GUYANA | IMF says oil production has the potential to transform Guyana’s economy

GUYANA | IMF says oil production has the potential to transform Guyana’s economy

WASHINGTON DC, June 4, 2022 - The International Monetary Fund says with increasing oil production having the potential to transform Guyana’s economy, Guyana’s medium-term prospects are more favorable than ever before.

The international lending agency welcomed the emphasis on public investment, it however warned Guyana against spending rapidly on public investment projects as this can have severe economic consequences.

The Staff urged “caution in determining the pace of ramping up public investment. While pressing development challenges still face the country, a large surge in public investment could add inflationary pressure, affect competitiveness of the non-oil economy, lead to an eventual loss in FX reserves, and might not be sustainable over the medium-term.

In addition, the Staff urged the authorities to simultaneously strengthen the capacity to manage public investment, based on recommendations from the 2017 PIMA report. 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.

“This rule will also ensure that fiscal spending, including capital spending, is increased at a measured pace, to address development needs without macroeconomic imbalances. Staff also recommend further analysis of the oil transfer rules, to ensure the long-term sustainability of the NRF and intergenerational equity,” the IMF said

The  international lending agency noted that “Oil production is expected to increase significantly with the coming on stream of two large oilfields in the Stabroek Block during 2022-26. Guyana’s commercially recoverable petroleum reserves is estimated to be well over 11 billion barrels, 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,” the IMF said.

In its Concluding Statement following its recent official staff visit  under Article IV of the IMF's Articles of Agreement, the IMF said it “strongly support 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 Low Carbon Development Strategy 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.”

The IMF noted that “the use of the exchange rate as the nominal anchor is currently appropriate, concurrent with increased efforts to diversify the non-oil economy and deepen the 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.

The IMF Staff commend the authorities’ good progress in strengthening Guyana’s anti-corruption framework and fiscal transparency and support further advances.

“Several pillars of the anticorruption framework have been recently strengthened, including the Integrity and Public Procurement Commissions (IC and PPC) and the National Procurement and Tender Administration Board (NPTAB).

“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 (Extractive Industries Transparency Initiative) 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.

The IMF pointed out that  the Guyanese economy was negatively impacted by the pandemic, and 2021 floods, but has recovered well supported by the oil boom, and policy actions. 

Following the pandemic-induced recession and delayed political transition in 2020, economic growth recovered in 2021, with non-oil Gross Domestic Product (GDP) growth reaching 4.6 percent.

The war in Ukraine exacerbated inflationary pressures in 2022—due primarily to higher fuel and food prices—but the government implemented measures to mitigate the impact on vulnerable households and the economy. Even though the current account deficit widened significantly in 2021 in part reflecting increased capital imports, the foreign exchange (FX) reserve position improved, due to the new Special Drawing Rights (SDR) allocation.  

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 and ‘shovel ready’ public investment projects, primarily improving road networks and providing affordable housing, and eased the tax burden on the most vulnerable. Public debt stood at 42.9 percent of GDP at end-2021, one of the lowest in the region. 

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