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Guyana: 2016 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Guyana

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
July 2016
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Background

1. Guyana has experienced a decade of uninterrupted growth. Nevertheless, per capita income remains the lowest in the English-speaking Caribbean and the debt burden, though low by Caribbean standards, remains elevated (Figure 1). The economy depends on the export of six commodities—sugar, gold, bauxite, shrimp, timber, and rice—which represent nearly 40 percent of GDP. In 2015, Exxon Mobil made a significant oil discovery off the coast of Guyana, on the order of 700 million barrels. Commercial production is not expected within the medium-term. Public debt reached 186 percent of GDP at the HIPC completion point at end-2003. In March 2007, the IDB, Guyana’s principal donor, canceled its debt of nearly US$470 million (21 percent of GDP), which, along with other debt relief, brought the debt-to-GDP ratio to 65 percent by 2009. A strong commitment to macroeconomic stability reduced debt to 49 percent of GDP as of 2015.

Figure 1.Guyana: Comparative Regional Developments 1/

Sources: Country authorities; and Fund staff calculations.

1/ Caribbean region measured as simple averages of corresponding variables.

2/ Tourism-dependent Caribbean includes Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

3/ Commodity-exporting Caribbean includes Suriname and Trinidad and Tobago.

2. The opposition won the May 2015 general elections leading to the first change of government in 23 years and the second since independence in 1966. The government faced a legislative impasse after the ruling People’s Progressive Party/Civic (PPP/C) lost its parliamentary majority and faced a no-confidence vote. The National Assembly was suspended in November 2014 and dissolved three months later. Elections in May 2015 were won by a coalition of A Partnership for National Unity-Alliance for Change (APNU-AFC), which formed a majority government. The political stand-off and subsequent elections significantly delayed budget implementation.

3. The authorities have an ambitious investment strategy for environmentally sustainable and socially inclusive growth. Improvements in transportation and telecommunication infrastructure and renewable energy projects aim to boost productivity, integrate remote regions, facilitate economic diversification, and ease key impediments to growth. If well implemented, these investments can stimulate economic activity, provide a durable increase in competitiveness, and ensure that the benefits of growth are more broadly distributed.

4. Since the completion of the PRGF in 2006, the authorities’ policies have been broadly in line with the Fund advice. Initially, technical assistance focused on VAT implementation, public financial management, and statistics. These reforms contributed to the fiscal consolidation efforts that have helped reduce the debt-to-GDP ratio. In recent years the Fund has recommended further fiscal consolidation to help reduce the debt and rebuild policy buffers. The authorities view their fiscal stance as consistent with their objective of reducing the significant infrastructure deficit and addressing unmet social needs. The 2013 Article IV recommended ensuring that the Amaila Falls Hydroelectric Project remains financially and economically viable. The authorities are reviewing that project. As it may no longer be pursued, it is not considered in the baseline projections. The Fund also recommended boosting the efficiency of public enterprises. The authorities are pursuing these efforts, notably with regard to the electricity and sugar companies.

5. The most recent safeguards assessment of the Bank of Guyana (BOG) was completed in May 2007. It made recommendations to strengthen key functions, including internal audit and reserves management, which were implemented at the time. The BOG is audited by the Audit Office of Guyana and the audit reports state compliance with international standards. The audited financial statements are published.

Recent Developments

6. Guyana’s economy continues to grow, despite headwinds. The decline in global commodity prices affected main commodity sectors. The sharp decline in public investment spending due to the delayed budget and the slowdown in the commodity sectors had a knock-on effect on the non-tradable sector, especially construction, wholesale and retail trade. Notwithstanding those shocks, real GDP grew by 3 percent in 2015, down from 3.8 percent in 2014 and an average of 5 percent during 2010-13 (Text Figure). Growth was boosted by the opening of two new large gold mines in the last quarter of 2015 (in their absence, growth in 2015 would have been 2.3 percent). Consumer prices contracted by about 1.8 percent (y/y) as of December 2015, reflecting lower import prices and a one-off increase in goods exempted from the VAT.

Real GDP Growth

(In percent)

CPI Inflation and Nominal Exchange Rate

(In percent)

7. The steep decline in international oil prices narrowed the 2015 current account deficit, while the balance of payments deficit remained due to weaker capital inflows. Lower prices reduced the cost of oil and fuel imports, which more than offset the effect of lower commodity export prices and narrowed the current account deficit to an estimated 4.6 percent in 2015 from 10.8 percent in 2014 and 13.3 percent in 2013. The overall balance was broadly unchanged, reflecting lower disbursements from multilateral donors and from the PetroCaribe agreement.1 Despite a loss of international reserves, the lower oil import bill allowed reserve coverage of imports to remain at about 3½ months as of end-2015.

8. The fiscal balance improved in 2015, partly reflecting one-off factors. The overall non-financial public sector (NFPS) deficit narrowed to 0.2 percent of GDP in 2015 from 5.7 percent in 2014, and 3.6 percent in 2013. The primary balance switched from a 4.8 percent deficit in 2014 to a 0.8 percent surplus in 2015. Despite the economic slowdown, revenue as a share of GDP increased by 4.2 percentage points, buoyed by fuel excises (which were raised as the international oil price declined), and a one-off increase in non-tax revenue from statutory agencies.2 Capital expenditures declined by nearly 30 percent compared to 2014, reflecting the late start of the public sector investment program. Transfers to the loss-making state-owned sugar company (GuySuCo) remain a drag on fiscal performance.

9. The 2016 budget reverses the 2015 contractionary fiscal stance. The authorities plan to accelerate the implementation of the public sector investment program and an early budget was submitted to parliament, which envisages an increase in total NFPS expenditure of about 6 percent of GDP. This increase is mainly driven by a 4 percentage point increase in the share of capital spending in GDP. While this increase may seem large compared to the 2015 low base, due to the delayed budget, it corresponds to a 1.5 percentage point of GDP increase in the share relative to 2014. The share of current expenditure in GDP will also rise by 2.1 percentage points in comparison to 2015, reflecting a 1.5 percentage point of GDP increase in transfers as well as increases in wages and goods and services. To expedite project approval and execution, the authorities have streamlined the procurement process by updating the threshold values on projects that can be approved by individual agencies.

10. The budget projects a moderate increase in revenue supported by improved tax administration. Revenues are projected to remain broadly stable as a share of GDP in 2016. Some of the measures envisaged will lower revenues, notably exemptions from excise taxes for newer vehicles, a 10 percent increase in the threshold for nontaxable income, and a decline in fuel excise taxes amounting to a 10 percent reduction in gasoline prices. The revenue decline is expected to be partially offset by a planned removal of some discretionary tax exemptions. The government also intends to introduce measures to improve tax efficiency, enforcement and compliance in order to boost revenue.

11. The monetary policy stance has remained accomodative, but growth in broad monetary aggregates decelerated in line with the slowdown in economic activity. The Bank of Guyana (BoG)’s monetary policy goals are price stability and provision of adequate liquidity for credit expansion and economic growth. The BoG targets broad money, and manages liquidity through open market operations. Growth in broad money (y/y) slowed to 1.5 percent in 2015 from 5.2 percent in 2014. Credit had grown at a vigorous pace but still broadly in line with economic growth and financial deepening. Credit to the private sector expanded at a slower pace of 6.2 percent in 2015, down from 9.1 percent in 2014, mainly on account of reduced lending to businesses. Base money grew by 9.1 percent in 2015, driven mainly by banks’ increasing excess reserves. The benchmark 91-day Treasury bill rate increased to 1.92 percent at end-December 2015 from 1.67 percent a year earlier. The real interest rate turned positive in 2015 and is higher than the nominal rate due to deflation. In the current environment of ample bank liquidity, foreign exchange intervention can play a stronger role in the management of liquidity. The decline in international oil prices tempered demand for foreign exchange in 2015 and the exchange rate versus the U.S. dollar remained broadly unchanged, despite limited central bank intervention.

Monetary Indicators

(12-month percent change)

12. Despite rising nonperforming loans (NPLs) and declining profitability, bank capital adequacy ratios (CARs) appear comfortable. NPLs increased to 11.5 percent of loans at end-December 2015 from 6 percent at end-December 2013, and are concentrated in the business sector. Returns on assets fell from 2.7 percent at end-2014 to 0.6 percent at end-December 2015. The effects of higher NPLs on bank CARs have been cushioned by slower accumulation of risk-weighted assets, delayed provisioning of NPLs, and strong noninterest income (fees and commissions). CARs have remained well above the 8 percent regulatory minimum (averaging 23.9 percent as of December 2015). However, provisioning has not kept pace with NPLs, declining from 69.5 percent of NPLs at end-December 2013 to 38 percent at end-December 2015 (regulations only require 20 percent provisioning when the loan is secured by collateral). Related party lending is a source of vulnerability.

13. De-risking by global banks has been limited so far. Close to half of Guyana’s correspondent banking providers originate from the Caribbean. Only two of Guyana’s banks have experienced terminations on their corresponding bank relationships, which took place prior to 2013. However, there is a concern that such losses could occur with short notice. Two of the largest banks are foreign-owned, which may attenuate their vulnerability to de-risking.

14. The parliament passed amended AML/CFT legislation but further actions are needed to address remaining deficiencies. Guyana has taken steps toward improving AML/CFT compliance, including by enacting the AML/CFT Amendment Act in 2015. Nevertheless, the FATF determined that strategic deficiencies remained, notably implementing an adequate framework for freezing assets, establishing an operational financial intelligence unit, and performing effective customer due diligence. In response, an amended AML/CFT bill was passed on December 2015, which included redefining ‘beneficial ownership’ and requiring customer identity verification when establishing a business relationship, among other measures. However, the framework continues to fall short of the action plan agreed with the FATF, including the judicial discretion in freezing assets.

Outlook and Risks

15. Growth is projected to increase, supported by public investment and gold output. In the baseline scenario, growth increases to 4 percent in 2016, supported by the recovery in public investment and the level effect from the gold mines that began production in late 2015, and are projected to contribute 1.7 percentage points to growth. Higher than expected gold output may lead to even higher growth. With the outlook for commodity exports subdued, medium-term prospects hinge upon productivity-enhancing reforms to diversify the economy, improve the business environment, and increase private investment. Growth is projected at 3.8 percent during 2017–21—broadly in line with staff’s assessment of potential growth—as public investment continues to provide stimulus and alleviate key infrastructure bottlenecks, which should also facilitate economic diversification. Lower electricity prices, and other mining projects should also help sustain growth once gold production in the two new mines stabilizes. Inflation turns positive in 2016 but remains modest due to lower prices for imported goods, including fuel.

16. The external balance will improve in line with relatively low fuel prices and rising commodity export prices. Despite the subdued outlook for rice and other non-gold commodity exports, lower oil prices will improve the outlook for the underlying current account deficit, which is projected to remain at 4½ percent of GDP in 2016.3 The terms of trade are expected to improve further in 2016, then remain broadly constant over the medium term. The revival of a long-standing border dispute with Venezuela led to the cessation of in-kind trade of rice-for-oil at above-market rice prices in July 2015, which will lead to a decrease in the value of rice exports by about 2 percent of GDP. The current account deficit is projected to increase in the medium-term, averaging about 7.2 percent of GDP in 2017–21, financed by the resumption of investment inflows and donor-supported investment. The overall balance is expected to improve in the medium term, leading to an increase in reserve cover from 3½ months at end-2015 to about 5 months at end-2021.

17. A sustained expansionary fiscal policy will lead to an increase in public debt. The authorities indicated that the fiscal deficit is expected to remain between 5 and 6 percent of GDP over the medium term. Under that fiscal stance, domestic financing needs will remain high, and the debt-to-GDP ratio is projected to rise from about 49 percent in 2015 to 60 percent by 2021. While the risk of debt distress is estimated to remain moderate in the medium-term, it will continue to rise in the absence of fiscal consolidation, which is needed to stabilize the debt-to-GDP ratio. Adverse growth and exchange rate shocks can worsen the debt dynamics.

18. Risks to the outlook are tilted to the downside (see RAM, Table 8). The prices of Guyana’s commodity exports tend to remain depressed with sluggish global growth, a continued slowdown in China, and a strong U.S. dollar. Heightened financial stability risks stemming from the slowdown in domestic activity and the large increase in NPLs warrant close monitoring. De-risking remains a major source of concern in Guyana, and throughout the Caribbean. On the upside, higher than expected gold production could increase output and exports. And sooner than expected development of Guyana’s recently-discovered oil deposits would strengthen its energy security and broaden its sources of fiscal and export earnings.

Table 1.Guyana: Selected Social and Economic Indicators
I. Social Indicators
Population, 2015 (thousands)767Population not using an improved
Life expectancy at birth (years), 201466 water source (%), 20106.0
Under-five mortality rate (per 1,000 live births), 201030Gini index, 1992-200744.6
Population living below the poverty line (%), 2000-0635HDI rank, 2014124
II. Economic Indicators
Est.Projections
201220132014201520162017
(Annual percent change)
Production and prices
Real GDP4.85.23.83.04.03.9
Real GDP per capita4.54.83.42.63.73.5
Consumer prices (average)2.42.21.0-0.30.12.1
Consumer prices (end of period)3.50.91.2-1.82.12.1
Terms of trade5.2-4.5-3.221.79.7-1.5
(In percent of GDP)
National accounts
Investment19.216.716.413.817.616.1
Private sector8.58.18.18.28.07.8
Public sector10.78.68.25.79.68.3
National saving 1/7.73.45.69.315.110.8
Private sector2.6-1.33.64.612.18.9
Public sector5.14.82.14.73.12.0
External savings11.613.310.84.62.55.2
Nonfinancial public sector
Revenue and grants25.624.623.628.128.826.4
Expenditure30.228.329.328.334.331.9
Current19.519.621.122.624.723.6
Capital10.78.68.25.79.68.3
Overall balance (after grants) 2/-4.6-3.6-5.7-0.2-5.5-5.5
Total public sector gross debt (end of period)63.757.951.948.652.353.8
External47.741.839.536.136.035.5
Domestic16.016.112.312.516.318.3
(Annual percentage change, end of period)
Money and credit
Broad money11.53.85.21.511.715.6
Domestic credit of the banking system7.525.820.517.617.512.2
Public sector (net)-72.714.934.575.0377.094.1
Private sector20.114.59.16.26.06.0
(In millions of U.S. dollars, unless otherwise indicated; end of period)
External sector
Current account balance 2/-330.0-397.9-331.3-144.2-83.6-183.8
(Percent of GDP)-11.6-13.3-10.8-4.6-2.5-5.2
Gross official reserves 3/855.6776.9665.6598.5690.4854.4
Months of imports of goods and services4.14.03.53.63.94.4
Memorandum items:
Nominal GDP (G$ billion)582.7614.1635.3653.3692.1735.1
Per capita GDP, US$3,7663,9294,0294,1254,3354,545
Guyana dollar/U.S. dollar (period average)204.1205.4206.4206.5
PetroCaribe loans savings (stock, in % of GDP)1.14.98.49.08.58.1
Sources: Guyanese authorities; UNDP Human Development Report; and Fund staff estimates and projections.

Includes public enterprises.

Including official transfers.

Includes SDR allocation.

Sources: Guyanese authorities; UNDP Human Development Report; and Fund staff estimates and projections.

Includes public enterprises.

Including official transfers.

Includes SDR allocation.

Table 2.Guyana: Balance of Payments
Est.Projections
2012201320142015201620172018201920202021
(In millions of U.S. dollars)
Current account (incl. official transfers)-330.0-397.9-331.3-144.2-107.1-209.9-232.7-292.1-344.6-325.7
Current account (excl. official transfers)-366.6-425.4-331.3-144.2-149.2-209.9-232.7-292.1-344.6-325.7
Merchandise trade (net)-581.2-471.4-570.2-304.9-317.7-385.2-414.8-481.5-539.1-521.4
Exports (f.o.b.)1,415.51,375.91,167.71,169.91,223.71,329.51,410.91,461.01,524.71,596.9
Bauxite150.8134.7124.7104.397.6100.2103.5107.6111.8115.5
Sugar132.1114.388.080.977.673.674.272.570.871.4
Gold717.0648.5469.8501.1646.0717.6762.7783.6816.2866.4
Timber39.038.553.443.544.544.945.445.846.346.7
Other376.6439.9431.7440.1358.0393.2425.2451.4479.5496.9
Imports (c.i.f.)1,996.71,847.31,737.91,474.91,541.41,714.61,825.81,942.52,063.72,118.3
Capital goods459.7415.2387.5329.0438.8467.8483.6505.8542.9517.3
Fuel and lubricants638.0574.7573.4350.8317.7407.0466.2514.4551.4582.1
Other899.0857.4776.9795.1785.0839.9876.0922.3969.41018.9
Services (net)-204.6-307.2-218.7-255.8-268.5-283.7-296.6-311.0-327.3-346.3
Net private transfers419.2353.2457.6416.5437.0458.9478.8500.3521.8542.0
Capital and financial accounts613.8471.5352.964.8217.6347.9383.7401.5396.2424.4
Capital account0.00.00.00.00.00.00.00.00.00.0
Financial account613.8471.5352.964.8217.6347.9383.7401.5396.2424.4
Nonfinancial public sector (net)315.2227.9147.6-83.096.1139.9167.3171.3160.8185.8
Net official transfers57.034.84.418.569.249.871.080.366.148.4
Net official borrowing250.1168.2238.7-47.426.990.196.391.094.8137.6
Other public sector (net) 1/8.124.9−95.5-54.1-17.5-0.3-0.3-0.3-0.3-0.3
Private sector (net)298.6243.5205.2147.8121.5207.9216.4230.2235.3238.7
Foreign direct investment (net)293.7214.0255.2121.7187.4240.8244.8249.1253.3257.7
Portfolio investment (net)69.921.17.83.45.47.49.210.812.313.6
Other (net) 2/-65.08.4-57.822.7-71.3-40.2-37.6-29.7-30.2-32.7
Errors and omissions, and short-term flows-171.7-120.0-89.521.90.00.00.00.00.00.0
Overall balance75.5-74.0-67.9-57.668.4137.9151.0109.451.698.7
Financing-75.574.067.957.6-68.4-137.9-151.0-109.4-51.6-98.7
Bank of Guyana net foreign assets-75.574.067.957.6-68.4-137.9-151.0-109.4-51.6-98.7
Change in NFPS arrears0.00.00.00.00.00.00.00.00.00.0
Exceptional financing 3/0.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.00.00.00.00.00.00.00.0
Memorandum items:
Current account, incl. off. transfers (in percent of GDP)-11.6-13.3-10.8-4.6-3.2-6.0-6.3-7.6-8.5-7.7
Current account, excl. off. transfers (in percent of GDP)-12.8-14.2-10.8-4.6-4.5-6.0-6.3-7.6-8.5-7.7
Gross international reserves855.6776.9665.6598.5666.9804.8955.91,065.21,116.81,215.5
(in months of imports of goods and services)4.14.03.53.63.84.24.74.94.95.1
Oil price assumption (US$/b)105.0104.196.250.834.841.044.547.649.450.5
HIPC and MDRI debt service relief33.922.321.120.419.418.117.416.716.114.0
GDP (US$ million)2,8542,9903,0783,1643,3353,5073,6703,8464,0344,240
(Annual percent change)
Exports of goods25.6-2.3-15.2-1.75.79.16.23.64.44.8
Imports of goods12.8-7.5-5.9-15.14.511.26.56.46.22.6
Terms of trade5.2-4.5-3.221.79.6-1.4-0.8-0.70.51.2
Sources: Bank of Guyana; Statistical Bureau of Guyana; Ministry of Finance; and Fund staff estimates and projections.

Includes capital flows of PetroCaribe financing.

Includes capital flows to finance the Berbice bridge and short-term capital flows.

Includes debt relief and debt forgiveness.

Sources: Bank of Guyana; Statistical Bureau of Guyana; Ministry of Finance; and Fund staff estimates and projections.

Includes capital flows of PetroCaribe financing.

Includes capital flows to finance the Berbice bridge and short-term capital flows.

Includes debt relief and debt forgiveness.

Table 3.Guyana: Nonfinancial Public Sector Operations(In billions of Guyanese dollars)
Est.Projections
2012201320142015201620172018201920202021
Revenue137.7144.2145.6177.2182.8185.9194.7201.1212.2224.3
Central government130.2143.0145.7162.7173.3179.2189.1199.8211.4224.1
Tax revenue118.3127.9135.9142.9150.4159.7168.7178.6189.2200.9
Non-tax revenue11.114.28.818.822.919.019.820.721.622.7
GRIF0.80.81.00.00.00.00.00.00.00.0
Capital revenue0.00.00.01.00.00.50.50.50.50.5
Public enterprises7.41.3-0.114.59.46.75.61.30.80.3
Expenditure175.9173.6186.2184.7237.7234.4251.3261.8272.1283.6
Current expenditure113.6120.6133.8147.6171.1173.7183.8190.8199.5207.1
Wages and salaries34.838.542.344.749.953.957.761.164.267.4
Other goods and services 1/34.237.540.143.247.750.753.656.760.163.8
Transfers39.439.945.153.366.762.564.564.165.364.8
Interest 2/5.24.76.36.56.86.78.08.89.911.2
Domestic2.61.71.51.71.92.84.04.65.25.8
External2.62.94.84.84.93.94.04.24.75.4
Capital expenditure62.353.052.437.166.660.767.571.072.676.5
External PSIP22.313.811.29.719.737.945.245.947.749.4
GRIF Projects0.80.81.00.00.00.00.00.00.00.0
Local PSIP26.529.735.118.930.616.218.621.421.023.1
Public enterprises5.42.61.46.414.16.63.73.83.94.0
PetroCaribe projects5.34.82.50.02.60.00.00.00.00.0
Overall balance before grants-37.8-29.1-40.6-7.5-54.6-48.5-56.6-60.7-59.9-59.3
Grants 3/11.67.14.26.216.87.917.519.616.713.0
Overall balance after grants-26.6-22.3-36.4-1.3-38.2-40.6-39.1-41.1-43.2-46.3
Financing26.622.336.41.338.240.639.141.143.246.3
Net foreign financing 2/25.629.98.4-0.47.318.820.319.424.830.0
Net domestic financing 4/5.95.123.76.930.921.818.821.718.316.3
PetroCaribe savings-4.9-12.84.3-5.30.00.00.00.00.00.0
Memorandum items:
NFPS wage bill60.564.167.072.877.079.383.486.388.892.5
Total capital expenditure62.353.052.437.166.660.767.571.072.676.5
Current balance before grants24.123.611.829.611.712.110.910.312.717.3
Debt relief2.62.20.50.70.50.40.20.20.20.2
Primary balance-21.4-17.6-30.15.2-31.4-33.9-31.1-32.2-33.2-35.1
Nominal GDP at market prices (G$ billion)582.7614.1635.3653.3692.1735.1776.9822.4871.3925.0
Revenue23.623.522.927.126.425.325.124.524.424.3
Central government22.423.322.924.925.024.424.324.324.324.2
Tax revenue20.320.821.421.921.721.721.721.721.721.7
Non-tax revenue1.92.31.42.93.32.62.62.52.52.5
GRIF0.10.10.20.00.00.00.00.00.00.0
Capital revenue0.00.00.00.20.00.10.10.10.10.1
Public enterprises1.30.20.02.21.40.90.70.20.10.0
Expenditure30.228.329.328.334.331.932.331.831.230.7
Current expenditure19.519.621.122.624.723.623.723.222.922.4
Wages and salaries6.06.36.76.87.27.37.47.47.47.3
Other goods and services 1/5.96.16.36.66.96.96.96.96.96.9
Transfers6.86.57.18.29.68.58.37.87.57.0
Interest 2/0.90.81.01.01.00.91.01.11.11.2
Domestic0.40.30.20.30.30.40.50.60.60.6
External0.50.50.80.70.70.50.50.50.50.6
Capital expenditure10.78.68.25.79.68.38.78.68.38.3
External PSIP3.82.21.81.52.85.25.85.65.55.3
GRIF Projects0.10.10.20.00.00.00.00.00.00.0
Local PSIP4.54.85.52.94.42.22.42.62.42.5
Public enterprises0.90.40.21.02.00.90.50.50.40.4
PetroCaribe projects0.90.80.40.00.40.00.00.00.00.0
Overall balance before grants-6.5-4.7-6.4-1.2-7.9-6.6-7.3-7.4-6.9-6.4
Grants 3/2.01.20.71.02.41.12.32.41.91.4
Overall balance after grants-4.6-3.6-5.7-0.2-5.5-5.5-5.0-5.0-5.0-5.0
Financing4.63.65.70.25.55.55.05.05.05.0
Net foreign financing 2/4.44.91.3-0.11.12.62.62.42.93.2
Net domestic financing 4/1.00.83.71.14.53.02.42.62.11.8
PetroCaribe savings-0.8-2.10.7-0.80.00.00.00.00.00.0
Memorandum items:
NFPS wage bill10.410.410.511.111.110.810.710.510.210.0
Total capital expenditure10.78.68.25.79.68.38.78.68.38.3
Current balance before grants4.13.81.84.51.71.71.41.31.51.9
Debt relief0.40.40.10.10.10.10.00.00.00.0
Primary balance-3.7-2.9-4.70.8-4.5-4.6-4.0-3.9-3.8-3.8
Nominal GDP at market prices (G$ billion)582.7614.1635.3653.3692.1735.1776.9822.4871.3925.0
Sources: Ministry of Finance; and Fund staff estimates and projections.

Includes fiscal consolidation measures.

Reflects interest and amortization after total debt relief.

Excludes HIPC grants and MDRI debt relief.

Includes statistical discrepancies.

Sources: Ministry of Finance; and Fund staff estimates and projections.

Includes fiscal consolidation measures.

Reflects interest and amortization after total debt relief.

Excludes HIPC grants and MDRI debt relief.

Includes statistical discrepancies.

Table 4.Guyana: Summary Account of the Bank of Guyana and Monetary Survey
Est.Projections
2012201320142015201620172018201920202021
(In billions of Guyanese dollars, end of period)
I. Bank of Guyana
Net foreign assets138.1125.4111.599.7114.9145.1178.7204.0217.2241.1
Foreign assets175.0160.2137.5123.6137.9168.1201.7227.0240.3264.1
Foreign liabilities 1/-36.9-34.8-25.9-23.9-23.0-23.0-23.0-23.0-23.0-23.0
Net domestic assets-79.1-64.5-39.1-23.9-34.7-59.9-88.6-108.6-116.2-133.8
Of which:
Credit to public sector (net) 1/-62.7-56.9-29.6-3.80.00.00.00.00.00.0
Liabilities to commercial banks-52.9-54.1-53.4-62.4-66.2-70.3-74.3-78.6-83.3-88.4
Other items (net)51.849.144.042.531.610.5-14.2-29.9-32.8-45.3
Currency in circulation60.360.972.575.880.385.290.195.4101.0107.3
Base money105.6108.4119.5130.4138.1146.7155.0164.1173.8184.6
Of which: Excess reserves8.16.06.211.14.810.12.80.50.50.0
II. Monetary Survey
Net foreign assets190.8174.6172.8156.2174.1195.7220.4232.8232.7243.0
Bank of Guyana 1/138.1125.4111.599.7114.9145.1178.7204.0217.2241.1
Commercial banks52.749.261.256.559.250.641.728.815.41.9
Net domestic assets111.1138.8156.9178.3199.3235.8255.2286.6317.6341.2
Credit to public sector (net) 1/2/-44.9-38.2-25.0-6.317.433.747.864.077.890.0
Private sector credit161.6185.1202.0214.5227.4241.0255.5271.3288.7307.4
Other items (net)-5.7-8.1-20.1-29.9-45.4-38.9-48.1-48.7-48.8-56.2
Broad money301.8313.4329.6334.5373.4431.5475.6519.4550.3584.2
(Percentage change, 12–month basis)
Net foreign assets15.2-7.5-0.9-8.511.512.412.65.6-0.14.4
Net domestic assets3.631.015.515.911.818.38.212.310.87.4
Domestic credit7.525.820.517.617.512.210.410.69.38.5
Of which:
Private sector credit20.114.59.16.26.06.06.06.26.46.5
Business sector26.813.214.00.8
Household sector8.018.2-10.011.0
Mortgage sector13.624.113.211.7
Other sectors-3.73.1-9.217.3
Public sector net-72.714.934.575.0377.094.141.934.021.415.7
Broad money11.53.85.21.511.715.610.29.25.96.2
(Contribution to changes in base money, 12℃month basis)
Base money12.82.710.29.15.96.25.75.95.96.2
Net foreign assets15.5-12.0-12.8-9.911.721.922.916.38.113.7
Other including net credit to public sector-2.714.723.019.0-5.8-15.7-17.2-10.5-2.1-7.5
(In million of U.S. dollars, unless otherwise indicated)
Memorandum items:
Bank of Guyana’s net foreign assets 1/682.0608.0540.1482.6551.0688.9839.9949.31000.91099.6
Commercial banks’ net foreign assets257.5238.6296.4273.7283.7240.3196.0134.071.08.8
Money multiplier2.92.92.82.62.72.93.13.23.23.2
Income velocity of broad money1.92.01.92.01.91.71.61.61.61.6
Excess reserves (ratio to required reserves)0.20.20.20.30.10.20.10.00.00.0
Average lending rates, in percent11.111.211.211.2
Sources: Bank of Guyana, and Fund staff estimates and projections.

Includes Fund debt relief.

Includes G$1.8 billion, a share of GUYMINE debt transferred from foreign assets to government credit in March 2006.

Sources: Bank of Guyana, and Fund staff estimates and projections.

Includes Fund debt relief.

Includes G$1.8 billion, a share of GUYMINE debt transferred from foreign assets to government credit in March 2006.

Table 5.Guyana: External Financing Requirements and Sources(In millions of U.S. dollars)
Est.Projections
2012201320142015201620172018201920202021
Financing requirement471.5383.1298168250388430444435465
External current account deficit
(excludes official transfers)366.6425.4331144149210233292345326
Debt amortization40.842.94792374146433940
NFPS amortization 1/29.431.63581324146433940
Bank of Guyana amortization11.411.31210400000
Of which:
IMF net credit11.411.31210400000
Gross international reserves (increase = +)64.1-85.2-80-68641381511095299
Available financing472383298168250388430444435465
Capital transfers (MDRI)0000000000
Official transfers5735418695071806648
NFPS loans2802002743477131143134134178
Other public sector net 2/825-96-54-1700000
Private sector (net) 3/127124116170122208216230235239
Exceptional financing0000000000
Financing gap0000000000
Source: Fund staff estimates and projections.

Scheduled amortization of NFPS after debt relief.

Includes the unspent portion of PetroCaribe financing.

Including change of commercial banks NFA, short-term flows and trade credits, net foreign direct investment, and errors and omissions of balance of payments.

Source: Fund staff estimates and projections.

Scheduled amortization of NFPS after debt relief.

Includes the unspent portion of PetroCaribe financing.

Including change of commercial banks NFA, short-term flows and trade credits, net foreign direct investment, and errors and omissions of balance of payments.

Table 6.Guyana: Indicators of External and Financial Vulnerability(In percent, unless otherwise indicated)
Est.Projections
2012201320142015201620172018201920202021
Financial indicators
Public sector debt-to-GDP63.757.951.948.652.353.853.956.357.959.9
NPV of public sector debt-to-GDP40.539.134.233.437.138.739.241.443.044.7
NPV of public sector debt-to revenue157.9158.6145.2118.9128.7146.9143.4154.3163.7174.2
Share of nonperforming loans in total loans6.06.08.6
Share of nonperforming loans to total assets2.62.74.2
Loan loss provisions to nonperforming loans73.169.545.4
Risk-based capital-asset ratio (end of period)19.321.221.8
Return on assets2.42.62.7
Three-month T-bill rate (end of period)1.51.51.7
CPI-inflation (end of period)3.50.91.2-1.82.12.12.42.82.93.0
External indicators
Exchange rate (per US$, end of period)204.5206.3206.5206.5
REER appreciation (12-month basis)3.20.2-0.212.2
Current account balance-to-GDP-11.6-13.3-10.8-4.6-2.5-5.2-5.6-6.9-7.8-6.9
Gross official reserves (in millions of U.S. dollars)855.6776.9665.6598.5690.4854.41033.21171.01252.31382.7
Gross official reserves in months of imports4.14.03.53.63.94.45.15.45.55.9
Gross official reserves to short-term external public sector debt2,0991,8111,4266521,8832,1032,2442,7283,1983,439
External public sector debt to GDP47.741.839.536.136.035.534.235.035.837.3
NPV of external public debt (in millions of U.S. dollars)697688674661695717714775841936
NPV of external public sector debt to exports41.844.546.746.545.943.841.243.144.847.5
NPV of external public debt-to-central government revenue103.497.995.577.079.080.877.682.485.691.0
NPV of external public debt-to-GDP24.423.021.920.920.920.419.520.220.922.1
Sources: Bank of Guyana; and Fund staff estimates and projections.
Sources: Bank of Guyana; and Fund staff estimates and projections.
Table 7.Guyana: Medium-Term Macroeconomic Framework
Est.Projections
2012201320142015201620172018201920202021
(Annual percent change)
Production and prices
Real GDP4.85.23.83.04.03.93.83.83.83.8
Consumer prices (average)2.42.21.0-0.30.12.12.22.63.03.0
Consumer prices (end of period)3.50.91.2-1.82.12.12.42.82.93.0
Terms of trade5.2-4.5-3.221.79.6-1.4-0.8-0.70.51.2
(In percent of GDP)
National accounts
Investment19.216.716.413.817.616.116.416.215.815.6
Private sector8.58.18.18.28.07.87.77.67.47.3
Public sector10.78.68.25.79.68.38.78.68.38.3
National saving 1/7.73.45.69.314.410.110.18.67.27.9
Private sector2.6-1.33.64.611.38.18.37.15.55.7
Public sector5.14.82.14.73.12.01.71.61.72.1
External savings11.613.310.84.63.26.06.37.68.57.7
Nonfinancial public sector
Central government revenue and grants25.624.623.628.128.826.427.326.826.325.7
Tax revenue20.320.821.421.921.721.721.721.721.721.7
Non-tax revenue1.92.31.42.93.32.62.62.52.52.5
GRIF0.10.10.20.00.00.00.00.00.00.0
Capital revenue0.00.00.00.20.00.10.10.10.10.1
Grants 2/2.01.20.71.02.41.12.32.41.91.4
Public enterprises operational balance1.30.20.02.21.40.90.70.20.10.0
Expenditure30.228.329.328.334.331.932.331.831.230.7
Current 3/19.519.621.122.624.723.623.723.222.922.4
Capital10.78.68.25.79.68.38.78.68.38.3
Overall balance (before grants)-6.6-4.8-6.4-1.2-7.9-6.6-7.3-7.4-6.9-6.4
Overall balance (after grants)-4.6-3.6-5.7-0.2-5.5-5.5-5.0-5.0-5.0-5.0
Financing4.63.65.70.25.55.55.05.05.05.0
Net external financing 3/4.44.91.3-0.11.12.62.62.42.93.2
Net domestic financing1.00.83.71.14.53.02.42.62.11.8
PetroCaribe savings-0.8-2.10.7-0.80.00.00.00.00.00.0
Total public sector gross debt (end of period)63.757.951.948.652.353.853.956.357.959.9
External47.741.839.536.136.035.534.235.035.837.3
Domestic16.016.112.312.516.318.319.721.322.222.6
(In millions of U.S. dollars, unless otherwise indicated; end of period)
External sector
Current account balance-330.0-397.9-331.3-144.2-107.1-209.9-232.7-292.1-344.6-325.7
Gross official reserves855.6776.9665.6598.5666.9804.8955.91065.21116.81215.5
Months of imports of goods and services4.14.03.53.63.84.24.74.94.95.1
Memorandum items:
Nominal GDP (G$ billion)582.7614.1635.3653.3692.1735.1776.9822.4871.3925.0
Per capita GDP, US$3,7663,9294,0294,1254,3354,5454,7414,9555,1815,430
Guyana dollar/U.S. dollar (period average)204.1205.4206.4206.5
PetroCaribe loans savings (stock, in % of GDP)1.14.98.49.08.58.17.77.47.06.7
Sources: Guyanese authorities; and Fund staff estimates and projections.

Includes public enterprises.

Includes debt service savings under HIPC and MDRI.

Reflects interest and amortizations after debt stock operations.

Sources: Guyanese authorities; and Fund staff estimates and projections.

Includes public enterprises.

Includes debt service savings under HIPC and MDRI.

Reflects interest and amortizations after debt stock operations.

Table 8.Guyana: Risks Assessment Matrix1
Source of RiskRisk2Impact2Policy Response
Significant China slowdown.L/MHGreater exchange rate flexibility to absorb external shocks.
Surge in the U.S. dollar as a result of the improved U.S. economic outlook.HMGreater exchange rate flexibility to stem real appreciation and attenuate impact on current account deficit.
De-risking of global banks leading to a loss of correspondent banking services.HHImplement the action plan agreed with the FATF and strengthen implementation of customer due diligence measures; consider temporary mechanisms involving public support, including subsidizing correspondent banks given the externalities; collectively approaching potential correspondent banks with other Caribbean countries to increase business volume.
Larger than expected slowdown in key sectors and losses/contingencies at public enterprises.MMAllow automatic stabilizers to work; fiscal consolidation/restructuring of problem enterprises; medium-term expenditure framework.
A significant deterioration in the quality of domestic banks’ credit portfolio.HMIncrease loan loss provisions; strengthen risk-based supervision; macroprudential regulations; contingency planning and crisis resolution framework.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Low (L), Medium (M), High (H).

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Low (L), Medium (M), High (H).

Policy Discussions

A. Fiscal Policy

Discussions centered on strategies to maintain fiscal and debt sustainability while boosting growth. The expansionary fiscal policy stance is depleting buffers that should be saved for the event of adverse external shocks. The growth in current expenditures should be moderated, the tax base broadened, and non-concessional financing avoided.

19. Staff recommended moderating current expenditure growth to avoid crowding out space for public investment. Non-interest current expenditures are projected to rise by 16.0 percent in 2016, driven by double-digit increases in wages, transfers and goods and services. Staff cautioned that increases in current expenditures are difficult to unwind, particularly in a low inflation environment. A more moderate increase in public sector wages would pose smaller risks and would also attenuate possible competitiveness pressures from spillovers to wages in the private sector. Wage growth moderation alone cannot yield large savings. Staff also recommended a reduction in transfers, particularly to public enterprises, whose reform could underpin a fiscal consolidation effort. Narrowing the deficit by 1.5 percent of GDP in 2017–21 through a reduction in current expenditures would largely stabilize the debt, reducing the debt in 2021 to 53 percent of GDP, compared to 60 percent in the baseline scenario. Staff recommends that consolidation in order to preserve buffers.

Active Scenario(In percent of GDP)
Est.Projections
20142015201620172018201920202021
Baseline
Real GDP growth (in percent)3.83.04.03.93.83.83.83.8
Overall balance after grants (percent of GDP)-5.7-0.2-5.5-5.5-5.0-5.0-5.0-5.0
Capital expenditure (percent of GDP)8.04.77.57.48.28.27.97.8
Public sector debt-to-GDP51.948.652.353.853.956.357.959.9
Active Scenario
Real GDP growth (in percent)3.83.04.03.33.63.83.83.8
Overall balance after grants (percent of GDP)-5.7-0.2-5.5-4.0-3.5-3.5-3.5-3.5
Capital expenditure (percent of GDP)8.04.77.57.48.28.27.97.8
Public sector debt-to-GDP51.948.652.352.351.052.052.453.2

20. Staff welcomed the progress on public enterprise reforms. Transfers to the Guyana Sugar Corporation (GuySuCo) were equivalent to 1.8 percent of GDP in 2015 and are budgeted at about 1. 3 percent of GDP for 2016. Staff urged the authorities to adopt a restructuring plan for the sector that will improve cost efficiency, productivity, and alternative revenues streams, drawing upon the reforms proposed by the Commission of Inquiry. The initial steps taken in that direction are welcome. The scope and pace of reform should take into account social implications. Staff noted the improved financial performance of Guyana Power and Light (GPL), which no longer requires subsidies for its operations. However, most of those gains stem from low oil prices, which could prove transitory. Further progress to reduce transmission and commercial losses will help place GPL on a more sustainable financial footing.

21. The simplified budgetary process for public procurement by individual agencies brings flexibility, but should not compromise project evaluation and internal controls. Staff stressed the importance of maintaining the quality of public investment by carefully selecting projects, taking into account their financially feasibility, impact on productivity, and social considerations.

22. Staff welcomed plans to improve revenues through better enforcement but cautioned against counting on gains before they materialize. Since the revenue measures in the 2016 Budget are likely to reduce revenue, further tax exemptions should not be granted in expectation of improved revenue collection, especially before achieving concrete results. Broadening the tax base by reviewing tax exemptions would help raise revenues, and staff welcomes plans to review the VAT with a view to improve its effectiveness.

23. The largely concessional nature of the debt is an important source of resilience, and staff cautioned against increases in non-concessional debt. While sustained deficits will lead to an increase in debt over the medium-term, sustainability concerns are mitigated provided debt remains financed mostly in concessional terms. The projected deficits will be financed with a mix of concessional external funding and grants, and domestic borrowing. External financing of about 5½ percent of GDP, in line with recent historical experience excluding PetroCaribe, is expected. Domestic debt consists of short-term Treasury Bills. The authorities envisage issuing longer-term bonds with a view to developing domestic capital markets. Staff supports those plans, which can also help the National Insurance Scheme match its liability profile, but cautions that significant increases in domestic borrowing could crowd out credit to the private sector, raise domestic interest rates, and have implications for growth. Staff welcomes the authorities’ intentions to continue to refrain from non-concessional external borrowing.

24. Staff welcomes the authorities’ exclusion of possible future oil income from their medium term plans. The recently discovered deep water oil fields have relatively high extraction costs. Production may not be commercially viable if oil prices remain low. Exploration is proceeding, but oil revenues are not likely to materialize in the medium-term, and authorities have not factored in such income in their plans. Staff welcomes this cautious approach, and the authorities’ interest in setting-up a fiscal framework for handling eventual oil revenues following best practices. The IMF Board Paper on Macroeconomic Policy Frameworks for Resource-Rich Developing Countries can provide guidance for these efforts.4 Staff noted that the Fund stands ready to help develop the institutional capacity and supportive infrastructure to implement fiscal rules that would facilitate a prudent use of mineral resource revenues.

Authorities’ views

25. The authorities stressed their plans to strengthen tax administration. While they acknowledged that some tax measures approved in 2015 and envisaged for 2016 would decrease revenue, they expect the effect to be small and offset by improvements in tax administration. The authorities also noted that they expect stronger growth over the medium-term, which will raise revenue. The authorities also indicated their wish to have technical advice from staff and signaled their intent to solicit CARTAC support to conduct a detailed review of the application of the VAT since its inception to present with a view of benefitting from the resulting recommendations.

26. The authorities noted that the large increase in current expenditure is due to one-off reclassification changes and an adjustment in wages. In respect of the former, they clarified that the increase in transfers was due largely to a consolidation of expenditure items of constitutional agencies into a single category and higher capital expenditure at public enterprises, while the increase in spending on other goods and services could be viewed as a one-off change. As for the latter, they pointed out that wage growth will moderate in the future.

27. The authorities remain committed to restructuring public enterprises to reduce their reliance on government support. The restructuring of GuySuCo aims to reduce inefficiencies and place operations on a financially sustainable footing. One underperforming sugar estate has been targeted for closure and planned budget transfers for 2016 have been reduced by 25 percent. The company intends to transition to a new business model that would ensure its long-run viability, drawing upon the Commission of Inquiry’s recommendations. With regard to the public utility GPL, a recent network modernization project has reduced some transmission losses; further progress is expected under a new IDB/EU project. Lower oil prices have reduced electricity generation cost and tariffs ensure cost recovery.

28. The authorities indicated that they would continue to refrain from non-concessional external borrowing, and expressed interest in developing domestic debt instruments. The authorities agreed that major public investment projects should continue to be donor financed on concessional terms. They also intend to mobilize private sector funding, including through well designed private public partnerships. The authorities expressed interest in developing long term domestic debt instruments with a view to developing financial markets and mobilizing domestic savings. In this regard, technical advice from staff on debt market development would be welcome. The authorities took note of staff’s view that domestic borrowing should be pursued with caution as it could raise the interest burden and crowd out private investment. They also reiterated that they are not factoring in possible future oil income in their medium-term plans.

B. External Stability

29. EBA-based estimates suggest that the current account is broadly in line with its norm and that the REER is broadly in line with fundamentals The real effective exchange rate (REER) appreciated by approximately 18 percent during July 2014–January 2016 and export growth has slowed. The underlying current account is projected to be broadly unchanged in 2016, with the loss of rice exports to Venezuela—a permanent shock—offset by higher gold exports. External reserves appear to be adequate under standard metrics, including when measured against the metric for Small Island Developing States (SIDS) states. Staff noted that while reserves are projected to grow, this is predicated on low oil prices and there is a need to build buffers to reduce vulnerability to adverse shocks. For example, if the price of oil were to rise to 60 dollars per barrel, ceteris paribus, reserve cover would dip below 3 months of imports in 2016 and 2017. Staff’s assessment of the external position, drawing on model-based estimates and judgment, is that it is broadly in line with fundamentals but vulnerable to downside risks. Staff’s proposed fiscal measures would help preserve external buffers and partly unwind the REER appreciation.

30. De facto exchange rate flexibility would soften the impact of terms of trade shocks. Given limited nominal exchange rate flexibility, a strong U.S. dollar contributes to Guyana’s real exchange rate appreciation. Recent adverse shocks to export commodity prices were offset by lower oil prices, attenuating the BOP impact of the former. Guyana remains vulnerable to large terms of trade shocks given its dependence on imported oil and the concentration of its exports on a few commodities. The exchange rate regime is a de facto stabilized arrangement, with very limited movements even in the face of large external shocks. Staff noted that exchange rate flexibility should play a larger role in facilitating adjustment to external shocks, mitigating their effect on growth, and safeguarding reserves. Exchange rate flexibility, supported by appropriate fiscal and monetary policies, can help maintain the current account deficit at a safer level, reducing external vulnerabilities.

Authorities’ views

31. The authorities noted that the exchange rate is market determined. Exchange rate stability reflects the confidence that market participants have in the currency and the economy needs that confidence. They also noted that over the past year, exchange rate depreciation was modest, with the central bank making net purchases of foreign exchange.

C. Monetary Policy

32. With inflationary pressures muted, the monetary policy stance should remain accommodative. Lower prices for imported goods, including fuel, continue to restrain inflation despite the expansionary fiscal policy. Monetary policy has traction, with private credit playing an important role in the monetary transmission mechanism (see SIP). With the implementation of the new credit reporting act, banks will gradually have access to better information on borrower’s creditworthiness, which should boost high-quality lending, help reduce lending rates, and reduce banks’ excess reserves. As long as inflationary pressures remain contained, a more accommodative monetary policy stance, with base and broad money growing above nominal GDP, remains appropriate. Such a stance, combined with an effective credit rating system and other financial sector reforms, would support lending and growth. However, the authorities should stand ready to tighten monetary conditions if inflationary pressures arise.

Authorities’ views

33. The authorities agreed that the monetary policy stance should remain accommodative. They will continue to monitor movements in international prices and their impact on inflation and growth. In addition to open market operations, they plan to manage liquidity through foreign-exchange market intervention.

D. Strengthening Financial Sector Resilience

34. The financial sector is dominated by commercial banks. There are three foreign banks and three local banks, whose combined assets correspond to about 70 percent of financial sector assets, and are equivalent to 68 percent of GDP. The largest bank is Trinidad-based, followed by a domestic bank, accounting for 40 and 22 percent of commercial bank assets, respectively. That domestic bank plays a relatively large role in lending to businesses, and is the bank with the highest share of NPLs. Among non-bank financial institutions, the New Building Society (NBS), a deposit taking institution that focuses primarily on mortgage loans, is the largest entity accounting for about 7 percent of financial sector assets and over a quarter of non-bank financial institution assets.

35. Vulnerabilities to foreign exchange and interest rate risks appear limited. A depreciation of the exchange rate would improve the financial position of the overall banking system since banks in aggregate carry net long positions in foreign exchange (84 percent of capital and reserves as of December 2015). Interest rate risks are mitigated by banks’ ability to adjust interest rates on existing loans, although a higher interest rate burden on debtors can increase credit risk. However, banks are exposed to credit risk in their CARICOM securities. Stress tests conducted by the authorities also suggest that the weaker banks are also vulnerable to downgrades on their investment portfolio.

36. Banks remain well capitalized, but heightened vigilance is warranted due to increases in NPLs. Since the 2006 Financial Sector Assessment Program (FSAP), the authorities have brought insurance companies and the NBS under central bank supervision. Staff supports plans to also include credit unions under central bank supervision. Banking system aggregate capital appears well positioned to absorb an increase in provisioning up to the levels observed prior to the recent rise in NPLs without breaching the prudential threshold of 8 percent, but individual banks with higher NPLs have weaker buffers. While all banks meet provisioning requirements, only 20 percent provisioning is required when the loan is secured by collateral. This exclusion is sensible when risks are assessed in isolation. But collateral can be difficult to seize. And from a macroprudential perspective, there is a concern that its value may decline following aggregate or sectoral shocks, suggesting a case for tighter requirements.

37. Staff encouraged the authorities to continue to strengthen financial sector supervision. Given risks stemming from loan concentration, related party lending, potential loan classification weaknesses, collateral valuation and potential challenges in realizing collaterals, staff recommended tightening: (i) provisioning requirements; (ii) large exposure limits; (iii) restrictions on related lending; and (iv) loan classification rules. In addition, the stress testing toolkit could be expanded to include shocks to loan collateral values and also take into account inter-linkages among economic sectors, borrowers, and financial entities. Finally, staff argued for improved coordination of supervision of insurers and banks within the same business group. Risks from global banks’ de-risking activity should continue to be monitored. An FSAP mission will visit Guyana in May, and provide a more granular analysis of financial sector challenges and assist the authorities with strengthening the prudential toolkit.

38. While recent steps towards strengthening the Anti-Money Laundering and Combating the Financing of Terrorism framework are welcome, the authorities should address remaining deficiencies promptly. In particular, the authorities are urged to accelerate the implementation of the action plan agreed with the Financial Action Task Force.

Authorities’ views

39. The authorities will continue to monitor closely the strength of the financial system and reforms will be guided by the findings of the forthcoming FSAP mission. In the meantime, they will continue their risk-based approach to onsite inspection of banks. They have already urged banks to reduce NPLs to no more than 5 percent and increase provisioning. Their financial stability assessments will continue to be published, including a summary of banks’ stress tests results. They will continue monitoring global banks’ de-risking decisions and are open to supporting potential solutions discussed with CARICOM. The authorities urged the Fund to actively support efforts to find a solution to this pressing issue. Reforms to the macro-prudential framework, including on the stress-testing framework, will be guided by the FSAP findings.

40. The authorities plan to pass the revised draft insurance act by end-2016. This act, which was prepared with technical assistance from the World Bank, aims to correct regulatory and supervisory failures that were highlighted by CLICO’s bankruptcy.

41. The authorities plan to upgrade the AML/CFT framework to international standards in the first half of 2016. The authorities have received technical assistance from the World Bank on this matter. The authorities are exerting efforts to fully address all deficiencies identified by the FATF and implement the agreed action plan.

E. Structural Policies to Raise Productivity and Support Strong and Inclusive Growth

42. The mission welcomed authorities’ focus on promoting inclusive growth through improvements in infrastructure, human capital, and financial inclusion. Guyana has made considerable progress in reducing many dimensions of extreme poverty, and achieved most of its MDGs. But its Human Development Index remains low (at 0.636, making it the 124th country in the rankings). Integrating remote areas in the hinterland through improvements in transportation, access to electricity, social services and agency banking will help spread the benefits of growth and reduce poverty, given its strong regional dimension.

43. There is scope for productivity-enhancing reforms in key sectors. Staff noted the importance of lowering production costs in the sugar and rice sector given their high social impact and deteriorating market outlook. The mission pointed out that Guyana’s extensive renewable energy resources could help achieve a durable reduction in electricity costs, which are among the highest in the region (Annex IV). This could strengthen competitiveness by promoting value added industries. Improving the connectivity of small green technology electricity generators to the grid could help increase supply and reduce energy losses. Staff also stressed the potential of business outsourcing, telecommunications and ICT services as other areas for diversification. Population aging will put pressure on the National Insurance Scheme. Increasing the statutory retirement age can help place its finances on a more sustainable financial footing, and also contribute to a higher potential output.

44. The mission encouraged the authorities to further strengthen the business climate in priority areas. The World Bank’s 2015 Doing Business Report ranked Guyana 137th out of 189 countries in terms of ease of doing business. Staff noted several areas in which Guyana lags regional peers, notably access to electricity and credit, and resolving insolvencies. The 2015–16 World Economic Forum’s Global Competitiveness Report ranked Guyana 121st out of 140 countries in terms of competitiveness, noting weaknesses in transport infrastructure, electricity and telecommunications, institutional quality, ICT, and innovation. The public investment program can help relieve structural bottlenecks such as transportation and electricity that have long been identified as impediments to growth and economic diversification.

Infrastructure, Education, and Health

(100 = percentage or best score)

Authorities’ views

45. The authorities outlined their strategy for environmentally sustainable and socially inclusive growth. They reiterated their commitment to renewable energy projects, noting a recent memorandum of understanding with a private company for a 25 megawatt wind farm. Going forward, energy policies would draw upon the conclusions of IDB’s comprehensive analysis of the country’s energy matrix that is currently underway. Mini hydro stations and solar panels are expected to play a central role in hinterland electrification. A number of projects aim to bridge the divide between the coastal area and the hinterland by improving transport infrastructure and access to healthcare, education, and other social services. In this regard, four hinterland communities have been selected for township development.

46. The authorities will promote competition and economic diversification. They plan to liberalize the regulatory framework for telecommunications and ICT services and seek to increase airlift supply from several countries, with the view of promoting growth in tourism and non-traditional exports, including fresh fruits and vegetables, fisheries and aquaculture.

Staff Appraisal

47. Guyana’s economy continues to grow despite global headwinds. In 2015, real GDP grew at 3 percent. Growth is projected to increase to 4 percent this year, supported by the level effect of two new large gold mines, and an increase in public investment. Strengthening private sector confidence is essential for maintaining growth momentum.

48. The public investment program can promote environmentally sustainable and socially inclusive growth. The high cost of electricity, transportation and telecommunications are key impediments to growth. Public investment and liberalizing reforms can ease these bottlenecks, raise productivity, help integrate remote regions, and promote diversification and job creation. Well targeted investments can stimulate the economy in the short-run, and provide long-lasting competitiveness gains.

49. Oil prices have particularly strong macroeconomic implications for Guyana. Lower oil prices narrowed the current account deficit and also improved the fiscal balance through higher excise revenues and a reduction in the subsidies to the electricity company. While oil prices are expected to remain low, they can suddenly reverse. Oil represents a major source of fiscal and external vulnerability, particularly after the termination of PetroCaribe financing.

50. Exchange rate flexibility should play a larger role in facilitating adjustment to external shocks. Guyana remains vulnerable to movements in commodity prices due to its dependence on imported oil and the concentration of exports on a few commodities. The exchange rate regime is a de facto stabilized arrangement. The exchange rate is broadly in line with fundamentals and staff believes it should play a stronger automatic stabilizer role going forward.

51. A moderation of the fiscal policy stance is needed to preserve fiscal and external buffers. Sizable deficits of 5 to 6 percent of GDP in the medium-term would imply a large increase in debt, raising sustainability concerns and contributing to external vulnerability. Although debt distress risks remain moderate and debt service manageable due to its largely concessional nature, fiscal consolidation needs to take place in order to stabilize the debt ratio. Staff recommends starting consolidation in 2017, which would preserve fiscal buffers for use when adverse shocks materialize. Consolidation should limit the growth of current expenditure and reduce public enterprises reliance in government support. Staff believes expenditure measures are needed to preserve fiscal space for public investment and poverty reduction, ease financing pressures and contain the public debt. Staff recommends a reduction in the fiscal deficit by 1.5 percent of GDP for 2017–21, compared to the authorities’ current plans. This would largely stabilize the debt to GDP ratio over the medium-term. Expenditure measures can be complemented by improvements in tax administration. There is also scope for reviewing tax exemptions so as to broaden the tax base.

52. The largely concessional nature of the debt remains an important source of resilience, and should be preserved. Non-concessional financing should be approached with care, including domestic borrowing which can drive up interest rates. This may require adjusting the size of the planned fiscal deficits based on the envelope of concessional financing and grants.

53. The monetary policy stance should remain accommodative. Lower prices for imported goods, including fuel, continue to restrain inflation. As long as inflationary pressures remain contained, an accommodative policy stance remains appropriate.

54. Banks remain well capitalized, but heightened vigilance is warranted due to increases in nonperforming loans. There is scope for tightening provisioning requirements including in the case of collateralized loans, large exposure limits, restrictions on related lending, and loan classification rules. A Financial Sector Assessment Program mission will visit Guyana in May to provide a more granular analysis of financial sector challenges and assist the authorities with strengthening the prudential toolkit.

55. While recent steps towards strengthening the Anti-Money Laundering and Combating the Financing of Terrorism framework are welcome, the authorities should address remaining deficiencies promptly. In particular, the authorities are urged to accelerate the implementation of the action plan agreed with the Financial Action Task Force.

56. Staff recommends that the next Article IV consultation with Guyana be held on the standard 12-month cycle.

Figure 2.Guyana: Real Sector Indicators

Sources: Bank of Guyana; Ministry of Finance; and Fund staff estimates.

1/ The rice agreement with Venezuela was suspended in the second half of the year and did not affect significantly rice production in 2015 but is likely to reduce future output.

Figure 3.Guyana: External Sector Developments

Sources: Bank of Guyana; and Fund staff estimates and projections.

Figure 4.Guyana: Fiscal Sector Developments

Sources: Ministry of Finance; and Fund staff estimates and projections.

Figure 5.Guyana: Financial Soundness Indicators

Source: Bank of Guyana.

Figure 6.Guyana: Monetary Developments

Source: Bank of Guyana Financial Statistics.

Annex I. External Balance Assessment

Model based estimates suggest that the current account deficit is broadly in line with its norm and that the real exchange rate is appropriate. Nevertheless, some flexibility in the nominal exchange rate together with fiscal consolidation would help contain prospective import growth, boost export competitiveness, and build buffers against potential external shocks.

1. The real effective exchange rate (REER) appreciated by approximately 18 percent during July 2014–January 2016, notwithstanding modest nominal depreciation relative to the US dollar. The REER appreciation largely reflects developments in the value of the US dollar—which the Guyanese dollar follows closely—against the Euro and other major currencies.1

Guyana’s real exchange rate appreciated by 18 percent during July 2014–November 2015.

2.Staff used the EBA-lite template to assess external stability in Guyana.2 The EBA-lite estimation results are sensitive to the terms of trade, which developed favorably in 2015 and led to a narrowing of the current account deficit.

3. Model based estimates suggest that the current account deficit is broadly in line with the norm and that the real exchange rate is appropriate. While the staff’s preliminary analysis suggests a current account deficit gap of 1.1 percent of GDP in 2015, which would require real exchange rate appreciation of 4.2 percent, the staff’s baseline medium term projection envisages a substantial widening of the current account deficit to about 8 percent due to expansionary fiscal policies and the projected recovery in oil prices; the discussions highlighted the need to limit spending, notably due to sustainability considerations, while shifting expenditure from wages and transfers toward capital. Nevertheless, higher imports of capital and intermediate goods would be desirable when underpinned by increased FDI inflows.

Current Account and REER Gaps(In percent of GDP, unless otherwise indicated)
EBA (2015)
Current account norm-5.7
Current account balance-4.6
Current account gap, of which:1.1
Policy gap1.0
CA elasticity to REER 1/-0.3
Exchange rate gap (percent)-4.2
Source: Fund staff estimates.

This elasticity is computed using the exchange rate elasticities for imports (0.92) and exports (-0.71) and the values of imports and exports of goods and services as a share of GDP.

Source: Fund staff estimates.

This elasticity is computed using the exchange rate elasticities for imports (0.92) and exports (-0.71) and the values of imports and exports of goods and services as a share of GDP.

Annex II. External Reserves Adequacy

Both standard and risk-weighted measures of reserve adequacy indicate that reserve coverage of imports would be adequate through 2021. The current account deficit initially narrows in 2016 under the WEO projection of a sharp decline in international oil prices, then widens as the oil price rises and imports outpace exports due to higher investment and the subdued outlook for commodity exports, then narrows modestly. The reduced reserve coverage of imports would not provide an adequate buffer against severe but plausible external shocks.

1. International reserves are currently slightly above traditional non-risk based adequacy metrics, supported by lower international oil prices. International reserves were 3.5 months of imports at end-2015, above the 3 month standard threshold (see Text Figure below). However, large and persistent terms of trade shocks reduced reserve coverage from 5.2 months of imports in 2010 to 3.5 months in 2014 (see Text Table below). The sizable decline in international oil prices and fuel imports in 2015 helped reserve coverage remain above the threshold, despite weaker capital inflows from PetroCaribe and lower disbursements.

Gross International Reserves and Adequacy Metrics

(US$ millions)

2. Reserves are projected to remain well above 3 months of imports through 2021. Coverage remains well above 3 months of imports under the WEO January 2016 assumption that international oil prices would fall to about 35 dollars per barrel in 2016 and remain below 50 dollars per barrel for most of the next five years. The ratios of reserves to broad money and reserves to short-term debt remain adequate, due to the small quantity of the latter. The projected reserve coverage of imports is sensitive to the assumptions made for the future path of international oil prices. For example, in a scenario were oil jumps back to 70 dollars per barrel, ceteris paribus, reserves would cover less than 2 months of imports by 2017, and less than one month by 2020.

3. With oil prices low, international reserves rise above the adequacy threshold under risk-weighted metrics. The first risk-weighted measure is applicable to all countries and suggests that reserves at end-2015 represented 130 percent of the adequacy threshold and would exceed the threshold by 2021. The second risk-weighted measure, which uses specific metrics for Small Island Developing States (SIDS), also points to improving adequacy through 2021. Under this metric, reserve coverage of imports is in the middle of the adequacy range of 75–100 at end-2015 and exceeds the threshold by 2018.

Table A2.1.Ratios of Reserves to Optimal Reserves Based on Various Measures(In percent)
Risk-WeightedSIDS3 months20% of BroadShort Term
MeasureMeasureImportMoneyDebt
20028762147273159
20039681146248548
20047863105196573
20058375102203786
20068781981941,976
200712077921952,592
200811978871982,848
20091951331653163,275
20102121411733402,575
20111831201453002,432
20121701121382902,432
20131591071322562,006
201413789118208780
2015130861191851,643
2016135901271861,487
2017149991401961,602
20181691111562142,028
20191771181642202,456
20201761191632202,590
20211801231722282,819
Adequate
Range100-15075-100100100100
Annex III. Guyana’s Power Sector Reform

1. Guyana depends heavily on imported oil for its power needs. The country’s installed power generation capacity is about 83 percent oil-based and 17 percent biomass (bagasse)-fueled. This capacity translates into a generation mix that is almost entirely dominated by oil-based generators, which supply about 95 percent of the country’s power consumption.

2. The oil-dependent power generation mix contributes to macroeconomic volatility. High oil prices widen the external current account deficit, increase fiscal transfers to the public utility Guyana Power and Light (GPL) and reduce oil tax revenues due to the limited pass-through in the domestic fuel pricing regime. Accordingly, adverse oil price shocks consume foreign exchange and fiscal resources. Volatility in oil prices quickly propagates to the external and fiscal sectors.

3. High electricity costs and tariffs are a drag on competitiveness and growth. Oil price shocks increase the cost of power generation. When those costs are passed on to users, they increase the cost of production and constrain investment. Average retail electricity prices were among the highest in the region in 2014 (Text Figure 1). GPL’s relatively high rate of technical and commercial losses also contributes to high electricity prices. Although the recent decline in oil prices has provided some respite, Guyana remains exposed to oil price corrections.

Electricity Prices and Share of Renewables, 2014

Source: Climatescope 2015.

4. Oil-dependent power generation is at odds with the vast renewable energy potential. The country has extensive hydro power potential, estimated at 7600 MW, which by far exceeds its annual consumption and installed capacity. Various studies have identified 67 sites as suitable for hydro power generation. Guyana’s climate is also suitable for wind and solar power generation while its sugar and rice industries provide opportunities for co-generation of electricity from biomass (sugarcane bagasse and rice husk).

5. A transition to a green power matrix will bolster resilience to shocks while reducing its carbon footprint, but has been delayed by various constraints. Interest in developing Guyana’s hydro potential dates back to the first oil shock of 1974-75. Plans to build a large hydroelectric project at Amaila Falls began in the late 1980s and evolved through several proposals and rounds of negotiations but implementation has been constrained by the project’s large size, complexity, cost, and Guyana’s limited fiscal space.

6. Guyana has recently launched a comprehensive review of its power sector strategy. The government has tasked the Inter-American Development Bank (IDB) with a review of its optimal energy matrix. The IDB will assess the optimal power generation mix for the country, looking at a broad array of energy sources. The government has also retained an international consultant for a review of the feasibility of Amaila Falls Hydropower Project. The power sector strategy will draw upon the results of these studies.

7. The government has also taken steps to increase the contribution of renewables to its power generation mix. A recently signed MoU with a private firm provides an opportunity for the construction of a 25 MW wind farm. The government has put in place fiscal incentives to promote solar power and will use solar panels and mini hydro stations in remote communities without grid access. Solar power is also increasingly used by businesses to power their buildings and operations. In this respect, enabling green technology independent power producers to sell their excess power to the grid could reduce energy losses, increase supply, and lower tariffs. The government is also exploring the modalities of renewing its ground-breaking low carbon partnership with Norway, which has provided grants for developmental projects in exchange for Guyana’s progress in preventing deforestation and reducing the economy’s carbon footprint.

1Venezuela provides concessional long-term financing for oil importers in the region through PetroCaribe agreements. In July 2015, Venezuela suspended the agreement with Guyana due to revival of a longstanding border dispute.
2In 2015, the government transferred large excess cash balances from statutory agencies (the Guyana Geology and Mines Commission and the National Frequency Management Unit) and the Lotto Fund to its account, amounting to about 1.4 percent of GDP, and resulting in a large one-off increase in non-tax revenues.
3Approximately $40 million in grants from the European Union are projected for 2016, which will improve the current account.
4Available at: https://www.imf.org/external/np/pp/eng/2012/082412.pdf.
1Guyana’s exchange rate regime is a de facto stabilized arrangement.
2The equilibrium real exchange rate could not be estimated due to the lack of data on productivity indicators.

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