A visiting International Monetary Fund (IMF) mission has suggested that authorities moderate the growth of wages and reform public enterprises to reduce their reliance on government support.
“In that regard, the improved financial performance of Guyana Power and Light and the reforms proposed by the Commission of Inquiry for the Guyana Sugar Corporation are welcome,” the IMF said in a statement issued following a February 24 to March 7 visit by a team, led by Marcos Chamon, to hold discussions for the 2016 Article IV consultation.
It added that the scope and pace of reform should take into account social implications, while also pointing out that containing current expenditure would provide additional space for public investment and preserve debt sustainability.
The statement said discussions with authorities, who were commended for maintaining macroeconomic stability, centered on strategies to maintain fiscal and debt sustainability while boosting growth. It noted, however, that increasing current expenditure will crowd out space for public investment, despite significant donor support.
According to the IMF statement, Guyana’s economy remains resilient and continues to grow “despite significant global headwinds.” It said that real Gross Domestic Product (GDP) grew at 3.0% last year, despite lower commodity export prices, delays in budget implementation, and political uncertainty in the run-up to general elections. It added that developments in the global economy remain a drag on growth, particularly for commodity exporters. Nevertheless, growth is projected to increase this year, supported by an increase in gold production and public investment. It said while authorities project 4.4% growth in 2016, the IMF mission projects 4.0%. “Boosting private sector confidence is key for growth momentum,” it added.
According to the IMF, the steep decline in international oil prices narrowed the current account deficit. Lower prices, it noted, reduced the cost of fuel imports, which offset the impact of lower commodity export prices, reducing the current account deficit to 4.6% of GDP in 2015 from 10.8% in 2014.
It added that reserves stood at 3.6 months of imports at the end of 2015 and are projected to increase over the medium-term, bolstered by foreign investment and donor support for public investment. The exchange rate has remained broadly stable due to offsetting positive and negative external shocks, it further said.
Nevertheless, the IMF noted, Guyana remains vulnerable to movements in commodity prices due to dependence on imported oil and the concentration of exports on a few commodities. As a result, the mission noted that exchange rate flexibility would continue to facilitate adjustment to external developments, mitigate their effect on growth, and safeguard reserves.
The IMF said the fiscal balance improved in 2015, reflecting one-off factors. “The overall non-financial public sector deficit narrowed to 0.2 percent of GDP in 2015 from 5.7 percent in 2014. Despite an economic slowdown, revenue increased buoyed by fuel excises (which were raised as the international oil price declined), and a one-off increase in non-tax revenue from statutory agencies. Capital expenditure declined by nearly 30 percent, reflecting the late start of the public investment program,” it noted, while adding that going forward the deficit is expected to remain between 5 and 6% of GDP.
The statement added that authorities have “an ambitious investment strategy” for “environmentally sustainable and socially inclusive growth.” Improvements in transportation and telecommunication infrastructure and renewable energy projects, it noted, will boost productivity, integrate remote regions, facilitate economic diversification, and ease key impediments to growth. “These investments should stimulate economic activity, provide a durable increase in competitiveness, and ensure that the benefits of growth are more broadly distributed,” it added.
The IMF also said that the magnitude and sources of financing of the deficit have implications for growth. “Domestic financing may crowd out credit to the private sector and raise interest rates. Regarding external financing, the mission welcomed the authorities’ intentions to continue to refrain from non-concessional external borrowing that would raise the interest rate burden and adversely affect debt sustainability. The authorities’ exclusion of possible future hydrocarbon export income from their medium-term plans is commendable,” it added.
The statement said the monetary policy stance should remain accommodative, while observing that lower prices for imported goods, including fuel, continue to restrain inflation. “Credit to the private sector had expanded at a rapid pace over the past decade, but broadly in line with economic activity and financial deepening. Credit growth has moderated since 2015, mainly on account of reduced lending to businesses. As long as inflationary pressures remain contained, a more accommodative monetary policy stance, with base and broad money growing more rapidly than nominal GDP, remains appropriate,” it explained.
Banks, the IMF said, remain well capitalised but heightened vigilance is warranted due to increases in nonperforming loans. It added that recent changes to credit reporting legislation are welcome and the authorities are encouraged to continue to strengthen financial sector supervision.
In this regard, the mission suggested tightening (i) provisioning requirements; (ii) large exposure limits: (iii) restrictions on related lending; and (iv) loan classification rules. In addition, it said the stress testing toolkit could be expanded to include shocks to loan collateral values and also take into account inter-linkages among economic sectors, borrowers, and financial entities. It added that a Financial Sector Assessment Program mission will visit Guyana in May to provide a more granular analysis of financial sector challenges and assist the authorities with strengthening the prudential toolkit.
The mission also welcomed recent steps towards strengthening the Anti-Money Laundering and Combating the Financing of Terrorism framework and added that the authorities should address remaining deficiencies promptly. “The authorities are urged to accelerate the implementation of the action plan agreed with the Financial Action Task Force,” it said.
According to the IMF, during an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials. The team then reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF’s member countries. A summary of the Board’s views is subsequently transmitted to the country’s government.
The statement said the IMF Executive Board is expected to discuss Guyana’s Article IV consultation in May 2016.
During its visit, the team met with Finance Minister Winston Jordan, Public Infrastructure Minister David Patterson, Natural Resources Minister Raphael Trotman, Central Bank Governor Gobind Ganga, and other senior officials, as well as representatives from the private sector, opposition party, labor unions, and other stakeholders.
