Ensuring proper management of Guyana’s projected oil bonanza will likely pose a great challenge given social and political pressures and the country should therefore adopt an expenditure rule, according to a February 2021 Inter-American Development Bank (IDB) study.
Entitled `Economic Institutions for a Resilient Caribbean’, the study said that the history of many oil producers has shown that excessive expenditure in the wake of oil discoveries results in inflationary pressures, future rigidities in the budget, and/or wasteful investment projects, particularly when institutions for management of the budget and public investments are weak.
“To counteract such pressures, Guyana would be well advised to quickly adopt an expenditure rule. This could be done by capping the real rate of growth of primary expenditures of the central government at a level somewhat lower than that of real GDP. The differential could be set higher for the next five years, when GDP growth is projected to accelerate sharply, and reviewed and reduced thereafter as GDP growth decelerates to its longer-term average”, the report said.