Guyana: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Guyana
Author:
International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
27 Sep 2022
eISBN:
9798400220289
ISBN:
9798400220289
Language:
English
Keywords:
debt carrying capacity; U.S. dollar; Guyana-Norway Partnership; transmission mechanism; oil resource; Fiscal stance
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1. The Guyanese economy was negatively impacted by the pandemic. Guyana’s economic growth was poised to accelerate sharply with the start of oil production in 2019, but the COVID-19 pandemic led to a non-oil GDP contraction of -7.3 percent, particularly sharp in construction and services. Oil GDP expanded in 2020, leading to an overall GDP growth of 43.5 percent.

Abstract

1. The Guyanese economy was negatively impacted by the pandemic. Guyana’s economic growth was poised to accelerate sharply with the start of oil production in 2019, but the COVID-19 pandemic led to a non-oil GDP contraction of -7.3 percent, particularly sharp in construction and services. Oil GDP expanded in 2020, leading to an overall GDP growth of 43.5 percent.

Background

1. The Guyanese economy was negatively impacted by the pandemic. Guyana’s economic growth was poised to accelerate sharply with the start of oil production in 2019, but the COVID-19 pandemic led to a non-oil GDP contraction of -7.3 percent, particularly sharp in construction and services. Oil GDP expanded in 2020, leading to an overall GDP growth of 43.5 percent.

2. Oil production has increased significantly and has the potential to transform profoundly Guyana’s economy. Oil production increased 57 percent in 2021 to 110,000 bpd. With the coming on stream of three additional fields—Liza-2 (February 2022), Payara (end-2023) and Yellowtail (2025)—oil production is projected to reach 720,000 bpd by 2026.1 Furthermore, Exxon has announced the discovery of three additional offshore fields in the Stabroek Block in April 2022. Guyana’s commercially recoverable petroleum reserves might reach over 11 billion barrels, the third largest in Latin America and Caribbean and one of the highest levels per capita in the world.

3. Human development needs are large. The country’s human development index is lower than the median for the region and for countries in the same income group (charts).2 The government plans to improve access to and quality of social services, improve infrastructure to support growth and diversify the non-oil economy, and advance more broadly towards the Sustainable Development Goals.

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Sources: IMF, World Economic Outlook Database; U.S. Energy Information Administration; and OPEC.1/ Estimated based on assumption of oil price increasing 0.7 percent per year and discount rate of 3 percent (the expected long run returns to Guyana’s NRF, as per the NRF Act).
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Sources: United Nations Development Program. Human Development Index.

Recent Developments

4. A political crisis stalled the reform program and delayed the government’s response to the pandemic. After a no-confidence vote in December 2018 requiring prompt elections, and a delay in transition from the March 2020 elections, a new administration took office in August 2020. As a result, the 2020 budget was approved only in September, affecting confidence and forcing increased reliance on direct financing from the central bank as external funding slowed down.

5. The Guyanese economy was negatively impacted by the pandemic and the 2021 floods but has recovered well, supported by the oil boom. Non-oil GDP growth recovered in 2021, supported by the mining, construction, and service sectors. However, summer floods affected the agricultural sector and economic activity in the hinterland in 2021. Inflation increased owing to higher food and fuel prices, and supply-side disruptions.

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Sectoral Contribution to Real Growth

(In percent)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

6. The COVID-19 situation has significantly improved. In 2020, the government implemented containment and mitigation measures that severely restricted mobility and provided additional public resources to the health system. Guyana has administered COVID vaccines to around two-thirds of the population. A three-phase reopening of the economy started in 2021.

7. The war in Ukraine has impacted the economy, but is not expected to affect food security. Rising global food and commodity prices (including fuel) have resulted in inflation rising from 5.7 percent at end-2021 to 6.6 percent by May 2022, although inflation has declined in May, reflecting a more moderate contribution of food inflation. Second-round effects from inflationary pressures seem negligible so far, as the authorities have taken measures to ease cost-of-living pressures for the population.3 Higher global oil prices are also strengthening the fiscal and external accounts.4 The impact of losing the limited trade connections with Ukraine and Russia could be absorbed by higher oil and food exports elsewhere, as agricultural production is recovering well. Imports from Ukraine and Russia contain limited quantities of milk products, thereby the war is not expected to affect food security in Guyana.

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COVID-19: Confirmed Cases and Vaccine Administration

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Bloomberg and IMF staff calculations.

8. Guyana’s external position strengthened in 2021 and is assessed to be broadly in line with the level implied by fundamentals and desirable policies (Annex I). In 2020, the decline in financing flows during the pandemic was offset by oil exports and the improvement in the non-oil current account balance as imports collapsed during the recession, leading to some accumulation in international reserves. In 2021, higher imports, reflecting mostly an increase in investment-related imports in the oil sector and the recovery in demand, and lower non-oil commodities exports, contributed to a widening of the current account deficit. The financial account improved due to higher FDI in the oil sector, and with the new SDR allocation5 and higher oil exports, FX reserves coverage improved to 1.9 months of imports (2.9 months of non-oil imports).6 The real and nominal effective exchange rates depreciated slightly in 2021 and remained stable so far in 2022.

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Fully Vaccinated Population in Latin American and the Caribbean

(In percent of eligible population)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Bloomberg LLC (reported on June 13. 2022).
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Real and Nominal Effective Exchange Rates

(REER/NEER 2010 = 100, increase = appreciation)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

9. After deteriorating markedly in 2020, the fiscal position remained appropriately supportive in 2021. In response to the pandemic, the authorities reallocated expenditures towards cash grants and transfers to households7 and ‘shovel ready’ public investment projects, primarily focused on improving road networks and providing affordable housing and eased the tax burden on the most vulnerable by, for example, setting the VAT rate on basic food items and household necessities to zero. The overall deficit (after grants) in percent of non-oil GDP witnessed a sharp deterioration in 2020, followed by a smaller deterioration in 2021. Public debt stood at 42.9 percent of GDP at end-2021, one of the lowest in the region.

10. Credit to the private sector improved in 2021. Broad money grew by 12.2 percent in 2021 and credit to the private sector recovered to its pre-pandemic levels (rising by 7.1 percent), driven by loans to the services and household sectors. The weighted average of commercial banks’ prime lending rate declined from 9.3 percent at the start of 2021 to 8.9 by year-end.

11. Guyana’s financial sector is well capitalized, but profitability and liquidity ratios have weakened. Notwithstanding the current context of excess liquidity and, at times, increased budget financing, the macro-financial risks are well monitored with eight indicators, including credit-to-GDP measures and the systemic risk matrix. House prices have declined by about 0.2 percent in 2021. At end-2021, domestic banks’ capital adequacy ratio (CAR) of 29.1 percent was well above the regulatory minimum of 8 percent, while the ratio of nonperforming loans to total loans improved to 7.8 percent from 10.8 percent at end-2020. However, returns on assets and equity deteriorated, likely related to the increased provisioning, significant write-offs owing to the recent asset quality reviews (AQR), and the narrowing of the lending spread. The Bank of Guyana (BoG) has advanced in major reform areas, specifically in (i) revising AQR guidelines (including revised credit classification and provisioning for the loss category) and (ii) implementing some pillars of Basel II and III.

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Monetary Indicators

(annual percentage change)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Guyanese authorities.

Outlook and Risks

12. Guyana’s medium-term outlook is very favorable, with increasing oil production having the potential to transform profoundly Guyana’s economy. Non-oil GDP growth is expected to rebound strongly in 2022 due to the recovery of sugar and rice production from the floods and positive spillovers from the oil sector. Over the medium term, non-oil GDP growth is expected to average 5 percent per year and inflation is expected to reach around 3.5 percent owing to more stable projected international food and fuel prices. Oil GDP is expected to grow over 100 percent in 2022, with the coming on stream of Liza-2, and to grow by about 30 percent on average per year during 2023–26. Inflation is expected to rise to 9.4 percent at year-end 2022 and decline thereafter.

13. Public investment spending is expected to increase in the medium term, to close infrastructure gaps and to support development needs, helping growth in the non-oil economy. The 2022 budget includes a rapid expansion in public investment and construction in the economy and measures to ease cost-of-living pressures for the population. However, only around 10 percent of budgeted public capital investment was executed in the first four and a half months of the year. Although some major projects were recently approved, the year-end execution rate is unlikely to be higher than 70 percent. This level of public capital investment, as well as the authorities’ commitment to a zero overall balance in the medium term (see next section), form the basis of the medium-term macro-fiscal framework presented in this report (see text table below and Macroframework tables 1–6). With this level of expected public investment implementation, and with tenders for large infrastructure projects allotted to international firms that will import capital goods and workers, inflation is expected to be contained in the medium term.

Text Table Guyana: Medium-Term Macroeconomic Projections

article image
Sources: Guyanese authorities and IMF staff calculations and projections.

14. The external outlook is expected to recover strongly, with revenues from oil production providing substantial buffers. Reserves cover will steadily improve and substantial buffers will accumulate in the Natural Resource Fund (NRF), which is expected to reach almost US$20 billion in 2027. The current account balance (including grants) will turn into a significant surplus in 2022, as oil exports from Liza-2 commence and oil prices remain high. Public debt peaked at 51 percent of GDP in 2020 and is expected to decline steadily thereafter, reaching around 13 percent at the end of the projection period in 2027.

15. Guyana’s debt-sustainability analysis (DSA) indicates that the risk of external debt distress remains moderate, with debt dynamics improving significantly with incoming oil revenues. Guyana’s debt carrying capacity, for both overall public debt and public external debt, has been downgraded from ‘moderate’ to ‘weak,’ reflecting a relatively low international reserves-to-imports cover in 2022 that is driven by a sharp increase in oil-related imports. Nevertheless, Guyana still has substantial space to absorb shocks, reflecting the current low level of external debt, a rapid expected increase in international reserves, and accumulation of savings in the NRF over the medium term. Furthermore, Guyana’s level of international reserves is expected to remain above adequate levels in terms of short-term debt, broad money, and non-oil related imports.8

16. Guyana’s medium-term outlook is subject to both downside and upside risks (Tables 7 and 8). On the downside, highly volatile oil prices, the slowing global economy, and the war in Ukraine (which could result in escalating sanctions and other disruptions, leading to even higher commodity prices) could adversely affect growth and fiscal performance, especially if the global economy enters a recession, leading to a reduction in oil demand and oil prices. New outbreaks of Covid could weaken growth. An excessively rapid increase in government spending could subject Guyana to appreciation pressures on the real exchange rate and an eventual loss in reserves,9 and possible governance concerns. At the same time, further oil discoveries and production could significantly improve Guyana’s long-term economic prospects.10

Authorities’ Views

17. The authorities agreed that medium-term growth prospects are better than ever before despite the risks surrounding the outlook. The authorities noted that the upside potential to the outlook coming from new oil and gas discoveries is significant, with the large increase in oil production boosting growth and creating substantial policy buffers to withstand future shocks. They also agreed there are downside risks to the outlook. Those stemming from international developments11 pose a particular concern. The authorities are confident that their measures will help contain inflationary pressures, especially on the housing and utilities parts of the CPI. The authorities are determined to ensure that the strategy to address the country’s development needs will not bring macroeconomic imbalances (e.g. excessively high inflation, significant loss of competitiveness and reserves).

Policy Discussions

Effective use of Guyana’s oil wealth will enhance the population’s living standards and the economy’s physical and human capital. To achieve these goals rapidly, yet in a prudent way, the authorities will need to put in place a medium-term fiscal framework with a clear fiscal anchor as well as structural reforms to ensure good governance, support inclusive growth and address challenges relating to climate change.

A. Fiscal Policy

18. Fiscal policy in 2022 has been appropriately supporting growth, while considerably reducing the fiscal deficit. The 2022 budget has reduced current expenditures by about 1 percent of non-oil GDP compared to 2021. It maintains support for pandemic-related health expenditures and ensures that the transfers to households implemented earlier in the pandemic to mitigate the impact of the lockdowns are not permanent. Additional measures have been implemented to mitigate the impact of rising commodity prices on households. Capital spending has been ramped up to support the non-oil economy. However, given implementation capacity constraints, an execution rate of around 70 percent of the 2022 capital budget is expected (representing an increase of about 2½ percent of non-oil GDP). Oil revenue (transferred to the budget in line with the amended NRF Act) is projected to increase sharply. As a result, the overall fiscal deficit is expected to decline significantly to 1¾ percent of non-oil GDP from 10½ percent of non-oil GDP in 2021. While the fiscal balance is still expected to record a small deficit, the public debt ratio is expected to decline, given the large increase in the nominal GDP.

19. Going forward, it is important to maintain prudent fiscal policy. Staff broadly supported the authorities’ measures to temporarily ease the burden of higher global commodity prices on the most vulnerable groups of society, given the absence of adequate safety nets. Since tax measures are poorly targeted tools, staff recommended a gradual unwinding of the general subsidies provided through the tax system and moving to full pass-through of international prices to domestic prices since the shock does not appear to be temporary, and therefore other forms of government support are more appropriate. This should be done simultaneously with measures to further develop and strengthen a well-targeted social safety net system. In addition, a sustainable and feasible increase in capital spending to support the transformation of the Guyanese economy is needed, but within a framework that does not generate macroeconomic imbalances. Moreover, the debt to the central bank incurred while monetizing the deficit during 2015-mid 2021 needs to be drawn down.

20. The NRF Act was strengthened recently. After a thorough review, and while restraining the spending of the oil receipts, the authorities amended the NRF Act in December 2021. The recent amendments set clear ceilings on withdrawals from the Fund for budgetary spending (Annex II).

21. However, the amendments to the NRF Act do not provide an effective fiscal anchor and Guyana still lacks a medium-term fiscal framework. The experience of other oil-producing countries shows that the absence of such a framework, in which annual budgets are developed within a medium-term framework, anchored in clear targets, has resulted in major macroeconomic imbalances (Annex III). A fiscal framework that constrains the annual non-oil overall fiscal deficit (after grants) to not exceed the expected transfer from the oil savings fund will anchor fiscal policy in the short term in Guyana and ensure that fiscal spending increases at a measured pace to address development needs without resulting in macroeconomic imbalances, including a loss of competitiveness and an appreciation of the real exchange rate due to an increase in non-tradeable prices (see Annex IV). Staff also recommended that a zero overall fiscal balance anchor should be supported by a medium-term expenditure framework, with current expenditures mostly growing in line with non-oil GDP and growth of capital expenditures being guided by absorptive capacity constraints (Annex IV). The medium-term framework presented in this report is consistent with achieving a zero overall fiscal balance target by 2025. Moreover, to serve effectively as a fiscal anchor a zero overall fiscal balance target needs to be complemented by a rigorous analysis and supplemented with changes if needed to the transfers rule set under the NRF, and an operational target for the non-oil balance. The transfer rule needs to ensure that transfers to the budget are optimally set to ensure intergenerational equity and long-term sustainability. This would also allow a sufficient build-up of savings in the NRF for Guyana to be able to reap the full benefits of its natural resource wealth.12 In this sense a clear operational target for the non-oil balance that ensures achieving all these objectives is also needed, and should be accompanied by measures that help mobilize non-oil revenues and contain the wage bill and non-current spending, to ensure that medium-term consolidation is not driven mostly by oil revenues which could be volatile.

22. Capacity weaknesses in the management of public investment must be tackled simultaneously with the strategy to close infrastructure gaps and development needs. The 2017 PIMA report highlighted weaknesses in the planning, budgeting, appraisal, selection, procurement, and implementation of capital projects. Staff urged the authorities to implement the recommendations of the report, and to undertake a public expenditure review to assess the efficiency and effectiveness of public spending.13

23. Guyana’s fiscal strategy—consisting of the objectives of fiscal policy, adoption of a fiscal anchor, and the transition path towards a sustainable fiscal position—should evolve over time as more information and expertise relating to management of oil resources become available. As Guyana is a relatively new oil producer, it is advisable that a simple fiscal framework, such as a zero overall fiscal balance (after grants), be implemented in the short term (next couple of years). As more accurate information becomes available about the scale of Guyana’s oil resources, and as absorptive and institutional capacity improve, Guyana should adopt a more comprehensive fiscal strategy. This would involve a fiscal anchor translated into an operational target for the non-oil primary fiscal balance. The transition to the long-term fiscal anchor should take into account Guyana’s infrastructure and human capital needs, intergenerational equity and fiscal sustainability, as well as absorptive and institutional capacity constraints.

24. Staff also emphasized the importance of continuing reform of public enterprises. With the increases in energy prices and the re-opening of three sugar estates, it is important to strengthen governance and transparency, and to control costs, at Guyana Power and Light Inc. (GPL) and at the sugar company GuySuCo.

Authorities’ Views

25. The authorities are strongly committed to fiscal prudence, while meeting critical developmental needs. The authorities agreed that containing the fiscal position over the medium term is crucial in anchoring fiscal policy in a sustainable way, by setting over the medium term annual budgets within a fiscal framework that constrains the annual non-oil overall fiscal deficit (after grants) to not exceed the expected transfer from the NRF. The authorities noted that the new framework strengthens the fiscal prudence of the existing system.14 Moreover, this will ensure that scaling up public investment to address Guyana’s infrastructure and human development needs is as rapid as feasible, without generating macro-economic imbalances. Consistent with the amended NRF Act, the authorities are committed to conducting periodic reviews of the oil transfer rule, which would be helpful in ensuring the long-term sustainability of the NRF and intergenerational equity.

B. Monetary and Exchange Rate Policy

26. Given the expected continued tightening of the U.S. monetary policy, monetary policy in Guyana also needs to be tightened, to maintain exchange rate stability. In addition, monetary policy will need to contain inflationary pressures due to elevated international commodity prices, the recovery in domestic economic activity, and higher government spending. Staff suggested deploying a combination of instruments to curb the growth of monetary aggregates, including raising the reserve requirement rate and expanding the sale of Treasury bills to contain excess liquidity.

27. The exchange rate should continue to serve as the nominal anchor, along with increased efforts to deepen the domestic financial markets.15 Exchange rate stability serves Guyana’s current needs best, given the underdevelopment of domestic financial markets. The accumulation of substantial buffers in the NRF will also strengthen Guyana’s headroom to maintain a stable exchange rate. Staff advised that foreign exchange interventions should be used to address disorderly market conditions and to smooth short-term fluctuations in the nominal exchange rate when these are not related to fundamentals. Over the medium to long term, as Guyana becomes a major oil producer, staff support authorities’ aims to deepen financial markets. Staff also recommended revising the monetary policy framework to ensure it is well suited for the economy’s needs, including allowing the exchange rate to absorb shocks and increase its flexibility to maintain competitiveness.16,17 Creating the necessary infrastructure for the effective functioning of the interbank, domestic debt, and FX markets will strengthen the monetary policy transmission mechanism and enhance the credibility of the central bank (Annex V).

Authorities’ Views

28. The authorities noted that the current monetary policy framework focused on exchange rate stability serves Guyana’s needs best currently, and as the economy grows over the medium term, a revised monetary policy framework may be needed. The authorities noted that the accumulation of reserves and substantial buffers in the NRF will strengthen Guyana’s headroom to maintain a stable exchange rate. Exchange rate stability serves best Guyana’s current needs of a nominal anchor. The authorities consider that over the medium to long term, as Guyana become a major oil producer, a gradual shift towards greater exchange rate flexibility may allow the economy to better withstand shocks and maintain competitiveness. The authorities desire a step-by-step approach in deepening the interbank, domestic debt, and FX markets to strengthen the monetary policy framework and the transmission mechanism. The authorities emphasized that in the current framework, the reserves requirement rate can be used to curb credit supply, and this is a sufficient policy tool to tighten the monetary policy stance when needed.

C. Financial Sector Policy

29. With the financial sector expected to grow with the growth of the economy, it is important to maintain financial stability. The authorities made good progress on implementing the recommendations of the 2016 FSAP (Annex VI), specifically on accelerating the implementation of Basel II/III, and remain committed to completing the implementation of the FSAP recommendations. They have also conducted commercial banks’ asset quality reviews. As a result, banks wrote off a substantial stock of NPLs, thereby reducing their credit risks. Progress was also made in updating Crisis Management and Supervision Guidelines, although moving away from paper-based functioning and towards broad based risk-based supervision remain key challenges. Guyana should ensure effective implementation of its AML/CFT framework. Guyana is expected to undergo the fourth mutual evaluation by the Caribbean Financial Action Task Force (CFATF) by end-2023. With the completion of the 2021 National Risk Assessment (NRA), the BoG is working on implementing the recommendations of the NRA with CARTAC.

30. Digital payments are growing. Until recently, Guyana was mostly a cash-based society, with bank services limited to electronic banking, credit, and debit cards. However, the COVID-19 pandemic accelerated the digital change, and many consumers adopted the existing Mobile Money Payment System offered by the Guyana Telephone and Telegraph Company (GT&T). Development in mobile money and digital payment should be balanced with a risk-based approach to regulation to mitigate risks including ML/TF risks. Staff suggested that the authorities consider technical assistance from the Fund on the regulation and supervision of mobile payments.

31. Staff welcomed the authorities’ strategies to promote financial inclusion. The authorities have already taken steps to promote financial inclusion. For example, a private credit bureau, CreditInfo, was established in July 2013. In January 2016, the Credit Reporting Act was amended to mandate information sharing to the credit bureau by both credit institutions and public utilities. Staff noted that fintech and digitalization could help increase the contribution of the financial sector to growth and help diversify the non-oil economy.

Authorities’ Views

32. On the financial sector, the authorities are committed to continuing with financial reforms and ensuring alignment of its legal framework with international standards. The authorities emphasized that Guyana is committed to strengthen effectiveness of its AML/CFT regime, by implementing its NRA recommendations and action plans. The authorities recognize that accelerating the digitalization could enhance the contribution of the financial sector to growth.

D. Structural and Governance Reforms to Support Inclusive Growth

33. To support growth, Guyana needs to lower unemployment, especially for youth in rural areas, and reduce inter-industry skills mismatches going forward. Staff advised the government to implement education and labor market policies to expand and diversify the non-oil economy (Annex VII).18 Staff recommended a multi-pronged approach, focusing on involving Guyanese diaspora, changing labor market regulation, and improving the education system by investing in expanding schools for all educational levels. The needed increase in expenditure on education policy reforms should focus on expanding access to education, improving the curriculum to better connect to current labor market needs and enhancing vocational training. Amongst other structural reforms, increased investment will be needed in healthcare, access to roads and electricity and telecommunication services. Also, international experience shows that reducing local content requirements can be beneficial for successful tackling of the skills mismatch problem by early engagement of foreign qualified skilled workers.

34. Further efforts in strengthening the anti-corruption framework as well as transparency of the governance of oil receipts will also be needed to support growth. The 2019 Article IV report noted weaknesses in the governance and anti-corruption frameworks that could give rise to corruption vulnerabilities.19 Staff noted the authorities’ progress in strengthening Guyana’s anti-corruption framework and fiscal transparency in the extractive industries (Annexes VIII and IX). Recent progress on the anti-corruption framework includes publication of audit reports of public expenditures, including for COVID,20 implementation of some recommendations noted in the 2019 Article IV Staff Report, as well as the re-establishment of the Integrity Commission. Asset declarations of a large number of public officials are submitted annually, and public procurement tenders are streamed live. On EITI (Extractive Industries Transparency Initiative), staff urged the authorities to improve the information sharing and publication of extractive industries’ financial statements, move towards electronic disclosures and more closely follow up on EITI’s recommendations to address the remaining gaps, where Guyana scores low (Annex X).

35. Staff welcomed the authorities’ plans for building resilience to climate change in the Low Carbon Development Strategy (LCDS). Guyana faces natural disaster risks, particularly floods and droughts, which are exacerbated by climate change (Annex X). With resources from the Guyana-Norway Partnership, Guyana developed a Climate Resilience and Adaptation Strategy to set out a comprehensive and overarching framework for adapting and building resilience to climate change impacts. Staff welcome the authorities’ efforts in this respect, and the implementation of the LCDS in 2022. On adaptation efforts, the LCDS includes a shift to renewable sources of energy, including investment in hydroelectric power, to diversify the energy matrix and help lower electricity costs (text charts), thereby supporting growth. On mitigation, by entering the international carbon credits market, Guyana will monetize and maintain its vast forest coverage.21 Furthermore, Guyana commits to reduce emissions by 70 percent before 2030 mainly via maintaining vast forest coverage and monitoring closely oil emissions on a sectoral and additive basis.

uA001fig08

Energy Balance in DBIS (Demerara Berbice Interconnected System) and Isolated Grids to 2041

(In GWh)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Guyana’s Low Carbon Development Strategy, 2030
uA001fig09

Residential Electricity Cost, 2021

(US cents per Kilowatt-hour)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Cable.co.uk.

Authorities’ Views

36. The authorities are working actively to improve efficiency and reduce mismatches in the labor market. The authorities recognize the importance of an efficient and responsive labor market given the scale and pace of the structural changes occurring in the economy. In response, the authorities are investing heavily in human capital development, including technical and vocational education, to ensure an adequate supply-side response to emergent demands in the market for skilled labor. Additionally, work has begun with the support of an expert to gather critical data to inform strategic interventions aimed at addressing labor market mismatches.

37. While there is considerable fiscal transparency and a robust anti-corruption framework, the authorities are committed to further strengthen governance, particularly on EITI. The authorities recognize that following up adequately on EITI recommendations is critical. Prioritization will be needed as capacity is built over time. The authorities are committed to accelerate the electronic publication of key information on procurement contracts, establish a bidders register, continue publishing audit reports of public expenditures including COVID-19 funds, and further strengthen mechanisms and processes for required follow up as applicable. The authorities noted that the anti-corruption framework is aligned with international standards, and is being further improved (e.g., by ensuring proper coordination and information of all public agencies involved). Moreover, the government intends to increase public awareness about the functions of its anti-corruption framework including increasing the efficiency of the Integrity Commission and the National Procurement and Tender Administration Board.

38. The authorities have advanced preparation of an expanded Low Carbon Development Strategy (LCDS). Recognizing the large contribution made by Guyana’s standing forests to the global fight against climate change, the authorities have developed the LCDS 2030 which has benefited from wide consultations and aims to monetize the climate services provided by Guyana’s vast forest cover, as well as to accelerate economic growth along a low carbon path. The LCDS also recognizes the urgent need for investment in the transition to clean and renewable energy and to strengthen resilience to floods and improve water management.

E. Other Issues

39. Capacity development needs are large, and they need to be prioritized carefully. Staff urged the authorities to request technical assistance from FAD on their framework for the management and use of oil resources, including the FARI model, and from MCM to support the development of financial market infrastructure, stress testing of bank balance sheets and AQRs for financial stability. Staff also noted capacity development available from the Fund for governance-related issues, including on strengthening transparency of public procurement process and public investment management frameworks.

40. Data provided to the Fund is broadly adequate for surveillance purposes. The authorities have made considerable progress in improving data provision to the Fund, notably in compiling International Investment Position data beginning in 2020. However, timeliness, reliability, and coverage can be further improved.

Authorities’ Views

41. The authorities concurred with staff on the need to prioritize capacity development requests.

Staff Appraisal

42. Following a protracted political transition and a pandemic induced recession in 2020, the economy recovered in 2021, supported by fiscal policy and the oil boom. The new administration took office only in August 2020 which delayed considerably the 2020 budget approval and the implementation of pandemic measures and forced an increased reliance on direct financing from the central bank. In 2021, the economy recovered from the contraction of the non-oil sector in 2020, despite floods, supported by fiscal policy. Public debt declined almost 10 percent of GDP, reaching 42.9 percent of GDP at end-2021, one of the lowest in the region. Guyana maintained a moderate risk of external debt distress, with debt dynamics improving significantly with incoming oil revenues. The external position strengthened, and it is assessed to be broadly in line with the level implied by fundamentals and desirable policies.

43. Fiscal and monetary policies should be cautious. In 2022, the government implemented tax measures to limit the passthrough to consumers of rising food and energy prices from the war in Ukraine. A gradual unwinding of these untargeted measures and strengthening and better targeting the social safety net system are recommended to better mitigate the impact of the inflationary shock. In addition, while a sustainable and feasible increase in capital spending to start the transformation of the Guyanese economy is needed, significant progress towards a new fiscal framework that does not generate macroeconomic imbalances is also needed. To maintain exchange rate stability and given the expected continued tightening of the U.S. monetary policy, monetary policy in Guyana should continue to be tightened.

44. Guyana’s medium-term prospects are very favorable, with increasing oil production having the potential to transform Guyana’s economy. Oil production is expected to increase significantly with the coming on stream of two large oilfields during 2023–26. Guyana’s commercially recoverable petroleum reserves is the third largest in Latin America and Caribbean, and one of the highest levels of oil reserves per capita in the world. This could help Guyana build up substantial fiscal and external buffers to absorb shocks while addressing infrastructure gaps and human development needs. However, increased dependence on oil revenues will expose the economy to volatility in global oil prices. A slowing global economy and the repercussions from the war in Ukraine could also adversely affect non-oil exports. On the other hand, higher global oil prices and additional gas and oil discoveries could significantly improve Guyana’s long-term economic prospects.

45. Staff strongly support the authorities’ goals to transform the economy, address development needs in an inclusive way, and protect the long-term economic well-being of the country. Staff welcome the authorities’ efforts to reduce electricity costs, improve transport infrastructure, diversify the economy, improve access to and quality of social services, and advance more broadly towards the Sustainable Development Goals. Staff commend the authorities’ efforts outlined in the LCDS 2030 to maintain the country’s forest coverage and address climate change challenges by shifting towards renewable energy sources, while entering the international carbon credits market.

46. Staff welcome the recent amendments to the NRF Act. The recent amendments to the NRF Act set clear ceilings on withdrawals from the Fund for budgetary spending and promote transparency in the management and use of oil resources. Staff praise the authorities’ thorough review of the NRF Act before making amendments, and the restraint in using any oil revenues before the passage of the amendments.

47. Staff recommend a feasible and moderate increase in public investment while further strengthening the medium-term framework for fiscal policy. Staff welcome the emphasis on public investment and policies to sustain growth into the longer term but urge caution in determining the pace of ramping up public investment. Staff also urge the authorities to simultaneously strengthen the capacity to manage public investment, based on 2017 recommendations on public investment management. Staff recommend setting annual budgets within a fiscal framework that, over the medium term, constrains the annual non-oil overall fiscal deficit (after grants) to not exceed the expected transfer from the NRF, to anchor fiscal policy in a sustainable way. Staff also recommend further analysis and any needed adjustment to the oil transfer rule, to ensure the long-term sustainability and intergenerational equity in the management of oil resources and to move towards a more robust fiscal framework if needed.

48. Staff agree with the authorities that exchange rate stability serves Guyana’s current needs best. The use of the exchange rate as the nominal anchor is currently appropriate, along with increased efforts to deepen domestic financial markets. The accumulation of substantial buffers in the NRF will strengthen Guyana’s headroom to maintain a stable exchange rate. Over the medium to long term, as Guyana becomes a major oil producer, staff support the authorities’ aims to deepen financial markets and recommend revising the monetary policy framework to ensure it is well suited for the economy’s needs, including allowing the exchange rate to absorb shocks and increase its flexibility to maintain competitiveness.

49. Staff commend the authorities’ efforts to maintain financial stability. Macro-financial risks are well monitored with a broad spectrum of indicators, including credit developments and the systemic risk matrix, and banks are well capitalized. Staff welcome BoG’s successful asset quality reviews, the progress in conducting stress testing exercises, and the authorities’ strategies to promote financial inclusion. Staff strongly support the authorities commitment to complete the implementation of the 2016 FSAP recommendations and the move towards broad based risk-based supervision.

50. Guyana has recently strengthened the AML/CFT framework and staff recommend ensuring sustained efforts for its effective implementation. Guyana has been removed from the CFATF list of strategic jurisdictions with strategic deficiencies in November 2016. Full compliance with international standards would bolster Guyana’s fight against money laundering and terrorism financing. Guyana should implement the recommendations and action plans identified in the recent NRA. Efforts to strengthen its AML/CFT legal framework should be sustained by ensuring its effective implementation. Full compliance with international standards would bolster Guyana’s fight against money laundering and terrorism financing.

51. Staff commend the authorities’ progress in strengthening Guyana’s anti-corruption framework and fiscal transparency and support further advances. Several pillars of the anti-corruption framework have been recently strengthened, including the Integrity and Public Procurement Commissions and the National Procurement and Tender Administration Board. Audit reports of public expenditures, including for COVID, are published, and their recommendations are followed up on. Asset declarations of a large number of public officials are submitted annually, and public procurement tenders are streamed live. The authorities made progress in implementing the recommendations of the 2019 and 2021 EITI reports, notably on the reconciliation with the fiscal regime. Some progress has also been made on information sharing and publication of extractive industries’ financial statements, and the authorities are strengthening capacity to address remaining gaps, including in moving towards electronic disclosure and adequate follow-up.

52. 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 2022, 317; 10.5089/9798400220289.002.A001

Sources: Country authorities; and IMF 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 2022, 317; 10.5089/9798400220289.002.A001

Sources: Bank of Guyana; Ministry of Finance; and IMF staff calculations.
Figure 3.
Figure 3.

Guyana: External Sector Developments

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Sources: Bank of Guyana; and IMF staff calculations.
Figure 4.
Figure 4.

Guyana: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Sources: Ministry of Finance; and IMF staff calculations.1/ Computed as total revenue less current expenditures.
Figure 5.
Figure 5.

Guyana: Financial Soundness Indicators

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

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

Guyana: Monetary Developments

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

Source: Bank of Guyana.
Table 1.

Guyana: Selected Social and Economic Indicators

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Sources: Guyanese authorities; UNDP Human Development Report; World Bank; and IMF staff calculations and projections.

Since 2015–16, public debt to GDP ratios have been adjusted to reflect unsettled government balances at the central bank.

The changes in public sector (net) are from a small base, making the series volatile.

The external current account for 2018 onwards includes high value imports of oil goods and services.

From 2022 through 2027 reserves include transfers of oil revenues consistent with staff’s fiscal policy advice on the use of oil revenues.

Gross reserves in months of projected imports of goods and services. From 2017, these are affected by high value imports of oil goods and services.

Table 2.

Guyana: Balance of Payments 1/

(In millions of U.S. dollars)

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Sources: Bank of Guyana; and IMF staff calculations and projections.

Table has been revised to BPM6 presentation.

Includes capital flows of PetroCaribe financing.

The external current account for 2018 onwards includes high value imports of oil goods and services.

Gross reserves are in months of projected imports of goods and services. For 2017 onward, these are affected by high value imports of oil goods and services.

Table 3a.

Guyana: Public Sector Operations

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff calculations and projections.

Reflects interest and amortization after total debt relief.

Includes statistical discrepancies.

Table 3b.

Guyana: Public Sector Operation

(In billions of Guyanese Dollars)

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Sources: Ministry of Finance; and IMF staff calculations and projections.

Reflects interest and amortization after total debt relief.

Includes statistical discrepancies.

Table 3c.

Guyana: Public Sector Operations

(In percent of Non-Oil GDP)

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Sources: Ministry of Finance; and IMF staff calculations and projections.

Reflects interest and amortization after total debt relief.

Includes statistical discrepancies.

Table 4.

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

(In billions of Guyanese dollars, end of period)

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Sources: Bank of Guyana, and IMF staff calculations and projections.
Table 5.

Guyana: Indicators of External and Financial Vulnerability

(In percent, unless otherwise indicated)

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Sources: Bank of Guyana; and IMF staff calculations and projections.

Since, 2015–16, the public debt to GDP ratios have been adjusted to reflect unsettled government balances at the central bank.

Gross reserves are in months of projected imports of goods and services. For 2017 onward, these are affected by high value imports of oil goods and services.

Table 6.

Guyana: Medium-Term Macroeconomic Framework

(Annual percent change)

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Sources: Guyanese authorities; and IMF staff calculations and projections.

Includes debt service savings under HIPC and MDRI.

Reflects interest and amortizations after debt stock operations.

Since 2015–16, public debt to GDP ratios have been adjusted to reflect unsettled government balances at the central bank.

Gross reserves are in months of projected imports of goods and services. For 2017 onward, these are affected by high value imports of oil goods and services.

Table 7.

Guyana: Financial Soundness Indicators

(In percent, unless otherwise indicated)

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Source: Bank of Guyana.
Table 8.

Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate 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. //These seem to have been included in the matrix?// The following three shocks in the GRAM were deemed to be low risk and/or low impact for Guyana, or incorporated in some of the other risks, and are therefore not included in the matrix: (i) de-anchoring of inflation expectations in the U.S. and/or advanced European economies; (ii) widespread social discontent and political instability; and (iii) global information infrastructure failure.

Annex I. External Sector Assessment

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The size of large, temporary oil-related imports was estimated by using estimates of large oilfield development costs for Liza-1 and Liza-2 in the FARI model. This difference is equal to 22.6 percent of GDP. A statistical adjustment (-4.2 percent of GDP) was also made to accommodate the classification of transfers to/from bank accounts abroad (see Informational Annex).

The policy gap is driven by loose monetary policy and low private credit growth in 2021.

Annex II. The Amended NRF Transfer Rule

1. To date international oil producers have discovered 11 billion barrels of commercially recoverable oil and gas that promises to transform Guyana’s agricultural and mining economy into a large oil producer, particularly considering it is a nation of about 790,000 people.

2. Guyana’s Parliament approved local content rules for oil producers and amendments to the 2019 Natural Resource Fund Act on December 29, 2021 to oversee management of the nation’s earnings from its oil resources.

3. The landmark Local Content Bill requires that energy projects use local businesses for specific projects, including environmental studies and metal fabrication. It paves the way for local companies and citizens to participate in at least 40 critical areas in the oil sector. The government and a number of private sector stakeholders say that this will ensure international oil companies and their contractors utilize more local services and products. Oil companies and their subcontractors will have up to December 2022 to prepare a five-year plan that outlines how they intend to employ and procure indigenous services.

4. The Natural Resources Fund Bill, No. 21 of 2021 introduced Amendments to the 2019 Natural Resources Fund Act. It was passed in the National Assembly despite an in-House protest from the Opposition.

5. Key differences from the 2019 Act include the following:

  • The Bill removes extensive powers from the Minister of Finance and vests them in a new Board of Directors.

  • The Bill proposes a much simpler and clearer formula to calculate how much can be withdrawn from the Fund for government expenditures. The formula is designed to be easily understood by the public, thereby promoting greater transparency.

  • The Bill replaces the 22-member Public Accountability and Oversight Committee with a new 9-member committee. The new committee is designed to establish practical and effective nongovernmental oversight over the management and use of the nation’s oil resources.

  • The Bill requires that all reports and receipts of all petroleum revenues be published in the Official Gazette. Failure to comply with this obligation results in a harsher penalty of $5 million-and ten-years prison time.

  • Finally, a key amendment in the legislation is that the Minister of Finance could face up to ten years imprisonment if he fails to disclose the receipt of any petroleum revenues received by Government in the Official Gazette within three months of receipt of such monies.

6. The new Bill has several good features, including making the transfer of oil revenues to the budget based on a clear formula that is easily understandable by the general public. All petroleum revenues, including royalties and profit oil, accruing to the government initially gets deposited in the Natural Resource Fund, the NRF. The balance in the NRF in period t, xt, follows the path:

xt = xt-1

+ Oil revenues accruing to the government in period t

- Oil revenue transfers to the budget in period t

7. The Natural Resource Fund (NRF) Bill, signed into law by President Irfaan Ali on December 30, 2021, allows the government to extract the entire amount deposited in the NRF, over US$600 million, in the first year of operation of the Fund (2022) and use it for budgetary spending. Thereafter, after the first withdrawal, the proposed legislation sets out a ceiling on withdrawals, with a progressively smaller proportion of the balance in the NRF being allowed to be transferred to the budget for public spending, and the remainder of the petroleum revenues is accumulated as savings in the NRF. More specifically, in any given year, US$500 million can be withdrawn and then a reducing percentage of what remains, starting with 75% from the second five hundred million; 50% from the third five hundred million; 25% from the fourth five hundred million; 5% from the fifth five hundred million, and then 3% from any amounts in excess of US$2.5 billion (see Table below).

Text Table Guyana: Natural Resource Fund Balance and Transfer to the Budget

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8. However, the new Bill does not incorporate a key principle of any suitable framework for the management and use of oil resources, which is that the transfer of oil revenues to the budget should be closely integrated with budgetary financing needs in the context of an appropriate and effective fiscal anchor. This is the same logic underlying the recommendation that was made in the 2019 Article IV Staff Report for “adopting a fiscal framework that anchors fiscal policy by constraining the annual non-oil fiscal deficit to not exceed the expected transfer from the NRF. This will ensure that fiscal spending is increased at a measured pace to address development needs while not resulting in public debt accumulation and adverse public debt dynamics.”

Annex III. Cross-Country Experiences and Lessons in Management of Oil Resources

1. This Annex briefly describes the framework for management and use of oil resources in three countries with similar economic and structural characteristics to Guyana: Timor-Leste, Ghana, and Kuwait. There are three key policy lessons to be drawn. The first is the need to supplement a prudent oil revenue management framework with a strong and effective public financial management system, and in particular a robust public investment management (PIM) framework. Second, the experiences of Ghana and Kuwait highlight the need to have an effective fiscal anchor to contain fiscal deficits and public debt accumulation. And third, the transfer of oil revenues to the budget should be closely integrated with budgetary financing needs in the context of an appropriate and effective fiscal anchor.

A. Timor-Leste

2. Petroleum is the mainstay of the economy in Timor-Leste. Although modest by international standards in terms of the absolute level of reserves, reliance on petroleum is extremely important to Timor-Leste given its small non-oil GDP. Income from petroleum currently accounts for over 70 percent of GDP and over 95 percent of total revenues. The fiscal framework in Timor-Leste is centered on two elements: a Petroleum Fund and a guideline focused on long-term fiscal sustainability.

3. To date, Timor-Leste’s fiscal framework has been an important anchor to ensure fiscal sustainability. In particular, strict application of a Permanent Income Hypothesis (PIH)-based benchmark has helped preserve the real value of government wealth from oil. At the same time, Timor-Leste’s pressing development needs as a low-income country have led to higher public spending in recent years. Balancing fiscal sustainability and addressing development needs is a critical policy issue for resource rich developing countries (RRDCs).

B. Ghana

4. Ghana started oil production at the end of 2010. Ghana discovered oil in large-scale commercial quantities in 2007 when a consortium of oil companies made a discovery in the Tano Basin. Production officially commenced in December 2010. The Norwegians assisted Ghana in the development of its framework for management of its oil resources. In 2011 the Petroleum Revenue Management Act (PRMA) was passed by Parliament (Act 815) to govern the utilization of oil revenues.

5. The early experience of Ghana in managing the nation’s oil resources has important lessons for other oil producing countries. The first is the need to supplement a prudent oil revenue management framework with a strong and effective public financial management system, and in particular a robust public investment management (PIM) framework. Second, Ghana’s experience highlights the need to have an effective fiscal anchor to contain fiscal deficits and accumulation of public debt. And third, Ghana’s difficulties during the first ten years of oil production illustrate clearly why the transfer of oil revenues to the budget has to be closely integrated with budgetary financing needs in the context of an appropriate and effective fiscal anchor.

C. Kuwait

6. As in the case of Ghana, Kuwait’s experience highlights the need to have a sound fiscal policy anchor for both macroeconomic stabilization and intergenerational equity purposes. For oil-producing and oil-exporting economies such as Kuwait (and Guyana), a well-designed fiscal rule would help preserve intergenerational equity by underpinning savings for future generations. At the same time, by providing medium-term fiscal targets or ceilings, it would better insulate the economy from oil price shocks, help protect government spending decisions from political pressures, and reinforce multiyear budget frameworks designed to contain fiscal deficits and accumulation of public debt.

Annex IV. Macroeconomic Impact of Scaling Up Public Investment1

This Annex analyzes the macroeconomic impact of scaling up the pace of public investment under a baseline scenario and an alternative ‘aggressive’ scenario using the Debt, Investment, Growth and Natural Resources (DIGNAR) model.

1. DIGNAR is a dynamic stochastic general equilibrium model of a small open economy used to analyze the macroeconomic and debt sustainability effects of scaling up public investment in resource-abundant developing countries. Financing public investments in infrastructure and human capital, natural resource revenues may help foster development and growth. Increases in public capital can raise the productivity of labor and private capital, inducing more accumulation of these productive factors and, therefore, growth. In addition, resource revenues can serve as collateral for borrowing from international markets, making it possible to build up public capital even before these revenues are generated. And by providing this external financing, resource revenues may help to mitigate and ‘smooth out’ the crowding out effects on private consumption and investment that are often associated with public investment increases. In practice, however, the management of natural resource revenues has been challenging for policy makers in developing countries and led to opposite results. One of them is the ‘natural resource curse’: resource-rich countries may end up having lower growth rates and loss of competitiveness compared to their non-resource rich counterparts. The DIGNAR model is particularly well-suited to studying and quantifying these possible ‘Dutch disease’ effects.

A. Scenarios Calibration

2. The DIGNAR model is calibrated for Guyana using specific macro- and micro-economic data and cross-country comparisons. Public investment efficiency is assumed at 59 percent in the ‘baseline’ scenario, in line with the findings in the 2017 PIMA Assessment (relative to 70 percent in LAC and 73 percent for EMEs). In the ‘aggressive’ scenario public investment efficiency is assumed to increase steadily from 59 percent to 70 percent, reflecting absorption constraints associated with rapid increases in public investment. The depreciation rate of public capital is assumed to be 7 percent. Exports in percent of GDP are projected to rise from around 58 percent in 2022 to 87 percent in 2024 before falling steadily to 40 percent by 2045.

3. The path of public investment scaling-up is simulated in two scenarios based on the pace of public investment spending and the speed of achieving an overall balance budget. This reflects a gradual adoption of staff’s recommendation of a fiscal responsibility framework that targets an overall balanced budget. The ‘baseline’ scenario models a path of public investment expenditures that allows an overall balanced budget to be achieved by 2025 (see fiscal policy section), to which the authorities agree and is in line with oil transfers from NRF to the budget consistent with the NRF Act. The ‘aggressive’ scenario models a path of public investment spending that allows an overall balanced budget to be achieved five years later, by 2030. The ‘baseline’ scenario sees a steady increase in public investment in percent of non-oil GDP from 9.5 percent in 2021 to 12.5 percent in 2024 and remaining at that level thereafter. By contrast the ‘aggressive’ scenario models a sharp increase in public investment from 9.5 percent of non-oil GDP in 2021 to almost 23 percent in 2026 (for illustrative purposes) and then a steady decline in the ratio to 12.5 percent by 2030.

uA001fig10

Guyana: Public Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

B. Macroeconomic Implications

4. The simulation results show less crowding out of private investment and contraction of the non-resource sector in the long run under the more gradual ‘baseline’ scenario. Rapid growth in public investment spending under the ‘aggressive’ scenario dampens private investment considerably more relative to the ‘gradual’ scenario—by a cumulative 10.8 percent over ten years— due to stronger crowding out effects. This is due not only to higher real interest rates from large public sector borrowing in the short term, but also to the massive front-loading of government investment spending leading to higher inflation and more pronounced appreciation of the real exchange rate, which in turn adversely affects export competitiveness. This is reflected in output in the tradable sector being 2.5 percent lower under the ‘aggressive’ scenario compared to the ‘baseline’ scenario after ten years. Similarly, despite the relatively lower amount of public investment spending to improve infrastructure, non-oil output growth under the ‘baseline’ scenario is higher in the long term compared to the ‘aggressive’ scenario, as the effects of the ‘Dutch disease’ and crowding out of private sector demand are lower: after ten years non-oil output is 3.3 percent lower under the ‘aggressive’ scenario.

Annex V. Financial Market Development, Monetary Policy Transmission, and Exchange Rate Flexibility

1. Guyana needs to take policy measures to modernize the monetary policy framework and strengthen the monetary policy transmission mechanism, as well as to develop and deepen the markets needed to support a move towards greater exchange rate flexibility over the medium to long term. As the 2016 FSSA notes, Guyana’s domestic capital markets are underdeveloped and mostly provide short-term funding: both corporate and government bond markets are minuscule, there is no secondary market trading, and long-term investors mostly hold short-term securities (which constrains their ability to generate reasonable returns and match long-term liabilities). Moreover, available empirical evidence suggests that that monetary policy transmission mechanism in Guyana is weak as the links between interest rates, monetary aggregates, and inflation appear to be weak at present. Preliminary results from VAR estimation by staff suggest that movements in the key central bank policy rate have no significant impact on monetary aggregates or on CPI inflation – which is hardly surprising, given that the policy rate has been fixed at 5 percent since March 2013.

2. Creating the necessary infrastructure, and establishing effective regulatory and supervisory frameworks, for the effective functioning of the interbank, domestic debt, and FX markets will be necessary to achieve these goals. Developing such infrastructure, and regulatory and supervisory frameworks. are essential pre-conditions for strengthening the monetary policy transmission mechanism, enhancing the credibility of the central bank, and facilitating the shift towards greater exchange rate flexibility.

3. Cross country evidence suggests that adopting an alternative nominal anchor to the exchange rate in Guyana in the short term would require developing deep, liquid, and efficient financial and foreign exchange markets (Bhattacharya, R, forthcoming). Further strengthening the monetary policy transmission mechanism, and putting in place systems to monitor, assess, regulate, and manage FX exposures and related risks, should be key priorities over the short term.

4. Based on earlier recommendations from the FSSA 2016, the following key measures continue to be critical:

  • Extend maturities of government securities to facilitate capital market development and use in sterilizing structural liquidity. Extending government paper maturities can be initially started with two-year instruments. A gradual deepening of the government securities market can enable banks to rebalance their portfolios away from foreign assets and reduce their large FX open positions owing to oil-related inflows. It would also expand medium- to long-term investment opportunities for institutional investors.

  • Develop an effective National Payments System (NPS) and medium-term savings products. A robust legal and regulatory framework, and safe and efficient payment infrastructures, are critical for facilitating account transactions and thus access to finance. These relate to both interbank payment mechanism and retail services. Innovative retail payment services, including bill payment and e-money services, should be further promoted. Execution should be broad-based for interbank currency trades, money market transactions, collateral placements in government securities, and government securities trading. Market infrastructures should develop immediately to electronically record transactions, manage risks, provide market transparency, or enable the Bank of Guyana to monitor developments on a timely basis.

5. These measures, coupled with efforts to reduce chronic excess liquidity in Guyana’s financial system, will effectively create the conditions to strengthen the monetary policy transmission mechanism and allow a gradual shift to a more flexible exchange rate regime.

Annex VI. Implementation of 2016 FSAP Recommendations

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I: immediate; NT: near term; MT: medium term. Paragraph numbers refer to the FSSA

Annex VII. Key Features of Guyana’s Labor Market and Policy Challenges1

This annex summarizes the findings by Luong (2020) on labor market strategies with the start of oil production in Guyana. It concludes, based on international experience, that government policies to boost educational and vocational training of the labor force, especially the youth, and effectively engaging diaspora in Guyana’s professional and investment networks will be vital in the medium and longer term while flexibility in migration laws and local content requirements will be key for the short term. Engaging the private sector as the major employer of Guyana’s labor force will also be critical.

1. The recently started oil production will significantly transform Guyana’s economy going forward. One of the challenges the country will face going forward is the impact on its labor market and the skills gap.

2. Labor-market strategies can help the workforce adapt to Guyana’s changing production and export structure following the start of oil production. The findings of the product-space and occupation-space analyses by Luong (2020) reveal how strategic diversification and workforce training can lead to a wealthier and more inclusive Guyanese economy. The product-space analysis highlights several key goods, notably cement, the production of which could be expanded to achieve short- and long-term development objectives. Meanwhile, diversifying Guyana’s range of wood-related products is likely to boost the country’s income level. Links between sectors and occupations (Hartmann et al., 2019) are especially important in Guyana, with its small labor market and high rate of emigration. Previous analytical work (Neffke et al. 2017) has shown that labor mobility between industries is limited in Guyana. Moreover, the difficulty of shifting between industries is due to industry-specific skills as well as occupation-related skills (Jara-Figueroa et al., 2018). Indeed, the polarization of the occupation space in Guyana indicates that workforce flexibility is likely to be a major challenge beyond the short and medium term.

3. Strategies on migration laws, local content requirements and educational fundings will be key going forward. With the low base in education and growing demand for skilled labor, the country needs to make a serious effort to reduce youth unemployment and build human capital – knowledge, skills, creativity, and well-being – by improving the education and health system. Such conditions are essential if the population is to effectively benefit from the wealth generated by the production of oil and other natural resources, as well as to generate ways to add the value needed to achieve the desired diversification of the country’s economy. However, this is also an issue that can only be overcome in a medium- to long-term time frame. For this reason, to fill the specialized labor gaps in the short term, the country will need to reattract the Guyanese diaspora that have left the country and attract foreign professionals (Goldwill, 2019) as did many Gulf countries including Kuwait. In this respect, labor market regulations allowing immigration from the Caribbean as a start, including within CARICOM, would be key. Lowering local content requirements in energy policies would also be important in the short term. For encouraging the influx of diaspora, the international experience suggests a multipronged approach including with creating a diaspora ministry, and for some countries, especially in the transition economies, encouraging joint venture enterprises with diaspora members and providing access to professional networks has worked quite well (Agunias and Newland, 2021).

References

  • Agunias, R., and Newland, K., “Developing a Road Map for Engaging Diasporas in Development” International Organization for Migration (IOM), 2021.

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  • Bureau of Statistics of Guyana, Guyana Labor Force Survey, November 2021.

  • Foray, D., 2014. Smart specialization: Opportunities and challenges for regional innovation policy. Routledge.

  • Goldwyn, D., 2019, Guyana Finds Massive Oil Reserves, but Can It Triumph Over the Resource Curse? Goldwyn Global Strategies.

  • Hartmann, D., Jara Figueroa, C., Kaltenberg, M., & Gala, P., 2019b. Mapping Stratification: the industry-occupation space reveals the network structure of inequality. Available at SSRN.

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  • Jara-Figueroa, C., Jun, B., Glaeser, E. L., & Hidalgo, C. A., 2018. The role of industry-specific, occupation-specific, and location-specific knowledge in the growth and survival of new firms. Proceedings of the National Academy of Sciences, 115 (50), 12646–12653.

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  • Lương, T., 2020 Guyana’s Economic Structure after a Major Resource Windfall: Trade and Labor-Market Strategies, The World Bank.

  • Neffke, F. M., Otto, A., & Weyh, A., 2017. Inter-industry labor flows. Journal of Economic Behavior & Organization, 142, 275–292.

  • International Labor Organization (ILO), The Kuwaiti Labor Market and Foreign Workers: Understanding the Past and Present to Provide a Way Forward, Working Paper.

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  • International Organization for Migration (IOM), Planning for Prosperity: Labor Migration and Guyana’s Emerging Economy, 2021.

Annex VIII. Progress with Implementation of EITI Recommendations

1. Guyana joined the Extractive Industries Transparency Initiative (EITI) in 2017 after announcing commitment in 2010. In 2015, the Ministry of Natural Resources of Guyana, declared the commencement of a process to appoint the members of a Multi-Stakeholder Group (MSG). In February 2017, the MSG was officially launched comprising twelve (12) members, four (4) representatives each from civil society organizations, extractive entities, and government agencies. The MSG approves the work plan for the Secretariat, approves the annual EITI Report, and assures that EITI contributes to the public debate. The Government of Guyana has also set up the GYEITI, which is the national secretariat in charge of coordinating EITI implementation. The MSG aims to ensure transparency and accountability in the governance of the natural resource sector and oversees the day-to-day operations and implementation of its work plan.

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Guyana

Citation: IMF Staff Country Reports 2022, 317; 10.5089/9798400220289.002.A001

2. Under the EITI standards, Guyana commits to: (i) high standards of transparency and accountability in government operations and business, (ii) full disclosure of laws, procedures and conditions under which contracts and licenses to extract and develop the resources are issued, including institutional responsibilities of the State, (iii) full disclosure of exploration, production and exports in the extractive sector (iv) report ownership structures, including beneficial ownership information, transactions and financial flows in the extractive sector, (v) disclose the fiscal regime for managing natural resource revenues and expenditures as articulated in the Natural Resource Fund Act (vi) report the contribution of the extractive sector in the economy.

3. Guyana published its second EITI Report, covering fiscal year 2018 in April 2021 and is currently going through the validation process under the EITI Standard started in October 2021. The report includes data on extractive activities such as mining, oil and gas, fisheries, and forestry. Currently the government of Guyana is working on improving the public access to information related to the extractive sector and has set up a work plan for 2021–22 with outlined expected outputs by December 2022 for a total cost of 567,000 US dollars. Amongst other tasks, the authorities are committed to having all contracts, licenses and permits published along with their geo-located data. These disclosures have been tasked to the e-governance unit of the National Data Management Agency (NDMA). For this the NDMA will work with the statutory bodies such as the Guyana Lands and Surveys Commission, Guyana Geology and Mines Commission, Guyana Forestry Commission, and Department of Energy, to establish online digital portals for the corresponding disclosures. The NDMA will also be working with the Deeds Registry to digitize company registration data so that it is easily accessible to the public.

Annex IX. Progress on 2019 Article IV Policy Recommendations

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Annex X. Strategically on Reducing Climate Change Risks

This Annex describes the climate change risks faced by Guyana and presents the authorities’ comprehensive strategy to manage them.1

1. Guyana faces serious climate change and natural disaster risks, particularly floods and droughts.2 This has been reflected in multiple and recurrent floods,3 alternating with droughts, which have caused significant damage to infrastructure and disruption of economic activity. The worst documented damages reached 60 percent of GDP in 2005.

2. Climate change will accentuate risks faced by Guyana. Sea level along the Guyana coastline is rising faster than the global average4 and is expected to accelerate in the coming decades due to global warming.5 This could result in increased flooding, prolonged inundation of settlements and agricultural land, and contamination of fresh water supplies, with negative impacts on economic activity.

3. The high disaster risk index for Guyana is due to high exposures and lack of coping and adaptive capacities. Guyana’s coastal vulnerability is aggravated by its ageing infrastructure system which is ill-equipped to handle higher water levels and more intense storm surges (Hickey and Weis, 2012).6 Investments in identified priority areas, such as upgrading infrastructure to protect against flooding and hinterland adaptation, would increase resilience.

4. Guyana has started to take action to build resilience and enhance capacity to adapt. It has ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1994 and the United Nations Convention to Combat Desertification in 1997. At the national level, Guyana has prepared the Green State Development Strategy (GSDS) Vision 2040, a framework for a 20-year national green agenda to achieve a sustainable, low-carbon and resilient development, with an emphasis on inclusiveness and intergenerational equity

5. Crucial investment in adaptation infrastructure should be part of a comprehensive strategy to fill infrastructure gaps and prioritize development needs. The absorptive capacity of the domestic economy and labor market will need to be considered in determining the pace of public investment. Incorporating governance-related measures in climate investment programs is crucial to ensure investment is governed with transparency, accountability and integrity.

6. Saving a part of the oil wealth in financial assets will promote intergenerational equity and insure against transition risk. A decarbonized world will have positive effects on Guyana by mitigating the effects of climate change but poses a challenge in the medium term on a lucrative source of revenue.

7. Guyana is committed to net-zero carbon emissions, but efforts should continue to meet its ambitious domestic targets and to compensate for increased emissions from oil extraction. The Low Carbon Development Strategy (LCDS) 2030 commits to reduce emissions by 70% before 2030 mainly via maintaining vast forest coverage and monitoring closely oil emissions on a sectoral and additive basis. Guyana is committed to address climate change challenges by shifting towards renewable energy sources, hydropower and solar, while entering the international carbon credits market. While Guyana does not currently have a carbon tax, it has implemented a flaring tax at US$45 per ton of carbon. Guyana’s vast forests and low deforestation rate supports its effort to mitigate climate change, which has benefited from the REDD+ Investment Fund (GRIF), established through an agreement with Norway, and more recently via a new proposal to join the LEAF (Lowering Emissions by Accelerating Forest Finance) Coalition. According to LCDS, starting in 2022, Guyana can access market-based mechanisms for forest climate services that includes private, as well as international public sector financing. This will enable a pathway to transition from the existing Guyana-Norway partnership and increase the value of sustainably managing Guyana’s forests.
1

The direct impact on the non-oil economy will be limited in the initial years, reflecting the cost of investment in the extraction infrastructure. Ratios in the macroframework Tables 1–6 are generally reported in relation to non-oil GDP, to avoid distortions.

2

With the start of oil production, Guyana graduated from low-income status in 2020.

3

Fiscal measures include:

(i) Extending the adjustment to the freight cost component in the CIF value used for the calculation of imports taxes in 2022, thereby reducing all revenues from imports and costing the budget around G$6 billion (0.2 percent of GDP, 0.5 percent of non-oil GDP).

(ii) Lowering the excise tax rate on gasoline and diesel from 50 percent to 0 percent.

(iii) Allocating about 0.2 percent of GDP (0.4 percent of non-oil GDP) for implementation of other measures to ease the impact of cost-of-living increases on the most vulnerable sections of the society.

4

Some of the increase in oil production in currently operating fields is due to the war in Ukraine. Oil companies indicated that they will take advantage of the increase in global oil prices, and ramp up production, where possible.

5

Guyana received an SDR allocation of 247.5 million in 2021, which was been maintained in international reserves.

6

Non-oil imports are equal to total imports less imports related to oil production in the oil sector. Total imports are often distorted by large, temporary oil-related investments that are financed by FDI.

7

Mostly untargeted measures.

8

Guyana’s level of international reserves will remain below adequate levels in terms of the Assessing Reserve Adequacy (ARA) Emerging Markets (EM) Metric, due to the large increase in oil exports.

9

Given that the majority of oil receipts are held offshore in the NRF, the main source of appreciation pressures stems from the expansionary fiscal stance.

10

Exxon announced in April 2022 the discovery of three additional offshore oil fields, which are not incorporated into projections.

11

Volatility of oil prices, the impact of the lingering war in Ukraine on imported prices (vis-à-vis the shock to global commodity prices), continued supply chain disruptions, or a slowdown in the global economy.

12

For example, transfers from the NRF could be based on a standard permanent income hypothesis (PIH) rule that aims to smooth consumption based on the annuity / perpetuity value of expected future oil revenues; or a more conservative ‘bird in hand’ rule by which public spending is based on the returns on the oil revenues already materialized.

13

The 2017 Public Investment Management Assessment report identified as critical (i) the completion and publication of a policy framework on PPPs; (ii) updating the regulatory framework to international standards; (iii) improving the monitoring of public corporations to coordinate their public investments and to monitor fiscal risks; and (iv) the preparation and dissemination of detailed guidance on project appraisal and selection, while allocating sufficient resources for pre-investment planning, and increasing the capacity to undertake project appraisals and selection in budget agencies.

14

The limits posed by the recently amended NRF Act, together with the Fiscal Management and Accountability Act of 2003, provide constraints on fiscal policy in practice, and debt sustainability is ensured by the commitment to maintain Guyana’s risk of debt distress at a moderate (or lower) level.

15

Guyana’s exchange rate regime is a de jure float, but a de facto stabilized arrangement with occasional foreign exchange rate interventions to maintain the nominal exchange rate.

16

Staff proposed an ‘inflation-lite’ targeting framework to modernize the current monetary policy framework in Guyana, in line with authorities’ efforts to develop the financial markets infrastructure needed to support it.

17

As government spending financed by oil revenues increases over time, larger FX inflows will need to be sterilized by the central bank to avoid pressures on the exchange rate. These sterilization costs, or pressures on the exchange rate, in addition to external shocks, will require ever-greater management to maintain exchange rate stability. As such, greater exchange rate flexibility will facilitate the economic expansion and adjustment to oil price shocks while maintaining price stability and safeguarding foreign reserves.

18

In the 2019 Consultation, staff emphasized that Guyana’s weak education indicators, particularly low secondary school enrollment ratios, had resulted in significant skill shortages and was a key impediment to long-term inclusive growth.

19

The weaknesses were noted in the areas of revenue administration, ease of doing business, import licensing, discretionary licensing allocation and the rule of law.

21

Guyana’s vast forests and low deforestation rate support its effort to mitigate climate change, which has benefited from the REDD+ Investment Fund (GRIF), established through an agreement with Norway, and more recently via a new proposal to join the LEAF (Lowering Emissions by Accelerating Forest Finance) Coalition.

1

Special thanks to Alexei Goumilevski and Max Yarmolinsky in ITD, and Zamid Aligishiev and Cian Ruane in RES, for help in running the DIGNAR model for Guyana.

1

Prepared by Manuk Ghazanchyan and Minnie Park. We thank Anna Luisa Paffhausen and Rohan Longmore, both at the World Bank, for their helpful comments.

1

This Annex contributed from the work of Seedwell Hove and Hussein Bidawi when they were part of the IMF Guyana team.

2

The 2021 UN World Risk Index, which measures exposure to natural disasters, susceptibility, and the capacity to adapt and cope with these events places Guyana in the 7th position in its disaster risk ranking of 181 countries.

3

It experienced floods in 1996, 2005, 2006, 2008, 2010, 2011, 2013, 2014, 2015, and 2021, alternating with droughts in 1997–1998, 2009–2010, and 2015–2016 (NAPG, 2016).

4

Sea level off Guyana coast rose at a rate of six times the global average, (0.4 inch, or 10.2 millimeters per year) from 1951 to 1979 (Guyana National Climate Committee, 2002).

5

Projections for Guyana suggest that sea level could rise by 0.14m to 0.26m by 2030s, and 0.4 to 0.51m by 2100 (McSweeney et al. 2010).

6

About 25 percent of the Guyana’s coast is protected by seawalls, 60 percent by mangroves, and 15 percent by natural sandbanks.

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Cover IMF Staff Country Reports
Guyana: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Guyana
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2022: Issue 317
Publisher:
International Monetary Fund
ISBN:
9798400220289
ISSN:
1934-7685
Pages:
102
DOI:
https://doi.org/10.5089/9798400220289.002

Sectoral Contribution to Real Growth

(In percent)

COVID-19: Confirmed Cases and Vaccine Administration

Fully Vaccinated Population in Latin American and the Caribbean

(In percent of eligible population)

Real and Nominal Effective Exchange Rates

(REER/NEER 2010 = 100, increase = appreciation)

Monetary Indicators

(annual percentage change)

Energy Balance in DBIS (Demerara Berbice Interconnected System) and Isolated Grids to 2041

(In GWh)

Residential Electricity Cost, 2021

(US cents per Kilowatt-hour)
Figure 1.

Guyana: Comparative Regional Developments 1/
Figure 2.

Guyana: Real Sector Indicators
Figure 3.

Guyana: External Sector Developments
Figure 4.

Guyana: Fiscal Sector Developments
Figure 5.

Guyana: Financial Soundness Indicators
Figure 6.

Guyana: Monetary Developments

Guyana: Public Investment

(In percent of GDP)

Guyana