Part 87
Introduction
According to the international press, Guyana will be the fastest growing economy in 2020. The USA-based Bloomberg, a highly regarded and influential business media house carried a story two days ago, with the caption” World Economy May Be Crashing but Guyana Still Seen Growing 53%”. The publication quoted from the IMF and the World Bank which projected that the Latin American and Caribbean region would register a sharp fall of 4.6% this year, except for Guyana, which the IMF projects to grow by 51.7%, and the Dominican Republic, which will end with flat growth of zero.
Not too long ago, the projections for Guyana were even rosier at something like 86% which goes to show how volatile the oil market is and how challenging it will be for any Government to budget for oil revenues. In that regard, the Natural Resources Fund Act which captures all the direct oil revenue and only releasing it into the Consolidated Fund based on a formula, makes a lot of sense. It has been a topsy-turvy year for oil which started the year at over US$60 per barrel but which has slumped dramatically as a result of the twin challenges of the decline in demand as the coronavirus pandemic has shut down major economies across the world and a sharp disagreement between two of the largest oil producers, Russia and Saudi Arabia which saw prices fall even further.
After a Mexican holdout, the two oil giants have come to an agreement with respect to the supply side. However, as countries around the world anxiously wait for the restart of economies, a return to a $60 per barrel for oil seems to be some way off, perhaps by as much as three years, although two years may be a bit more likely. Based on oil price projections for 2020, I estimate direct oil revenue this year of less than US$200 million, using a US$35 per barrel as the average price. I use the term direct revenue to refer to the country’s share of profit oil (12.5%) and royalty of 2%. This is in contradistinction to the indirect revenue from employees’ income tax, withholding tax and corporation tax.
The GDP myth
Oil price factors in both the IMF projections and my estimates of revenues from the sector but I have a fundamental problem with the so-called 51.7% as I have had with the 86%. That is economics theory, measuring the value of all the oil produced as part of the Guyana economy. One does not need to be a genius to see the fallacy in that kind of reckoning of the performance of an economy. Can we reasonably regard all the work being carried out one hundred and twenty-five miles offshore Guyana, the profits of the product of which is then shared between the Government of Guyana and a consortium of oil companies which immediately export their share as part of the performance of the Guyana economy.
What makes the proposition even more absurd is that in computing the profits for 2020, deduction has to be made for past expenditure running into billions of US dollars along with current year expenditure and costs. This column has argued before that with petroleum likely to dominate the Guyana economy – for the better or worse – a measure of economic performance using GNP (gross national product) may be more reflective of economic reality than GDP (gross domestic product). For some reason most countries of the world use GDP, with even the USA abandoning GNP to measure the performance of its economy. I think that Guyana should be measuring its economy in two segments – Oil and non-oil as Trinidad and Tobago does. Alternatively, and perhaps more usefully, to measure its economy using both GDP and GNP.
Where an economy both attracts foreign investments as well as has nationals who invest abroad, the gap between the absolute GDP and GNP numbers tend to be very narrow and one measure no less useful than the other. However where, as Guyana seems to be heading, there is a major imbalance between inward and outward foreign investments, the measure will be markedly different. So what we will have is that all the oil produced will be counted in the Guyana economy. Since we live in the IMF/World Bank world, we will have to accept their yardstick but will need to understand their limitation.
Implications for Guyana
The thing to understand is that even where the measure is not inappropriate, it is not a measure of wealth of the country’s nationals. Our nationals do not automatically become that much richer, the country’s exchange rate stronger, its tax revenues higher or its foreign reserves greater. Our public servants, teachers, police and health workers will not be able to call on their employer to increase their wages and salaries by anything close to 51% or 53%.
Ironically, the equally significant political problem we face with the Government trying just about everything possible under the sun to justify staying in power after a loss at the March 2, 2020 elections, may not have a substantial short term impact on the economy. The oil is produced offshore and is directly exported. Yes, the problems could affect the limited onshore activities but it surely is not unthinkable that those very services can be procured from Trinidad and Tobago.
