[CNBC.COM] – The International Monetary Fund (IMF) believes one of South America’s smallest countries is likely to see a dramatic upswing in economic growth next year.
Guyana, a country of about 780,000 which shares a border with Brazil, Suriname and Venezuela in the northeast of South America, will see economic growth of 86% in 2020, according to the IMF. That’s up from 4.4% in 2019.
Such an explosive expansion of annualized real GDP (gross domestic product) would likely see Guyana register the fastest economic growth in the world next year. To be sure, Guyana’s projected economic expansion would be 40 times that of what is expected from the U.S. — the world’s largest economy.
“The reason the IMF is projecting that is because Guyana has the highest amount of oil for each individual person of any country in the world,” Natalia Davies Hidalgo, a freelance Latin American analyst, told CNBC via telephone on Monday.
In comparison to OPEC kingpin Saudi Arabia, which has approximately 1,900 barrels of offshore reserves per person, Guyana has 3,900 barrels, Hidalgo said.
“And it could have more, as production hasn’t even started yet and new discoveries are still being made.”
‘Ambitious’
Guyana is poised to start oil production next month — a prospect which analysts believe will be transformative for economic prosperity in South America’s only English-speaking country.
However, Hidalgo described the IMF’s projection as “ambitious,” noting it was probably the highest annual economic forecast the global crisis lender had ever predicted.
That’s because the country’s government is technically interim until elections are held in March, meaning it is currently unable to pass a budget for 2020. In addition to a lack of regulatory legislation in the country, Hidalgo said the likelihood of project delays and non-payment in the infrastructure sector could also threaten the IMF’s forecast.
In comparison to the IMF’s prediction that Guyana will register economic growth of 86% next year, IHS Markit believes political instability in the country makes it much more likely the country’s economy will expand by about 30%.
‘Dutch disease’
Earlier this year, the IMF described Guyana’s medium-term prospects as “very favorable,” citing plans for the country to start oil production next month.
“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,” a staff team from the IMF said in a statement in June.
However, the Washington D.C.-based organization was quick to issue a word of warning about the potential dangers that could coincide with such rapid economic expansion.
“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.”
“Dutch disease” refers to the negative consequences that can arise from a spike in the value of a nation’s currency. The economic term is most commonly associated with the paradox which occurs when good news, such as Guyana’s discovery of large oil reserves, harms a country’s broader economy.
“The Guyanese haven’t had the experience with this type of windfall, and it is coming so suddenly,” Valerie Marcel, an associate fellow at think tank Chatham House, told CNBC via telephone on Monday.
“It will be a big challenge,” she added, highlighting Guyana could struggle to cope with a “resource curse” in the long term.
It is going to be “very difficult for Guyana not to be completely subsumed by the oil sector,” Marcel said.
