According to the World Bank, Guyana could be a high income, oil-producing economy by 2030 but its development must include an agenda for broad-based growth and social cohesion, where all citizens receive a fair share of growth benefits.
In its first systematic country diagnostic (SCD) published in November 2020 the multilateral organisation posited that projected oil production and revenues could see, Guyana’s GDP rise from US$4.3 billion in 2019 to US$14.0 billion in 2030, with the oil sector alone accounting for US$3.6 billion at the end of the period.
“Assuming the population growth rate remains on its current trajectory, Guyana’s per capita GDP would exceed US$16,900 by 2030, enabling the country to reach close to high-income status,” the SCD concluded while stressing that for this high income to reflect actual gains for the general population Guyana must improve its human capital development and health indicators, and reduce poverty levels while maintaining macroeconomic stability and environmental sustainability.
The report titled “A pivotal moment for Guyana: realising the opportunities” notes that since oil exploration and production activities are currently located entirely offshore, with only modest ties to the nonoil economy, public policy will play a major role in determining how the oil sector impacts the income levels and living standards of Guyanese households.
It is explained that because of Guyana’s small manufacturing base and lack of specialised sector skills the oil sector is expected to remain largely isolated from the larger economy therefore public spending will be the major channel through which the oil sector impacts Guy-ana’s economic and social development.
Policymakers therefore have to balance the critical tradeoffs between spending, investment, and savings.
“The magnitude of the country’s anticipated resources presents a serious risk that oil revenues will be spent too quickly, overwhelming the public sector’s capacity to manage expenditures prudently while distorting prices and economic incentives,” the report cautions reiterating that it is public policy which will shape the impact of the oil sector on the scope and pace of economic growth, as well as the distribution of income gains between households and across generations.
It points out that even before the discovery of oil, Guyana had struggled to transform its resource wealth into inclusive and sustainable growth since despite its abundant natural resources, Guyana’s per capita GDP in 2018 was the second-lowest in South America at just under US$5,000, and its national poverty headcount rate was among the highest in the Latin America and Caribbean (LAC) region at 43.4 percent.
Unbalanced distribution
“Guyana’s commodity-focused economic model contributed to an unbalanced distribution of returns, which was underscored by the low growth elasticity of poverty,” it stressed.
Both the international experience with oil and gas and the legacy of Guyana’s mining industry are used to highlight the risks that resource-driven growth poses to job creation and the competitiveness of the non-resource sectors. The report notes that among developing countries, an overdependence on oil exports is strongly associated with slow job creation and persistently high poverty rates. Additionally Guyana has proven vulnerable to the adverse effects of real exchange-rate appreciation on employment dynamics and productivity.
“Between 2006 and 2017, the mining industry rapidly expanded, but instead of sustained job creation, Guyana experienced a shift in employment across sectors. Public sector employment expanded, but service delivery remained poor. Agriculture continued to absorb labor, albeit at low wages, while industrial employment contracted as Dutch-disease effects diminished the competitiveness of processed exports on international markets. Years of largely
jobless growth had little impact on poverty reduction and inhibited the structural transformation of the Guyanese economy,” the report highlights.
During this period the annual GDP growth rate averaged about 4 percent per year yet a one percent increase in GDP per capita was associated with a mere 0.5 percent decline in the poverty rate.
If there is to be a change moving forward, the Bank advises that spending must be targeted towards human capital development, as public spending on health and education will directly impact the productivity of the current and future workforce.
“This will influence the ability of Guyanese workers to participate in the oil sector and related activities, as well as the economy’s capacity to sustain robust growth rates as oil revenues diminish,” the report states.
Another area which must receive targeted spending is social protection and cash transfers, as these policies will be critical to ensure that the benefits of the country’s oil wealth reach the poorest and most vulnerable households.
Speaking on conditional cash transfers the report highlights the need for a cash transfer mechanism and targeting system and improved social registry.
They however advise that authorities must recognize that cash transfers are a supplemental mechanism and cannot substitute for the provision of essential social services therefore there must be investment in achieving full coverage of basic services and infrastructure.
“Guyana’s geography deepens spatial disparities, as the sparse population and remote communities of the interior reduce the rate of return on infrastructure investments and raise the cost of delivering basic services. Oil revenue can finance improvements in areas that are critical to welfare and human capital development, including access to improved water sources, improved sanitation, roads, electricity, education, healthcare, information technology, and financial services. Spending should be prioritized to areas that need major improvement. Increasing the supply of education and health staff while upgrading vital infrastructure will be necessary to expand the provision of high-quality public services,” they stressed
Currently, despite gains in public education and healthcare, Guyana’s human capital indicators are below the regional average with education and health indicators revealing deep disparities between regions and ethnic groups.
“The poor quality of education undermines learning outcomes, especially in rural areas. Tertiary education offers low returns, and a large share of tertiary-educated Guyanese emigrate to more favorable labor markets. Meanwhile, lack of access to basic health care and infrastructure such as improved drinking water and sanitation has an adverse impact on maternal and child health in rural areas. High out-of-pocket costs and a lack of healthcare professionals further weaken Guyana’s overall health indicators. Access to basic health care services is limited especially in rural areas, and the problem is expected to be more challenging during the COVID19 pandemic,” the report laments.
While the report acknowledges the establishment of the Natural Resource Fund (NRF) to manage the expected influx of revenue it notes that it was implemented without bipartisan parliamentary support. The PPP/C party which now governs was absent from the assembly when the Bill was passed. Just after assuming office in 2020 the party promised to repeal or amend the “unacceptable” Act in early 2021. This has not happened.
The World Bank meanwhile has cautioned that channeling all fiscal oil revenues directly into the budget, with no savings in a Sovereign Wealth Fund, would cause a sharp increase in the inflation rate, and slow growth immediately after the oil revenues were exhausted.
“Frontloading public investment beyond the revenues generated by the oil sector could boost the annual GDP growth rate to 8 percent, but it would cause an unsustainable increase in the debt stock, and debt-service payments could fully consume future oil revenues,” they noted.
An alternative option is to allocate spending to either boost savings and foreign assets, or directly boost imports, thereby not affecting domestic demand.
