Tuesday, November 29, 2022

Is Guyana’s economy self-adjusting or in the early stages of Dutch disease?

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Since the emergence of the oil industry in 2015, Guyana has experienced an almost cosmic shift in its revenue inflows. Today, the hydrocarbon sector accounts for more than 50% of Gross Domestic Product (GDP). Traditional sectors, like manufacturing, rice and sugar, have been struggling to keep up.  Is the sudden shift in economic contributions enough to say definitively that the new oil-producing state is experiencing symptoms of the Dutch Disease?

The literature on this subject matter as well as stakeholders who have studied it in detail would caution against jumping so quickly to conclusions.

When it comes to the oil industry, its impact on economies can be varied and depends on a range of factors, including government policies. The potential impact of the Dutch Disease phenomenon is an apt example of this. Historical texts dating back to the first time the term was coined and used in 1977, and even evolved definitions over the years, do provide the general understanding that the Dutch Disease speaks to a sudden increase in the production of an emerging natural resource sector and the decline in other traditional contributors. But it is much more than this.

The natural resource boom is also seen as so lucrative that labour migration happens at a rapid rate, thereby harming the competitiveness of pre-existing industries. There is also a substantial appreciation of the domestic currency.

With the emergence of the oil sector in Guyana following the first commercial discovery in 2015, there has been an unavoidable injection of multi-billion-dollar investments to develop the resources discovered in the ExxonMobil-led Stabroek Block. The speed with which this has happened has left many stakeholders wondering if the symptoms of the Dutch Disease are already present.

Director of Guyana’s Local Content Secretariat, Dr. Martin Pertab, believes it is too early to tell. While oil accounts for a significant share of GDP, one cannot deny the fact that the economy, and the world over, have been hit by two unprecedented events – the COVID-19 pandemic and the Russia-Ukraine war.

Oil production at the Liza Phase 1 Project started in December 2019, and in a matter of three months, the new oil-producing State was hard hit by the pandemic. Importantly, Guyana was also gripped by a five-month period of instability due to the turbulence of the 2020 General and Regional Elections. The new government took office in August 2020 and had a mere few weeks to prepare and pass an emergency budget.

Just as the world was preparing to get back on its feet in 2021, Russia was planning an invasion of Ukraine that would start in February 2022 and continue to present day. The result is that supply disruptions, food security complications, inflationary pressures and urgent need for energy security are critical concerns for world leaders, even those in Guyana. No country has emerged untouched from the geopolitical catastrophe that worsens with each passing day.

With the foregoing context, it is difficult, according to Dr. Pertab, for any reasonable thinker to believe that Guyana is already afflicted by the Dutch Disease. The existing data on economic performance for the period 2020 to 2022 were deeply affected by three major factors as explained earlier.

Putting aside, briefly, the trifecta expounded upon, have you ever pondered whether Guyana is experiencing the symptoms of adaptation to its newfound wealth? Christine Ebrahimzadeh, a former Assistant to the Director for Communications and Outreach in the International Monetary Fund’s (IMF) Middle East and Central Asia Department, put it eloquently in one of her research pieces titled, Dutch Disease: Wealth Managed Unwisely, that the so-called symptoms or effects one might characterise as being the Dutch disease may simply represent the economy’s adaptation to its newfound wealth, making the term “disease” a misnomer. She wrote that oftentimes, the symptoms one might see are just the economy’s way of self-correcting and restructuring.

The important question, or what determines whether the Dutch Disease will be present and have a destabilising effect is the extent to which policy leaders help the country deal with the ramifications of the newfound wealth.

So, what are key steps to be taken? According to the World Bank, a critical long-term policy to prevent Dutch Disease is to diversify the economy. Diversification can happen by boosting the variety of exports, products, and assets available in the economy. The financial institution also recommends the implementation of a Sovereign Wealth Fund if rents are expected to continue on a long-term basis.

The country may undertake other reforms that do not necessarily involve large expenditures, but that enhance economywide productivity such as improvements in business regulations, reduction in red tape, reduction of monopolistic barriers that discourage innovation, and other improvements in the overall business climate. Such policies, according to another World Bank paper, reduces the regulatory burden on the nonrecourse economy and promotes foreign direct investment into other industries.

Already, the government has gone above and beyond with its efforts to push diversification as it remains focused on agricultural expansion and growth. According to the 2022 Mid-Year Report, the agriculture, forestry and fishing sector is estimated to have expanded by 10.9% in the first six months of 2022, driven by higher output from the other crops, forestry and livestock. This is notwithstanding weaker performances in the sugar, rice, and fishing industries due to inclement weather. The sector is now expected to grow by 11.9%. Guyana is also leading the charge regionally, by pushing the Caribbean Community (CARICOM) to reduce its importation bill by 25% in three years’ time.

Furthermore, the country has also been lauded by the IMF for the strengthening of the governance systems for Natural Resource Fund. That account has over US$1.2 billion. All expenditure must be approved by the National Assembly.

Outside of the foregoing, the Head of the Local Content Secretariat indicated in an exclusive interview that the government has also extended its multifaceted approach to addressing the Dutch disease by using the Secretariat as a vehicle to drive investments and opportunities in other sectors such as agriculture. He also believes that the coveted gas-to-energy project will play a significant role in unleashing the productive potential of other sectors, thereby realizing Guyana’s goal for a truly diversified economy.

Dr. Pertab was also keen to note the government’s mass education drive through its Guyana Online Academy of Learning (GOAL) Scholarship Programme which he posited will also go a far way in ensuring the population has the capabilities needed to drive development in the oil and non-oil economies. This effort is also complemented by a US$44 million World Bank loan for the Guyana Strengthening Human Capital through Education Project. This initiative is intended to focus on expanding access to quality education at the secondary level, as well as improving technical and vocational training (TVET) to meet the needs of the labour market. The funding also aims to prepare Guyanese citizens to excel in emerging sectors of the economy including climate-resilient agriculture, low-carbon technology, and digital development.

Guyana will also benefit from a US$37 million Inter-American Development Bank (IDB) loan to support the transformation of the education sector to meet the requirements of the 21st century. The specific objectives are to improve and expand access to safe and improved learning environments in select schools and expand and improve educational services for vulnerable students.

Conclusion

While it is too early to tell if the Dutch Disease symptoms are present, the Guyana government is aggressively implementing the necessary mechanisms to ensure it is, by no means, a destabilising factor in the future.

About Energy Insights

From the people who bring you day-to-day coverage through OilNOW – the Caribbean’s premier oil, gas and energy information service – the Energy Insights column offers perspectives and analyses on the evolving energy sector in the South American/Caribbean region, and further afield.

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