Economic Development and Outlook

3. Over the past 10 years, Guyana’s growth rate has consistently been above the regional Caribbean average, but significant development needs remain. The discovery of relatively large oil reserves has brightened Guyana’s medium-term prospects and provides an opportunity to address the country’s development needs. Nevertheless, the impact of the oil production on government flow of revenues is not immediate, since there will be an initial period of upfront cost recovery for the energy company.

4. Economic growth momentum recovered in 2018 with broad based expansion in all major sectors. Increased activity in the construction and services sectors, together with a recovery in the mining sector and improved performance in livestock and other crops buoyed growth in 2018. The growth impetus is anticipated to continue into 2019, with the authorities projecting economic growth of 4.5 percent, driven by continued strengthening of construction and services sectors, ahead of oil production in 2020. Inflation remained well contained at 1.6 percent at the end of 2018, allowing monetary policy to remain accommodative. The authorities project inflation to stand at 2.5 percent in 2019.

5. Going forward, external stability is projected to improve substantially. With the onset of oil production, the ramp-up of oil-related imports have weakened the current account deficit, which have widened to 17.5 percent of GDP in 2018 from 6.8 percent in 2017. This temporary worsening of the current account is anticipated to continue this year and would continue to be largely financed by higher foreign direct investment in oil-related activity. However, in the medium-term, it is expected to improve significantly with the reduction of oil-related imports due to the completion of oil fields and the start of oil exports.

Fiscal Reforms and Policy

6. The Guyanese authorities continue to implement a prudent fiscal policy and are strongly committed to maintaining fiscal discipline. Central government revenues improved in 2018 as tax collection increased substantially, supported by a tax amnesty program which relaxed the interest and penalties on payment of outstanding taxes. The introduction of electronic tax filing and the operations of the Large Taxpayers Unit also contributed to improved revenue and efficiency of tax collection. These tax measures, together with lower expenditure due to slower capital spending, resulted in a central government deficit of 3.5 percent of GDP, below the 2018 budgeted target of 5.4 percent of GDP. The authorities intend to continue focusing on strengthening tax administration efficiency and tax compliance to improve revenue collection and encourage discipline in the system. They are also committed to strengthening revenue administration with improved monitoring and control of customs transactions, with the commencing of a pilot of the Automated System for Customs Data.

7. The central government’s overall deficit is projected at 5 percent of GDP in 2019, on the back of higher capital and current expenditures to meet substantial infrastructural needs to support connectivity and human capital development. Going forward, a balanced budget is being considered by 2022, as the authorities intend to follow a fiscal framework that constrains the annual non-oil deficit to not exceed the expected transfer from the NRF to the budget, which is in line with the NRF Act. A medium-term expenditure framework would be developed in accordance with the multi-year budgeting framework of their Green State Development Strategy (GSDS). The authorities plan to enhance the quality and efficiency of expenditure and tax administration whilst further strengthening public investment management with a thorough criteria-based project selection process and prioritization in accordance with the GSDS. This will serve as a key input into costing the implementation of the GSDS. Improving the choice of public investment projects and making them criteria-based within the budget, as well as enhancing the procurement system, are vital to fiscal discipline and transparency.

8. The authorities are always cautious to safeguard public debt sustainability and they have continued to improve their debt management strategy. The authorities have indicated that they do not intend to compromise the fiscal integrity of Guyana by contracting large debt, in light of impending oil revenues. Nevertheless, they have acknowledged that the debt ratio would rise slightly over the near-term and will improve significantly over the medium-term, as oil production commences in 2020. Meanwhile, the debt service would remain manageable due to the concessional nature of a large portion of their external debt portfolio. In addition, the authorities have committed to consolidating and strengthening their debt management legislation.

Monetary Policy and Financial Sector

9. Monetary policy remained broadly accommodative in 2018. The Bank of Guyana (BoG) maintained a bank rate of 5 percent, whilst ensuring an adequate level of liquidity in the banking system to create an enabling environment for credit and economic growth. Accordingly, private sector credit grew by 4 percent in 2018, reflecting a faster pace than in 2017. This improved credit growth in 2018 was mainly driven by the business sector.

10. The authorities underscore that over the years, the current exchange rate arrangement has served the country well, as it has remained broadly in line with macroeconomic fundamentals. Guyana is committed to a flexible exchange rate regime and the BoG allows the exchange rate to adjust to changing market dynamics. With the new era of oil production and its accompanying robust growth and potential price pressures, the BoG will continue to closely monitor its monetary policy stance.

11. The financial sector remains sound and the banking system is well capitalized, liquid and profitable. Despite trending downwards, non-performing loans (NPLs) for some banks remain high. The BoG intends to continue closely monitoring this trend and has increased frequency of reporting by commercial banks, enhanced on-site inspections and intensified follow-up actions to ensure greater bank compliance, as well as hold regular discussions with commercial banks. The BoG also plans to implement a hybrid approach to the Basel framework by end 2019 where the capital definition and operational risk are based on Basel III while market risk and credit risk are based on Basel II.

12. The authorities have made significant progress with implementation of the 2016 Financial Sector Assessment Program (FSAP) recommendations. They have fortified several pieces of legislation with amendments to include emergency liquidity assistance to deposit-taking financial institutions and orderly resolution of failing institutions. The Deposit Insurance Act and the National Payment System Act were both assented in 2018 and made operational this year. The authorities are currently in the process of finalizing and operationalizing a Crisis Management Plan and intend to build on the progress so far to further strengthen their financial supervision oversight and regulatory framework.

13. The AML/CFT framework has been improved based on recommendations of the 2017 National Risk Assessment (NRA), including amending the AML/CFT Act and establishing a National Co-ordinating Committee. The Financial Intelligence Unit has been actively pursuing greater collaboration with its regional and international peers and has been closely monitoring suspicious activities including laundering of money and terrorist financing and criminal proceeds, including those of companies and politically exposed persons. In February 2019, Guyana was removed from the European Union terrorism financing and money laundering blacklist and the authorities intend to continue to strengthen the AML/CFT framework by undertaking another NRA prior to the Caribbean Financial Action Task Force (CFATF) in 2022. Although correspondent banking relationships (CBRs) have stabilized, the authorities continue to be vigilant and remain committed to build on the progress made to date by mitigating any drivers behind CBR pressure.

SOE Reforms and Inclusive Growth Strategies

14. The authorities remain committed to enhancing the efficiency of the state-owned enterprises, particularly upgrading the infrastructure of Guyana Power and Light Incorporated (GPL) and Guyana Sugar Corporation (GuySuCo). Reducing the cost of electricity and improving its reliability are critical to improving Guyana’s business environment and external competitiveness. In this regard, the authorities intend to strengthen the management and governance structure of GPL, with a focus on reducing the overall electricity losses, both technical and commercial, and improving the safety and reliability of the system. They also intend to assess the use of domestic natural gas resources as an energy source and seek to strengthen and expand the generation and transmission capacity of GPL, thereby potentially reducing the cost of electricity. The restructuring of GuySuCo and the recapitalization of estates are ongoing, and it is anticipated that sugar production will increase progressively over the next few years.

15. The authorities are cognizant that oil revenue would provide fiscal space and the opportunity to undertake the much-needed structural reforms and investment to boost productivity and improve the standard of living of the Guyanese people. The GSDS charts a path of development that is diversified, inclusive and sustainable and captures a more holistic view of social, economic and environmental well-being in line with the United Nation’s Sustainable Development Goals. The GSDS has identified the modernization of the traditional sectors, expansion in high-growth sectors and development of new high value-adding sectors such as tourism, business process outsourcing, and agro-processing. It also highlights as critical the provision of new opportunities for investments in renewable power supply and efficient roads and infrastructure to bridge the divide between coast and hinterland. The authorities have indicated that despite their capacity constraints, they intend to prioritize investment to improving quality of education, health care and caring for the vulnerable sections of the population whilst improving conditions for private sector growth and job creation. They remain committed to enhancing the education system to make meaningful steps to empower Guyanese people with the requisite skills to enable them to optimize the benefit from the future employment prospects.

16. Considering the scaling up of public investments, the Guyanese authorities intend to strengthen governance and transparency, as well as enhance its procurement system. To strengthen transparency and accountability in the extractive sector, the authorities are implementing the Extractive Industries Transparency Initiative (EITI) report’s recommendations. They have also launched the Beneficial Ownership Disclosure Roadmap to enhance transparency from the extractive sector and are reviewing legislation governing the extractive sector. Moreover, the public procurement legal framework is being amended to be in line with best international practices. The National Procurement and Tender Administration Board is currently undertaking the implementation of several reforms including setting aside 20 percent of government procurement for small businesses and debarment procedures for contractors who do inferior work. These would not only further enhance transparency of the procurement system but help develop small businesses. The authorities also intend to further promote transparency and inclusiveness with the use of the CARICOM Public Procurement Notice Board and the development and implementation of an electronic procurement system by 2021.

17. Guyana remains exposed to risks of climate change, volatile commodity prices, and possible negative regional and international spillovers. With its coast being below sea level, Guyana remains highly vulnerable to climate change and the consequent trend in sea level rise. Although the authorities do not foresee any additional major significant spillovers from neighboring Venezuela, an influx of migrants into the rural areas has increased socio pressures on the local communities. Also, Guyana remains subject to commodity price shocks, heightened protectionist trends and slowdown in international trade. As such, the authorities intend to continue working to build a more robust and diversified economy, achieve financial resilience and foster inclusive growth, whilst expanding opportunities and competitiveness for businesses to grow and flourish and supporting its green economy initiatives.

Conclusion

18. The Guyanese authorities have made considerable progress on macroeconomic and financial reforms, despite financial and human capacity constraints. However, substantial infrastructure gaps, social needs and pockets of poverty continue to exist. With the upcoming oil wealth, the authorities have pledged unwavering commitment to building human capital through investment in health and quality education whilst meeting the Sustainable Development Goals and investing for the benefit of present and future generations. As the country addresses these long-standing issues and new challenges, the authorities reiterate their appreciation for IMF staff adept analysis and advice and hope to continue its close collaboration with the Fund and CARTAC.