A likely sector coup

A novelty

From the look of things, almost everyone in Guyana is preoccupied with the events in the emerging oil and gas industry in the country.  Sitting on the favourable side of oil and gas is a novelty for a country like Guyana which has endured some of the most damaging effects of being an oil-deficit country.  Blackouts, damaged household equipment, frustratingly high gas prices and import taxes on motor vehicles, restricted consumer choices and uncompetitive cost structures have conspired to constrain the ambitions of a free-thinking and pioneering Guyanese people for years.  It possibly even triggered detestable survival instincts which sullied the image of the nation.  Therefore, it is easy to understand the excitement being induced by the emerging industry and the positioning for influence that is taking place therein.  Divergent opinions about oil’s impact on governance and accountability are emerging also with different entities staking a claim as advocate or soothsayer with the correct viewpoint of the future industry and its risks for the Public Treasury.   But, the emergence of oil and gas on the horizon brings with it the likelihood of realignments in the national economy and leads this writer to reflect on the mining and quarrying sector which is likely to see oil’s imminent entry into Guyana’s production structure dethrone gold in a sector coup.

Clearest reflection

Guyana’s economy has been targeted to achieve growth of 3.8 per cent this year with the expectation that the mining, quarrying and services sectors will be the drivers of this growth. This year, it is expected also that gold production will again be around the 700,000-ounce mark.  The achievement of this year’s economic targets will be in line with the International Monetary Fund’s (IMF) projections of an increase in economic activities in developing economies for 2017 and 2018.  Over the years, the mining and quarrying sector has represented a significant component of Guyana’s economy in which its performance in 2016 was the clearest reflection of this yet. The sector has and continues to play a significant role in the nation’s economic development and although its capacity is not completely actualized, it is one of the most important contributors to the wealth of the country.

Gold, bauxite, other minerals

As could be seen from Table 1 below, over the period 2007-16, the mining and quarrying sector has been dominated by gold. Over this period, gold’s contribution to the sector remained significantly high and unwavering with an average share of 69 per cent of the mining and quarrying sector and a 12 per cent annual average growth rate.  Gold had a prolific run during the period under review nearly doubling its output by 2016 and establishing a single-period record of a 58-per cent increase between 2015 and 2016.  This single-period performance no doubt reflects the commencement of production by the two multinational companies whose output helped to boost the numbers.

The steady hand of gold is not evident in the experience of bauxite and “other” minerals as revealed in Table 1.  Unlike gold, the contribution and performance of bauxite has not given much to rejoice about during the period in review. On average, bauxite contributed 15.7 per cent to the mining and quarrying sector. Despite the contribution to the sector, bauxite exhibited negative growth frequently over the period.  The six times that it declined was too much for the industry, causing its output to decrease annually by an average of five per cent from 2007 to 2016. Like gold however, bauxite’s output to the sector decreased in 2014, but regained some strength in 2016.

Table 1

Following a similar pattern to bauxite was that of “other” minerals, with a contribution of 15.6 percent to the mining and quarrying sector.  Though output is similarly small in relation to gold, the experience of “other” minerals was much more favourable than in the case of bauxite.  Output did not exhibit the frequent peaks and troughs seen in bauxite production.  As a consequence, output of “other” minerals was relatively stable throughout the period.

Value-Added

The economic value-added generated in the economy by the mining and quarrying sector over the period in review averaged 15.5 per cent annually, increasing from an estimated $40 billion in 2007 to $145 billion in 2016. The value-added generated by this sector compared to other sectors is significantly larger and is likely to become even greater if the output of oil and gas is added to the mining and quarrying sector as this writer expects to be the case.  The dominant contributor currently is gold.  Major contributions came from the small-scale miners who produced two-thirds of the industry’s output in 2016 and almost all of it in prior years.  According to an annual report of the Guyana Geology and Mines Commission (GGMC), the gold industry has also generated employment for an estimated 9,000 to 10,000 persons with a range of skills, including heavy-duty machine operators, cooks and suppliers of food items to the various camps. The need for accommodation and related services has also generated service-related jobs within the industry.

Days numbered

But gold’s days might be numbered as the industry’s most dominant player and foreign exchange earner with the imminent inclusion of oil and gas in the measurement of the output of the sector.  People are falling all over each other to be a part of the upcoming industry.  The analytic attention that the industry is receiving and the planning that is taking place three years out for participation in the oil and gas industry are commendable.  But, the shift in resources towards the emerging industry is also an indication that the realignment of Guyana’s economy has already started.

Dethroned

Sugar was once king, but has long been dethroned by gold in an industry coup.  Gold which reigns supreme could itself suffer a similar fate in a sector coup with oil and gas replacing it at the perch.  As is the case with sugar, the sector coup could have traumatic economic effects, which were likely to be transmitted by the ‘Dutch’ disease, for both businesses and people who depend on the gold industry.  With the knowledge that the majority of Guyana’s gold output comes from the small-scale gold miners, it raises the spectre of a fight between David and Goliath.  If there are no traumatic financial events in the world when oil and gas come on stream for people to hold gold as a preferred asset, the outcome might not be as favourable for David as the Bible’s version of the story.  Unlike in the case of sugar, the realignment is not being driven by government, but by private sector decisions.  Its impact will be no less painful if people remain unprepared for the change.