With oil production on the horizon, the International Monetary Fund (IMF) says the medium-term prospects for the South American country of Guyana are ‘very favourable’ and provides an opportunity for government to scale-up capital and current spending to address infrastructure and other needs of the nation of 750,000 people.
“The commencement of oil production in 2020 presents an opportunity to scale-up capital and current spending at a measured pace over the medium term to address infrastructure gaps and human development needs, while attenuating debt sustainability concerns at the same time,” the IMF said on Monday in a statement following a staff team’s visit to the country on June 3 – 14.
IMF said the mission welcomes the passage of the Natural Resource Fund (NRF) legislation for managing the country’s natural resource wealth, stating, “it underscores the authorities’ commitment to fiscal responsibility. To ensure fiscal responsibility is achieved, the mission recommends complementing the NRF legislation with a fiscal framework that constrains borrowing and achieves a balanced budget in the near- to medium-term.”
To achieve this target, IMF said the annual non-oil deficit should not exceed the expected transfer from the NRF. “This would ensure that excessive public expenditure will not lead to debt growing at the same time as the NRF accumulates. It is also necessary to preserve the spirit of the NRF framework, which appropriately aims to save part of the income from oil as net wealth for future generations.”
The pace of scaling-up public spending needs to be gradual, the IMF pointed out, in order to reduce bottlenecks from absorptive capacity constraints, avoid waste, and minimize macroeconomic distortions related to “Dutch” disease that has often inflicted economies experiencing sizable increases in resource-based income.
IMF said authorities in Guyana “have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues. The rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field.”
However, the monetary body said authorities are “developing strategies to mitigate such a possibility, including a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.”
The international funding agency said Economic growth in the South American country strengthened in 2018 with broad-based expansion across all major sectors. “Real GDP grew by 4.1 percent in 2018, up from 2.1 percent in 2017, led by construction and services sectors. Inflation remained steady at 1.6 percent at end-2018, on the back of stable food prices and exchange rate.”
For 2019, IMF said the mission projects real economic growth of 4.4 percent, driven by continued strength in the construction and services sectors ahead of oil production in 2020, and strong recovery in mining. “The authorities do not foresee any significant spillovers from the crisis in Venezuela at present. However, the influx of migrants into the hinterland and rural areas could put socio-economic pressures on the local communities.”
The visiting IMF team met with Prime Minister Moses Nagamootoo, Finance Minister Winston Jordan, Minister of Legal Affairs and Attorney General Basil Williams, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, banks, the opposition party, labor unions, and other stakeholders.