Abstract
On behalf of our Guyanese authorities, we thank the mission team led by Ms. Alina Carare for their open and constructive dialogue during this year’s Article IV consultation. The authorities also want to acknowledge the work of former mission chief Mr. Arnold McIntyre, who recently retired from the Fund.
On behalf of our Guyanese authorities, we thank the mission team led by Ms. Alina Carare for their open and constructive dialogue during this year’s Article IV consultation. The authorities also want to acknowledge the work of former mission chief Mr. Arnold McIntyre, who recently retired from the Fund.
Notwithstanding the authorities’ appreciation of staff advice and candor, they believe the report does not fully represent the current dynamism and prospects of the Guyanese economy. Guyana is in the midst of an energy boom after the discovery and production of oil and natural gas. The rapid growth in the energy sector is impacting the rest of the economy and propelling a major economic transformation. Foreign oil and gas companies operating in Guyana have raised their long-term production forecasts, which will help to attract new capital investment and lift the growth outlook to a double-digit expansion for at least the next five years. From the authorities’ standpoint, this remarkable macroeconomic outlook should’ve been widely featured in the analysis presented in the report instead of leaving it in the annex tables.
The current administration overcame extremely challenging socio-political conditions. A parliamentary no-confidence motion in the previous administration was enacted in December 2018, triggering a constitutional requirement for elections to be held by March 2019. The election was pushed back until March 2020, and the electoral results were delayed until August 2020. This situation impacted the authorities’ ability to respond to the pandemic crisis through standard budgetary procedures. In addition, the dire political situation resulted in the withholding of access to funding by key multilateral and other development partners, and a reluctance by the private sector to fully engage in the economy. After taking office, the new administration embarked upon rapid investment and social protection programs amid difficult prevailing conditions.
The Guyanese government will continue to leverage on the experiences of other resource-rich countries. The authorities are well aware of the unique challenges associated to oil, mining and gas extraction, and are fully committed to make policy decisions that help avoid some of the mishaps while maximizing the benefits. In that vein, the authorities plan to boost investment in education, health, and infrastructure to help ensure the general population profit from the country’s expected economic growth. In addition, they have put in place local-content policies to facilitate that local businesses are able to benefit from the energy sector development.
Recent macroeconomic developments
The new oil discovery in Guyanese waters has propelled the country into becoming the fastest growing economy in the world. The Guyanese economy is projected to grow 57.8 percent in 2022, according to staff estimates. This unprecedented rate of expansion is expected to be driven by the oil sector, with all major sectors regaining momentum from the full reopening of the economy as the pandemic gradually wanes and supporting fiscal measures alleviate the rising costs of production and services. During the first quarter of the year, real GDP growth was consistent with the forecast, with the non-oil sector exhibiting a strong performance led by agriculture, manufacturing, and services.
The upward trend in international oil prices has prompted foreign operators to bring forward investments, accelerating the development of oil fields. For instance, Exxon Mobile recently reported that it had already exceeded its original year-end daily production target of 340,000 barrels of oil equivalent per day. Oil export growth, along with higher public and private investment, should continue to provide a sustained boost to domestic demand, and overall economic growth, even despite a high base of comparison and the lingering impact of the pandemic.
Despite a slight recent moderation, inflationary pressures continue. Inflation was already surging prior to the war in Ukraine due to rising commodity prices and disruptions in global value chains. While war-related shortages are expected to continue to put pressure on international commodity prices, domestic inflation, particularly food, has somewhat slowed down during the second quarter of 2022 as the authorities continue to take measures to ease the cost-of-living and guarantee food security. For year-end 2022, the inflation rate is expected to remain around 4 percent according to official estimates.
Fiscal Reforms and Policies
In the short-term, fiscal policy will remain sensitive to growth needs and inflationary pressures. The NRF Act allowed Parliament to authorize a US$607.6 million transfer to support the 2022 budget to invest heavily in capital expenditure while supporting the needs of the vulnerable population. In addition, the strong oil windfall is allowing the authorities to temporarily lower rates or remove taxes on selected items, including gas and diesel fuels, to mitigate the impact of rising inflation. Furthermore, considering the significant rise in fertilizer prices, the authorities are also supporting farmers to access fertilizers at a more affordable cost.
The authorities are committed to gradually adjust the fiscal stance and strengthen the medium-term fiscal framework. The framework will reflect the annual non-oil overall fiscal deficit (after grants) constrained to not exceed the expected transfer from the NRF over the medium to longer term. Such actions will put the country on an even more sustainable fiscal position and reduce the risk of macroeconomic imbalances. However, the road to a balanced budget may take longer than the 2025 target put forward by staff in the report, considering the significant investment in both physical and human capital needed to support Guyana’s development goals.
The oil windfall will help boost fiscal buffers and significantly improve the public debt outlook. Guyana currently exhibits one of the lowest debt-to-GDP ratios in the region, with all external debt indicators below the relevant indicative vulnerability thresholds according to staff’s Debt Sustainability Analysis, and a fact that should’ve been more prominently featured in the staff report. In addition, the authorities have established effective statutory ceilings on domestic and external debt, that will be recalibrated to reflect the economy’s evolving financing needs and the country’s debt-carrying capacity. In this regard, staff’s assessment may be inconsistent with the growing international reserves and the fact that imports associated with oil production tend to rise vis-à-vis the energy boom. Therefore, a more adequate metric to estimate debt-carrying capacity for oil producing economies may be needed to avoid misconstructions. Using imports net of capital imports for the energy sector may be a more suitable benchmark.
Monetary Policy and Financial Sector developments
The Bank of Guyana (BoG) has maintained its focus on price stability. The BoG continues to monitor local and international conditions to react to the global tightening, especially to the rate increases in the US by the Federal Reserve. With the rapid growth of the oil sector, there has been increased foreign exchange transactions in all segments of the market including bank and non-bank. Therefore, the monetary authorities have strategically intervened in the market to avoid disorderly conditions. Notably there has been an increase in international reserves due to foreign exchange inflows, which was complemented by IMF’s injection of SDRs. The inherited overdraft at the Bank of Guyana was effectively addressed with the issuance of debentures in June 2021, though this contributed to a rise in domestic debt.
The financial sector remains resilient. The authorities are fully committed to continue the implementation of the recommendations of the 2016 FSAP, particularly regarding Basel II and III. The modernization of the payment system has accelerated with many consumers and businesses adopting digital payments solutions as the country rapidly transitions away from a cash-based society. In this context, the integration of the Guyana Real Time Gross Settlement (G-RTGS) and Guyana Central Securities Depository (G-CSD) systems with the Automated Clearing House (ACH) system would help accelerate this trend in an orderly fashion.
Structural reforms
Notwithstanding the focus on the energy sector, diversification efforts will be intensified. The authorities are conscious of the international push away from fossil fuels and have ensured that funds are being devoted to further diversify and boost production in the non-oil sector, with an expansion into non-traditional areas such as wheat and soya bean, and investment in a seed bank to increase its food security and diversification. In addition, the tourism industry is also set to experience a significant boost as international hotel chains such as Hyatt, Best Western and Marriot are expected to start or complete construction of new hotels across the country.
Human capital investment remains a top priority. The Ministry of Labor, through its Board of Industrial Training, is implementing programs to boost technical capacity in areas, related to new and emerging sectors, to help reduce geographical and occupational inter- industry skills mismatches going forward. Policies to improve the education system are also being implemented including by investing in expanding schools at all educational levels. The authorities are also looking at the country’s immigration policy to address evolving trends and meet the country’s present labor market needs.
Infrastructure investment will strategically support sustainable growth efforts. The construction of new highways, bridges, and roads will also help boost the non-energy sector as the authorities ramp up capital expenditure. The New Demerara River Bridge, the Corentyne River Bridge linking Guyana and Suriname, and road infrastructure linking Guyana to Brazil are some of the projects to be undertaken. The construction sector will also benefit from the authorities push to increase the housing stock across the country. In all cases, the procurement process will be open and competitive, including public and online viewing of opening of bids and publication of awardees.
The authorities are fully committed to further strengthen governance. The anti- corruption framework is aligned with international best practices standards, and the ongoing improvement of the legal framework, public financial management practices and policy coordination across public agency remain a priority. Furthermore, the country is also part of the Extractive Industries Transparency Initiative (EITI), which promotes the transparent and accountable management of resources from the mining, energy, fishing, and forestry industries, and the authorities recognize that following up adequately on EITI recommendations is paramount. The government is currently working on increasing 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.
Investment in climate change adaptation is a key element of the authority’s policy agenda. The country will invest in renewable energy with multiple utility-scale, photovoltaic solar projects distributed across the country supported by Norway’s International Climate and Forest Initiative and implemented by the IDB. The country is also looking to enter the international carbon credit market to issue between 8 and 10 million carbon credits in ART- TREES (Architecture for REDD+ Environmental Excellence Standard). Furthermore, the country has implemented a flaring tax at US$45 per ton of carbon and commits to reduce emissions by 70 percent before 2030.
Conclusion
The Guyanese authorities have made considerable progress capitalizing on the energy boom, despite the limitations imposed by the pandemic, political instability, and human capacity constraints. As the country addresses long-standing development challenges, the authorities reiterate their commitment to maintain a productive engagement and close collaboration with the Fund and CARTAC.