. It is also necessary to preserve the spirit of the NRF framework, which appropriately aims to save part of the income from oil as net wealth for future generations. The pace of scaling-up public spending needs to be gradual to reduce bottlenecks from absorptive capacity constraints, avoid waste, and minimize macroeconomic distortions related to “Dutch” disease that has often inflicted economies experiencing sizable increases in resource-based income.
The mission supports continued efforts by the authorities to strengthen institutional, governance and management practices, which will also help reduce vulnerability to corruption. It commends the ongoing efforts in modernizing the revenue administration and strengthening the public investment management system. At the same time, the mission reiterates the importance of addressing the weaknesses identified in the 2017 Public Investment Management Assessment. Greater urgency is attached to these reforms ahead of the expected increase in public spending as oil production begins. The mission notes authorities’ intent to move to rigorous project selection and prioritization criteria within the context of the new long-term Green State Development Strategy. The authorities are committed to considering mechanisms to further improve fiscal transparency, including relating to the management of natural resources.
The mission encourages building on recent progress in strengthening transparency and governance. Guyana completed its first Extractive Industries Transparency Initiative (EITI) Report in 2019 and started implementing its recommendations to further enhance transparency in the extractive industry. In addition, the recent re-establishment of the Integrity Commission has resulted in over 50 percent of politically exposed persons (PEPs) and other required officers making declarations within the first year. Ensuring greater compliance over time with the asset declaration regime would underscore the authorities’ support and commitment to the UN convention against corruption. The mission also welcomes the progress made in strengthening public procurement, and encourages the authorities to ensure timely compliance with existing regulations and take further actions to fortify the transparency of the procurement system.
The authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues. The rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field. The authorities are developing strategies to mitigate such a possibility, including a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.
The mission recommends that the authorities continually reassess the monetary policy stance to reflect changes in macroeconomic outlook or risks surrounding the outlook . The mission encourages exchange rate flexibility as part of the monetary policy framework, given the expected large and potentially volatile foreign inflows from oil production. It encourages the authorities to consider developing over the medium-term, supported by IMF Technical Assistance, the necessary infrastructure for a suitable monetary policy framework that facilitates economic growth and adjustment to oil price shocks while maintaining price stability.
The financial sector remains stable. The mission supports the authorities’ resolute efforts in implementing 2016 Financial Sector Assessment Program (FSAP) recommendations. Credit to the private sector grew by 4.0 percent in 2018, faster than 2.1 percent in 2017. The banking sector nonperforming loans (NPLs) to total loans ratio have fallen slightly to 11.9 percent as of end- December 2018, from 12.2 percent a year before, but remained high. Staff recommends an Asset Quality Review to examine banks’ credit risks and enhance financial sector stability. Four bills were approved by Parliament in 2018, covering deposit insurance, emergency liquidity assistance, bank resolution, and national payment system. The transition to Basel II regime (with some elements of Basel III) is on track for completion by end-2019. Staff encourages the authorities to implement the remaining FSAP recommendations, including eliminating reduced provisioning requirements for “well-secured” portions of NPLs and raising the minimum capital adequacy requirement to 12 percent.
Commendable progress has been made in strengthening the framework for anti-money laundering and counter terrorism financing, based on the 2017 national risk assessment. Guyana has been officially removed from the European Commission’s Money-Laundering Blacklist in February 2019 and is scheduled to undertake a mutual evaluation by the Caribbean Financial Action Task Force in 2022. The Financial Intelligence Unit (FIU) has been actively examining cases relating to suspicious transactions, money laundering, terrorist financing and criminal proceeds including those of PEPs, and is working towards greater collaboration with other global FIUs.
Structural reforms are needed to support economic diversification, and achieve inclusive and equitable growth . Infrastructure bottlenecks, skilled labor shortages, and weaknesses in electricity supply are major obstacles to growth. Staff supports the authorities’ proposed increase in investments to improve access to roads, electricity, and telecommunication services to enhance economic activities, including the hinterland. Simultaneous investment in upgrading the education system is critical and would enhance skills and employment prospects. To address skills gap and satisfy an expected increase in labor demand, Guyana could adopt more liberal or open immigration policies, including free movement of all categories of workers from other CARICOM countries. Promoting more flexible working arrangements could help increase female labor participation. Further regulatory and administrative reforms—including property rights and insolvency regime and reducing bureaucratic red-tape—would help strengthen competitiveness.
The IMF Executive Board is expected to discuss Guyana’s Article IV consultation in August 2019. The mission expresses its sincere thanks to the authorities and other Guyanese stakeholders for their warm hospitality, cooperation and candor.