With 11 billion barrels of oil equivalent resources in the Stabroek Block, and multi-billion barrels poised to be unlocked, Guyana could soon see more than a trillion Guyana dollars being deposited annually into its Natural Resource Fund (NRF).
With such significant revenues on the horizon, Guyanese authorities will be tempted to ramp up spending, be it for infrastructural, educational, or social needs.
Given the legal structure of the nation’s Natural Resource Fund law, which only allows the authorities to spend a portion of the wealth per annum, Guyana will also have to incorporate a mix of loans from its bilateral partners to meet its development targets. It is the collision of these two circumstances that will unleash several tests for Guyanese authorities, says Dr. Meredith Arnold McIntyre, an economist of 30 years.
In a recent OilNOW column, McIntyre posited that the government must be ever mindful of the following missteps: overheating the economy, engaging in unsustainable borrowing practices, and of course, creating circumstances that would invite the dreaded Dutch disease and its far-reaching tentacles.
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McIntyre explained that the ‘Dutch Disease’, as history has shown, can be economically crippling. He explained that it occurs when a resource boom reduces the internal incentives to produce or diversify while hindering the international competitiveness of domestically produced goods.
He also wrote that the ‘Dutch Disease’ can occur if spending increases significantly and runs up against absorptive capacity constraints that result in higher prices for certain goods. He said it can also occur if there are inflationary pressures leading to a revaluation of the real exchange rate.
Given the significant development needs of the country, Dr. McIntyre opined that Guyana’s fiscal policy framework needs to iron out how increased spending will occur at an appropriate rate. One recommended option, he said, would be to have roughly equal shares of saving versus spending of the oil income in the medium-term (3-5 years) and as oil revenues substantially increase over the long-term and development indicators improve, greater shares could go to savings.
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The expert also cautioned that Guyanese authorities should ensure, as far as possible, that capital spending is guided by absorptive capacity constraints to avoid ‘overheating’ the economy.
In summary, the economist believes Guyana’s windfall is large enough to support increased spending without resorting to debt accumulation.
By keeping its eyes on prudent spending and debt sustainability, the economist argued that this strategy would be effective in keeping the ‘Dutch Disease’ as well as other economic ills at bay.
