Guyana: 2018 Article IV Consultation—Press Release and Staff Report

2018 Article IV Consultation-Press Release and Staff Report

Abstract

2018 Article IV Consultation-Press Release and Staff Report

Background

1. Guyana is expected to become an oil-producer in 2020, with much higher oil reserves than estimated in the 2017 Article IV Staff Report. In 2015, ExxonMobil made a significant offshore oil discovery, conservatively estimated to hold between 800 and 1,400 million barrels. Following additional discoveries in 2017-18, recoverable resources are now conservatively estimated at around 3.2 billion barrels of oil. Commercial production is planned to commence in early-2020, with an output conservatively estimated at 100,000 barrels/day (bpd), rising to 300,000 bpd in 2025.1 Oil exploration and drilling is partially included in the balance of payment statistics, but not in the national accounts.2 The main direct effect of the oil sector on the domestic economy will be through fiscal revenue. Under the revenue-sharing agreement, 75 percent of oil production is initially allocated to “cost recovery” to ExxonMobil and its partners. The remaining 25 percent is considered “profit oil” and is shared 50-50 with the government. The agreement sets a royalty of 2 percent on gross earnings, which brings the initial government share to 14.5 percent of total oil revenues.3

A01ufig1

Guyana: Oil Production and Government Oil Revenue 1/

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

1/ Based on Liza Phase I and II (45 percent of estimated recoverable resources).

2. The authorities’ policies have been broadly in line with Fund advice. Some of the key past Fund recommendations include fiscal consolidation to preserve buffers, refraining from nonconcessional external financing, improving the efficiency of public enterprises, allowing exchange rate flexibility to play a larger role in facilitating the adjustment to external shocks, and strengthening supervisory and regulatory framework in line the 2016 FSAP. The authorities’ response to these recommendations has been broadly consistent (Annex I). In addition, the authorities continue to take full ownership of the various strains of Technical Assistance (TA) and Capacity Development (CD) delivered by the Fund and other providers. There are strong synergies between this TA and Fund surveillance, with the latter helping identify areas where TA is needed, and the delivery of TA helping increase the traction and implementation of the Fund’s policy advice.

Recent Developments

3. Economic growth slowed in 2017, but became more broad-based. The economy grew by 2.1 percent, down from 3.4 percent in 2016, on the account of lower than expected mining output and weak performance in the sugar sector. Nonetheless, non-mining growth rebounded to 4.1 percent following a contraction in 2016. Construction expanded significantly for the first time since 2015, buoyed by higher public investment. The rice sector recovered from weather-related shocks. Inflation remained stable at 1.5 percent at end-2017, largely driven by food items, while core inflation was close to zero.

A01ufig2

Headline and Core Inflation

(period average yoy, in percent)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

A01ufig3

Real and Potential GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

A01ufig4

Real and Potential Growth of Non-mining Sector

(In percent)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

4. Weaker than expected export growth and higher oil prices contributed to the current account balance turning negative. In 2017, the current account recorded a deficit of 6.7 percent of GDP from a surplus of 0.4 percent of GDP in 2016. The financial account improved due to FDI, particularly in the oil and gas sector, and higher loan disbursements to the public sector. Gross reserve cover declined to 3.2 months of imports. During January-December 2017, the real and the nominal effective exchange rates depreciated by about 6 and 5 percent, respectively, mostly driven by developments of the U.S. dollar vis-à-vis other currencies. Guyana’s exchange rate regime remains a de jure float, but a de facto stabilized arrangement.

5. The central government’s deficit remained stable at around 4.5 percent of GDP in 2017, lower than the budgeted 5.6 percent. Improvements in tax administration contributed to a 1.2 percentage point increase in the tax revenue to GDP ratio, which was partly offset by a 0.4 percentage point decline in the ratio for non-tax revenue. Public debt stood at 52.2 percent of GDP at end-2017.

6. Credit to the private sector grew 2.1 percent in 2017 due to a combination of weak demand and banks continuing to strengthen their balance sheets. Credit growth was stronger in the mortgage (4.5 percent) and household (2.7 percent) sectors, but weaker in the business sector (0.9 percent) in line with the evolution of activity. The 91-day Treasury Bill rate declined to 1.54 percent at end-2017, from 1.68 percent at end-2016, continuing to imply negative ex ante real rates.

A01ufig5

Real and Nominal Effective Exchange Rates

(Index, 2007=100; increase = appreciation)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

A01ufig6

Monetary Indicators

(12-month percent change)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

7. Guyana’s banking system remains relatively stable. Although banks remain profitable and have adequate capital buffers, non-performing loans (NPLs) remain high at 12.2 percent of total loans at end-2017, down from 12.9 percent at end-2016. The business sector accounts for 72 percent of NPLs. One domestic bank accounts for about half of NPLs, though it has extended only a fifth of loans. Credit concentration appears high while provisioning is low in comparison with other countries in the region. Banks have responded to higher NPLs by tightening credit.

A01ufig7
Sources: Bank of Guyana, Eastern Caribbean Central Bank, IMF, National Authorities

8. Pressures on Correspondent Banking Relationships (CBRs) have stabilized. However, some banks noted higher charges for cross-border transactions, stricter requirement for customers’ information, and higher operational costs due to the AML/CFL compliance. While banks continue to have CBRs, two of the three domestically-owned banks cannot conduct business with third-party foreign currency cheques but can still execute wire transfers.

Outlook and Risks

9. Guyana’s medium-term prospects are very favorable. Economic growth is projected to be 3.4 percent in 2018, driven by continued strength in the construction and rice sectors, and a recovery in gold mining. The commencement of oil production in 2020 will be a turning point. Further oil exploration is likely to increase long-term production and proven reserves. Reaping the benefits of this mineral wealth will hinge on structural reforms to improve the business environment, increase resilience to external shocks, promote inclusive growth, and the effective use of the oil windfall to enhance the economy’s physical and human capital.

10. The external outlook is expected to improve significantly after the start of oil production in 2020. The current account deficit is projected to narrow to 6.1 and 4.3 percent of GDP in 2018 and 2019, respectively. The deficit will be financed largely by FDI inflows and donor-supported investment. The balance of payments will swing sharply to positive in 2020. The current account will move to large surpluses, which will be partially offset by deficits in the financial account as repatriation of “cost recovery” revenues by oil companies.4

11. Public debt is projected to rise in the short-term, before declining with the onset of oil production. The central government deficit is projected to widen to 5.4 and 5.1 percent of GDP in 2018 and 2019 due to the cost of restructuring the sugar sector and an increase in infrastructure-related capital expenditure. The public debt is projected to peak at 57.2 percent of GDP in 2019. A publicly guaranteed 5-year syndicated external bond, with a 4.75 percent interest and amounting to 3.7 percent of GDP is being issued by the National Industrial and Commercial Investments Limited (NICIL) to finance the restructuring of the state-owned sugar enterprise (GuySuCo).5 It will push the total public and publicly-guaranteed debt slightly above 60 percent of GDP in 2018–19. That ratio is projected to decline sharply after 2020, reaching 41.4 percent by 2023.

12. Overall, risks are tilted to the downside in the short-term but to the upside over the medium to long-term (Table 8). Weaker-than-expected global growth can weigh down on commodity export prices. Low energy prices would benefit Guyana in the short-term, by reducing its oil import bill. But a persistent shock would hurt its eventual exports (in the first years of production, changes in oil prices have a one-for-one impact on fiscal revenue.)6 A strong U.S. dollar can erode external competitiveness in the absence of greater exchange rate flexibility. A disorderly restructuring of the sugar sector would have major economic and social costs. Further CBR losses remain a risk. As Guyana grows richer, it could lose access to grants and concessional financing, which are projected to taper off with the start of oil production. On the upside, further oil discoveries and production, as well as successful implementation of envisaged reforms within the public sector, would significantly improve economic growth over the medium- to long-term.

Table 8.

Guyana: Risks Assessment Matrix 1/

article image

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

13. Debt sustainability concerns are attenuated by future oil revenues, but the financing of short-term deficits should be carefully managed. The authorities have been prudent and refrained from private external borrowing in anticipation of future oil income. The one instance of such borrowing has been the publicly guaranteed NICIL bond to finance the restructuring of GuySuCo, which should strengthen the fiscal position over the medium-term by eliminating further government bailouts to that company.7 Staff encouraged the authorities to rely as much as possible on Multilateral Development Banks, including non-concessional financing.

14. Domestic financing options remain limited. At present, domestic debt consists of short-term Treasury bills. The government has maintained an outstanding balance at the central bank of about 6 percent of GDP at end-March 2018 (from 3 percent at end-2016 and 3.5 percent at end-2017). Staff includes this overdraft in the debt figures in this report. These operations provide limited benefits in terms of reduced borrowing costs since the interest rate on the Treasury Bills issued for monetary policy operations is paid by the Treasury.8 Staff reiterated and stressed the importance of settling these balances at the central bank, which the authorities agreed to do in the short-term through the issuance of Treasury Bills. Staff encouraged the authorities to follow-up on their plans and TA recommendations provided by MCM in 2017 to develop the domestic bond market (Annex II). That could provide a stable source of financing while meeting the demand for longer-term instruments from banks, insurance and pension funds. Initial issues will likely carry a premium to compensate investors while a critical mass of liquidity builds up in the bond market, but the eventual benefits will outweigh these costs.9 If longer-term bonds cannot be issued in the near term, there is scope for additional financing through Treasury Bills. Private external debt should continue to be avoided if possible, and central bank financing should not be used at all.

A01ufig9

Overdraft from the Bank of Guyana

(In Percent GDP)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: Bank of Guyana1/ This amount is net off Treasury bills issued by the Bank of Guyana for monetary policy operations.

15. While consolidation is not needed for the sake of debt sustainability, a moderation of the deficit would reduce financing needs and preserve external buffers.

A01ufig10

Central Government Current Expenditure

(In Percent GDP)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Sources: National Authorities, IMF FAD dataset

An undershooting of the planned deficits of ½-1 percent of GDP is likely to materialize due to one-off revenues from a tax amnesty,10 and staff encouraged the authorities to save that overperformance. Staff cautioned that scaling up public investment without addressing the shortcomings identified in the 2017 Public Investment Management Assessment (PIMA) could undermine its effectiveness. Current expenditure as a share of GDP used to be among the lowest in the region, but has increased significantly in recent years. Staff recommended an expenditure review to assess the efficiency and effectiveness of public spending, and provide opportunities for safety net reform and more effective action on inclusive growth. The authorities’ intent to conduct the third Public Expenditure and Financial Accountability (PEFA) assessment in 2018 is welcomed.

16. Staff supports the authorities’ efforts to reform public enterprises. The restructuring of GuySuCo included a reduction in its workforce and the establishment of a Special Purposes Unit at NICIL, tasked with divesting some of its assets. As part of that process, different revenue streams are being pursued, including co-generation of electricity with sugar cane bagasse, production of plantation white sugar, and investment in packaging facilities. That process envisions the privatization of 3 out of 6 sugar estates. It involves significant upfront costs, but should strengthen the fiscal position in the medium-term by placing a downsized GuySuCo on sustainable financial footing. Staff emphasized the importance of providing a safety net to protect those affected by this process given the economic and social implications, geographic concentration of the displaced workers (which amplifies spillovers to the impacted regions’ economies) and the difficulties sugar workers may face transitioning to other occupations. Further, the reliability of electricity is low, linked to technical and institutional deficiencies in Guyana Power and Light (GPL). Technical losses in electricity transmission are about 10 percent, while commercial losses are about 30 percent. GPL reported a loss of US$ 3 million in 2017, and has asked the government for financial support to upgrade its power generation and electricity grid to increase reliability and meet the growing energy demand. Any significant investment would likely require additional borrowing or a Public Private Partnership (PPP) arrangement.

17. The authorities are working closely with the Fund and other TA providers to adopt a transparent rules-based fiscal framework for managing oil wealth. Plans for establishing a natural resource fund are well-advanced, and legislation is expected to be presented to the Cabinet and to Parliament later this year. Fiscal policy objectives, after oil revenue comes on stream, should strike a balance between development spending and preserving macroeconomic stability. An appropriate macro-fiscal policy framework will provide the basis for determining the allocation of annual oil revenue for stabilization and domestic capital expenditure, as well as intergenerational savings. It should be integrated into the budget framework with no parallel spending authority. It is important to ensure consistency between the fund deposit/withdrawal rules and a fiscal rule. This should be reinforced by an overarching fiscal responsibility legislation. Annex III provides country experiences in managing natural resource windfalls.

18. Tax administration and PFM efforts are ongoing (Box 1). Staff supports continued efforts by the authorities to enhance the quality and efficiency of government expenditure and tax administration, in response to the 2017 PIMA and Tax Administration Diagnostic Assessment Tool (TADAT). They include modernizing revenue administration, and reinforcing public financial management systems, including strengthening public investment management. The 2017 VAT reform broadened the base while reducing the rate, yielding a gain in the VAT revenue to GDP ratio. Staff welcomed recent efforts in improving tax administration, including the establishment of a Large Taxpayers Unit and creation of new outposts to improve tax collection. Nonetheless, staff cautioned that the expectation of future amnesties can weaken compliance.

A01ufig11

VAT Revenue

(In percent GDP)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: Ministry of Finance

Fiscal Structural Reforms

Fiscal structural reforms are important as Guyana prepares to become an oil producer. Major oil discoveries and the government’s plan to ensure that new extractive industry projects support a diversification of the economy will require: (i) modernizing the revenue administration; (ii) strengthening public financial management systems, including enhancing the efficiency of public investment management; (iii) and fine-tuning fiscal policy objectives to achieve a balance between development and macroeconomic stability.

Modernizing the Revenue Administration

There are some areas of good practice in tax administration. The recent TADAT identified strong performance in several areas. The range and accessibility of tax information and assistance provide strong foundations for voluntary compliance. Robust internal and external controls along with an independent graduated dispute resolution process are in place. Income Tax legislation mandates advance installment payments and withholding at source.

The operational framework of the Guyana Revenue Authority (GRA) has been weakened by the absence of a strategic planning management system. Lack of a strategic plan and structured risk management approaches have led to uncoordinated programs related to day-to-day operations and reform initiatives. Data integrity and availability are major issues—hampering effective compliance management and credible reporting. Weak filing and payment compliance are pervasive. There is no e-filing facility, which impacts the cost of compliance and increases the burden for taxpayers to meet their filing obligations. Furthermore, disjointed case selection and management of audits compromise audit outcomes.

Reform strategies for modernizing revenue administration include:

  • Developing a three to five-year strategic plan as a roadmap to guide operational delivery.

  • Establishing a dedicated reform unit to coordinate the implementation of reforms, and improve management control through performance targets.

  • Improving information technology, particularly in the use of third party data, business process simplification, and data analytics to build an evidence-driven compliance strategy.

  • Addressing inadequacies in the integrity of the taxpayer register and accounts.

  • Institutionalizing a compliance risk management program to enable risk profiling and assessment.

  • Reorganizing the GRA’s structure to place all core specialized functional areas of Customs under the full purview of the Head of Customs.

  • Reorganizing field offices along segmentation principles.

  • Establishing the GRA as the single revenue collection agency for the petroleum sector, and creating a specialized petroleum revenue team within the Large Taxpayers Unit.

Enhancing Public Financial Management

Public financial management needs to be reinforced. An initial step would be to strengthen a medium-term fiscal framework, eventually integrating the revenue forecasts from extractive industries. The revenue forecasting framework could be enhanced by developing project-specific cash flow models for the petroleum project and the two large gold mines. At the same time, continued efforts to improve the annual budget process, including enhancing the presentation of the budget, will increase credibility.

Public Investment Management (PIM) capacity must be strengthened. Guyana’s PIM has many desirable features, but the system is less efficient than comparator countries, based on a recent IMF assessment.1 It is affected by significant weaknesses in the planning, budgeting, appraisal, selection, procurement, and implementation of capital projects. Reform should include:

  • Putting in place a transparent rules-based fiscal framework by 2020.

  • Identifying key strategic public investment projects to guide medium-term budgeting.

  • Completing and publishing the policy framework on PPPs.

  • Improving the monitoring of SOEs to coordinate their public investments and to monitor fiscal risks.

  • Preparing and disseminating detailed guidance on project preparation and appraisal, allocating sufficient resources to pre-investment planning, and increasing the budget agencies’ capacity to undertake appraisals.

  • Enhancing access to public procurement information and updating regulatory framework to international standards, including the requirement for procurement planning.

  • Issuing detailed guideline on project management, enforcing ex-post reviews for major projects, and building a database for monitoring project implementation.

  • Taking small but gradual steps in monitoring public assets by conducting regular surveys, keeping record of value, condition, and location of non-financial assets.

1 Capital and recurrent budgets are prepared within the Ministry of Finance (MoF) albeit by two separate divisions, information on capital spending is quite extensive despite poor budget presentation, elements of a medium-term budget framework are being put in place, and the coordination between the central and lower levels of government is relatively orderly.

Authorities’ Views

19. Notwithstanding the positive prospects of energy revenues on the horizon, the authorities are committed to maintaining fiscal discipline. Given the immediate social and infrastructure needs and the costs of GuySuCo’s restructuring, they expect the central government deficit to remain in line with previous years during 2018-19, before gradually falling over the medium-term. In addition to the on-going tax amnesty, improvements in tax collections including through the recovery of arrears, court judgement awards, and fines are already having a positive impact on government revenues. Efforts to enhance the quality and efficiency of government expenditure and tax administration are ongoing, albeit capacity constraints have made progress slower than the authorities would have liked. They noted that moral hazards associated with expectations of future tax amnesties are well contained since the last amnesty was in the 1980s, and further amnesties are not expected.

20. More broadly, the authorities highlighted that the adoption of an oil and gas fiscal framework, the establishment of a SWF, and considerations for a medium-term debt strategy will help frame fiscal policy. The latter will help clarify the sources of domestic and external financing, and cost-risk trade-offs. The authorities agreed, in principle, that an appropriate funding mix will involve limited private external borrowing, and they will rely on Multilateral Development Banks to the extent possible. They are also keen to issue medium- to long-term bonds to assist in capital market development, but highlighted that capacity constraints have delayed those plans. They plan to settle government balances in the Bank of Guyana (BoG) in the short-term. They have set up an inter-agency MoF-BoG working committee, and note that the establishment of a Treasury Single Account will help narrow the balance by consolidating government funds, while the issuance of Treasury Bills will also help close that balance in the near term.

21. The authorities noted the on-going restructuring and downsizing of GuySuCo, and recognized the importance of an appropriate safety net for those affected by that process. Several programs have been put in place to help displaced workers, including re-employment in the revitalization of sugar estates, and in drainage and irrigation activities. Many former employees have received severance payments, and pay-outs to others who qualify are in progress. Re-training programs are being offered, as well as some assistance to support workers in starting small businesses.

B. Monetary Policy and External Stability

22. Monetary policy should gradually revert towards a neutral stance. An accommodative stance was appropriate due to the economic slowdown, weak credit growth, and low inflation. But as the economic recovery strengthens and inflationary pressures arise, monetary policy will need to be tightened. International prices and their pass-through to domestic inflation should be closely monitored, as well as the effects of changes in the interest rate differential vis-à-vis the United States.

23. Staff assessed Guyana’s external position as moderately weaker than levels consistent with fundamentals. External Balance Assessment (EBA) based estimates suggest the current account balance in 2017 to be around 1.9 percent of GDP lower than its norm of a 4.8 percent deficit, implying a moderate real exchange rate overvaluation (Annex IV. A). The current account gap is expected to narrow over the short-term, given the expansion of commodity exports and a favorable terms-of-trade shock in 2019. This expected narrowing of the current account gap would imply an exchange rate that is broadly in line with fundamentals. International reserves remained above traditional metrics and meet the Fund’s composite adequacy metric (Annex IV.B).

24. Staff recommended more exchange rate flexibility, which would facilitate the adjustment to external shocks and safeguard foreign reserves. The nominal exchange rate has remained broadly stable since a small depreciation in early 2017. Guyana remains vulnerable to terms of trade shocks given its dependence on imported oil and the concentration of exports on a few commodities.

25. The foreign exchange interbank market remains limited. Banks tend to rely on a few exporting customers to meet their other customers’ FX demand needs, with relatively few transactions among banks. This leads to hoarding of FX by banks, since they cannot rely on a well-functioning interbank market to supply eventual needs. Banks attributed this problem to the small scale of the market. Prudential limits on the net open FX position could create incentives for more interbank FX market transactions.

Authorities’ Views

26. The authorities are of the view that the recent slowdown in growth and low inflation provided the space for monetary policy to be supportive. Since spillovers from global financial conditions affect the domestic economy with lags, higher international rates have not yet begun to fully impact domestic rates. The BoG remains focused on achieving its output and inflation objectives, and the future path of monetary policy will continue to be informed by domestic and international economic and financial conditions.

27. The authorities remain committed to a market determined flexible exchange rate regime. After some tightness in early 2017, the FX market is now in a strong surplus position of U.S. dollars. While the exchange rate has adjusted to some degree to reflect this position, due to the oligopolistic nature of the market and resulting frictions, rates remain somewhat weaker than justified by market fundamentals.

C. Strengthening Financial Sector Resilience

28. There has been significant progress in implementing the 2016 FSAP regulatory framework recommendations (Annex IV). In April 2018, four bills were submitted to Parliament: amendments to the Bank of Guyana’s Act to provide an emergency liquidity assistance (ELA) to deposit taking financial institutions; amendments to Part VIII of the Financial Institutions Act (FIA) for orderly resolution of a failing institution; the National Payment System (NPS) law to facilitate the establishment, regulation and oversight of a modern national payment system; and the Deposit Insurance Act to foster financial stability by protecting depositors and by contributing to the resolution of member institutions. The authorities confirmed that the deposit insurance scheme (DIS) would be introduced after an effective resolution regime and the ELA framework are formalized.

29. The BoG continues to strengthen financial sector resilience as per the FSAP’s recommendations. It established a Financial Stability Unit (FSU) to monitor and identify systemic risks, and to support the Financial Stability Committee. The BoG continues to closely monitor and request frequent reporting on commercial banks’ asset quality and remedial actions to reduce NPLs. A sustained recovery in the non-mining sectors will help reduce the stock of NPLs. Moreover, the Crisis Management Plan (CMP) and Supervision Guideline (SG) are currently being reviewed to fill information gaps on banks’ conditions and group structures, tighten the definition of related party lending, and refine loan classification and provisioning. CARTAC provided TA on Basel II/III in February 2018, and the BoG drafted the road map for Basel II implementation—focusing on the minimal capital requirement in the first phase (Pillar 1), followed by enhancing supervisory review requirements (Pillar 2) and improving market discipline through effective public disclosure requirements (Pillar 3). The draft Financial Consumer Protection legislation is also being prepared. The authorities have addressed significant deficiencies in the AML/CFT framework, and are encouraged to continue working towards fully aligning it with the FATF standard and ensuring its effective implementation.

30. A balance sheet analysis shows that households are the principal domestic creditor with banks serving as the center of linkages to other domestic sectors. In stock terms, households provided about 26 percent of GDP to the banking sector (commercial banks and central bank) in 2016. Government external funding has the largest share of total inter-sectoral net credit. The government financed externally 33.8 percent of GDP, largely from concessional loans. Its domestic financing from the BoG and commercial banks were 2.9 percent and 6.9 percent of GDP, respectively.

Balance Sheet Analysis Matrix, 2016 Net positions

(In percent of GDP)

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Source: Fund staff calculations.NBFIs: non-bank financial institutions: NFCs: non-financial corporations; HHs: households; and ROW: rest of the world.

Authorities’ Views

31. The authorities are committed to making further progress in implementing FSAP recommendations. They highlight the efforts made to enhance the BoG’s supervisory powers and establishing the ELA framework, while noting the progress on the legislative front pertaining to the insurance bill, national payments system and deposit insurance. They have also been holding discussions with commercial banks on upcoming revisions in regulatory frameworks, including the guideline on provisioning requirements for “well-secured” loans.

32. The authorities continue to closely monitor the asset quality of commercial banks. Although still relatively high, NPLs have declined and are concentrated among a few large borrowers who have solvent businesses. They have been conducting follow-up examinations on a more regular basis and are requesting frequent periodic reporting to assess the institutions’ credit risk management practices and asset quality. They have also been meeting with the Board of Directors and senior management of institutions to discuss areas of significant concern.

33. The authorities have significantly strengthened their AML/CFT framework, and are committed to keeping it up-to-date with international best practices. As such, although CBR withdrawals remain a concern, the situation has stabilized. Indeed, the authorities are cautiously optimistic that on-going discussions with international banks regarding new CBRs will yield positive results.

D. Enhancing Competitiveness, and Supporting Inclusive Growth

34. Productivity-enhancing reforms are needed to improve competitiveness and facilitate inclusive growth.

  • Traditional sectors: The ongoing reforms to the sugar sector will increase its productivity, but reduce its size. As the sector shrinks, the authorities should continue to facilitate the retraining of workers and diversification into other crops and activities. Prospects for the rice sector are favorable, and yields continue to rise, supported by an active rice research program.

  • Diversification: Staff noted ongoing efforts to support diversification of the economy by increasing backward linkages of the oil industry to the rest of the domestic economy. Notwithstanding the upside benefits, the prospect of the oil sector could lead to real exchange appreciation, eroding competitiveness in non-energy intensive sectors. It will be important to mitigate such appreciation through improvements in the business climate and infrastructure.

  • Energy sector: High energy costs are a longstanding obstacle to growth. Plans to use Guyana’s natural gas for power generation could provide a cleaner and more affordable alternative to the current energy matrix. That would help meet immediate needs while renewable energy initiatives, to which the authorities remain committed, are pursued. Large commercial users are finding solar panels to be a cost-effective investment.

  • Inclusion: The reduction of economic and social disparities between the coast and the Hinterland remains a priority to the authorities. Improved access to transportation, including improvements on the road to the border with Brazil, health, education, electricity and telecommunication services should spread the benefits of growth more widely and enhance employment opportunities. Moving from the flood-prone coastal region to the interior would also improve resilience to climate change.

  • Labor market: A recently published labor force survey fills important data gaps (Annex IV). The youth unemployment rate is 21.6 percent compared to an average unemployment rate of 12 percent. Female labor force pariticipation increased from 34.6 percent in 2012 to 43.6 percent in 2017, but remains much lower than male participation. The authorities are currently discussing family-friendly labor policies with a possible extension of maternity leave and some early childhood intervention programs.

A01ufig12

Human Development Index, 2010 and 2015

(Rank of 188 countries)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: UNDP Human Development Report, 2016.
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Unemployment Rate, 2017Q3

(Percent)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: Guyana Bureau of Statistics.

35. Staff emphasized the importance of unlocking private sector-led growth. The costs of doing business remain high, and Guyana lags its peers in several areas, including: dealing with construction permits, resolving insolvency, getting electricity, and trading across borders. Guyana is rated at 56.3 out of 100 in terms of the World Bank Doing Business Distance to Frontier, despite a small improvement in 2017.11 The public investment program can help relieve infrastructure-related bottlenecks and high energy costs. To reduce the cost of setting up a business, the authorities established a memorandum of understanding with line ministries to resolve duplicate or overly cumbersome procedures. Guyana’s score in the Corruption Perception Index has significantly improved since 2015, rising from 29 to 38 (out of 100) in 2015–17.12 Becoming a candidate member of the Extractive Industries Transparency Initiative (EITI) and committing to ensure transparency and accountability under EITI 2016 standard is a welcome step.

A01ufig14

Doing Business Ranking 2018

(Distance to Frontier, 100 is the Frontier)

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: World Bank Doing Business.

Authorities’ Views

36. The authorities remain committed to environmentally sustainable and socially inclusive growth. They are in the process of preparing the Green State Development Strategy (GSDS), which is expected to focus on creating an enabling environment for private sector-led economic diversification and growth. The GSDS priorities are: building a green economy, diversifying the economic base, transitioning to renewable energy, supporting resilient infrastructure, sustainable management of natural resources, human development, governance and transparency, and the development of knowledge-driven growth industries. Innovations in rice production and access to new markets will expand exports. The authorities stressed that bridging the divide between the coastal area and the Hinterland is underway, by improving infrastructure and access to healthcare, education, and other social services which continues to be a major cost driver for government expenditure.

Other Issues

37. Data provision, while broadly adequate for surveillance, should be strengthened. Problems persist with the quality and timeliness of macroeconomic indicators, due to pervasive staffing issues and coverage. In the current circumstances, effective surveillance warrants a timely provision of high frequency data to monitor developments, revision of the national accounts and BOP statistics to include the oil sector, dissemination of IIP, submission of FSI data, and compilation of house price indexes. Staff welcomed compilation of balance of payments using the classification of the BPM6. The authorities are finalizing an all-urban CPI, a household budget survey, and a living conditions survey. Capacity constraints remain an obstacle in addressing these statistical weaknesses.

Staff Appraisal

38. Guyana’s macroeconomic outlook remains favorable. While growth slowed down in 2017, it became more broad-based, and is expected to accelerate in the run-up to the start of oil production in 2020. The extractive industries and public investment will be key drivers of economic growth over the medium-term. Reducing the costs of doing business, strengthening private sector confidence, and advancing productivity-enhancing reforms are essential for sustaining growth in the short-term, and for reaping the full benefits of the oil windfall once it materializes.

39. Short-term financing needs should be carefully managed. The authorities’ prudence and restraint towards borrowing in anticipation of future oil revenue is commendable. They should rely as much as possible on Multilateral Development Banks, including their non-concessional financing operations. Developing the domestic capital markets would provide a more stable source of financing and help meet the needs of domestic long-term institutional investors. Private external borrowing should continue to be avoided, and central bank financing should not be used at all. Staff welcomed the authorities’ intention to close the overdraft balances at the central bank in the near-term. Saving the one-off gains from the tax amnesty would reduce financing needs, and also help preserve external buffers.

40. The quality and efficiency of government expenditure should continue to be improved. It is important to address the shortcomings identified by the PIMA before public investment is significantly scaled-up with oil revenues. For similar reasons, it would be useful to review current expenditures to ensure they achieve the maximum welfare and inclusion benefits.

41. The rules-based fiscal framework for managing oil wealth should be transparent and consistent with the resource fund deposit/withdrawal rules. It should provide the basis for determining the allocation of annual oil revenue for stabilization and domestic capital expenditure, as well as intergenerational savings. The consistency between the fund deposit/withdrawal rules and a fiscal rule could be reinforced by a fiscal responsibility legislation.

42. Monetary policy should gradually revert towards a neutral stance as the economic recovery gains pace, and inflationary pressures arise.

43. The exchange rate should play a more active role in cushioning external shocks going forward. Guyana remains vulnerable to external shocks given the concentration of its exports in a few commodities and its reliance on imported oil in the short-term. Over the long-term, building an adequate buffer stock of savings from the oil revenues would also help cope with external shocks.

44. Significant progress has been made in implementing the 2016 FSAP recommendations, but further progress is needed in some areas. Ensuring the internal consistency of supervisory function from routine supervision to intervention and resolution remains a priority. Other important areas where work still needs to be finalized include: eliminating reduced provisioning requirements for “well-secured” portions of NPLs; refining the definition of “related parties” with the international standards; reducing the reliance on overdraft lending; clarifying the upstream and downstream ownership of institutions; and raising minimum capital adequacy requirement to 12 percent; and reducing the banks’ large exposure limits.

45. Enhancing competitiveness and supporting inclusive growth should remain a high priority. Greater efforts are needed to lower the cost of doing business by addressing infrastructure-related bottlenecks, reducing energy costs, and cutting red tape. Increasing female labor force participation and bridging the gaps with the Hinterland can boost growth and help spread its benefits more widely.

46. Oil exploration and production should be included in the national accounts when they are rebased, and also in the BOP statistics. Strengthening external sector statistics and compiling an international investment position should be a priority.

47. It is proposed that the next Article IV consultation takes place on the standard 12-month cycle.

Figure 1.
Figure 1.

Guyana: Comparative Regional Developments 1/

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Sources: Country authorities; and Fund staff calculations.1/ Caribbean region measured as simple averages of corresponding variables.Tourism-dependent Caribbean includes Antigua and Barbuda, Bahamas, Barbados, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.Commodity-exporting Caribbean includes Belize, Suriname and Trinidad and Tobago.
Figure 2.
Figure 2.

Guyana: Real Sector Indicators

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Sources: Bank of Guyana; Ministry of Finance; and Fund staff estimates.
Figure 3.
Figure 3.

Guyana: External Sector Developments

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Sources: Bank of Guyana; and Fund staff estimates.
Figure 4.
Figure 4.

Guyana: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Sources: Ministry of Finance; and Fund staff estimates.
Figure 5.
Figure 5.

Guyana: Financial Soundness Indicators

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: Bank of Guyana.
Figure 6.
Figure 6.

Guyana: Monetary Developments

Citation: IMF Staff Country Reports 2018, 220; 10.5089/9781484367957.002.A001

Source: Bank of Guyana.
Table 1.

Guyana: Selected Social and Economic Indicators

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

The 2015-17 public debt to GDP ratios are adjusted to reflect unsettled government balances at the central bank.

The increase in public sector (net) is from a small base, which makes the series volatile.

Table 2.

Guyana: Balance of Payment 1/

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

Table has been revised to BPM6 presentation.

Includes capital flows of PetroCaribe financing.

Table 3a.

Guyana: Nonfinancial Public Sector Operations

(In billions of Guyanese dollars)

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

Reflects interest and amortization after total debt relief.

It is assumed that oil revenues finance investment projects through 2024 and a certain fraction is saved afterwards.

Includes statistical discrepancies.

Table 3b.

Guyana: Nonfinancial Public Sector Operations

(In percent of GDP)

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

The declines in tax revenue and expenditure as a ratio to GDP after 2019 are due to the large increase in GDP after the start of oil production.

Reflects interest and amortization after total debt relief.

It is assumed that oil revenues finance investment projects through 2024 and a certain fraction is saved afterwards.

Includes statistical discrepancies.

Table 4.

Guyana: Summary Account of the Bank of Guyana and Monetary Survey

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