In last week’s article, we discussed the state of Guyana’s economy as reflected in the Bank of Guyana report for the first quarter of 2022. The following are the highlights of the report:
Major sectors of the economy recorded mixed performance with rice and sugar production declining by 53.1 percent and 47.7 percent, respectively. There was no mention of the actual Gross Domestic Product (GDP) growth, especially the non-oil growth;
The inflation rate was 1.7 percent and is expected to rise to 4.1 percent by year-end. However, other sources indicate that inflation was over six percent which is in line with the experience of other countries such as the United States, Canada, United Kingdom, and Trinidad and Tobago as well as the world average;
The overall balance of payments reflected a deficit of US$132.0 million. The current account deficit was US$280.0 million while the capital account showed a surplus of US$144.1 million;
The total public debt was US$3,248.6 million, domestic debt accounting for G$389.469 billion, equivalent to US$1,868 million;
International reserves amounted to US$678.8 million, equivalent to 1.2 months import cover, which is significantly less than the general rule of at least three months’ coverage; and
The economy is projected to record real oil GDP growth of 49.6 percent while the non-oil economy is estimated to grow by 7.5 percent. The latter appears to be over-estimated considering growth last year and the performance of the economy in the first quarter of 2022.
In today’s article, we provide the highlights of another report that assessed the state of Guyana’s economy. We refer to the International Monetary Fund (IMF) Article IV Consultation report issued last June. The following are the preliminary findings contained in the report.
Overall performance of the economy
The economy recovered from the impact of COVID-19, delayed political transition in 2020, and the 2021 floods; and was well supported by the oil boom and policy actions. Non-oil GDP growth in 2021 was 4.6 percent. The war in Ukraine has added to the inflationary pressures in 2022 due mainly to higher fuel and food prices. According to the IMF team, the Government responded by implementing measures to mitigate the impact on vulnerable households and the economy. These include the reallocation of expenditures towards cash grants and transfers; implementing ‘shovel ready’ public investment projects; improving road networks; providing affordable housing; and easing the tax burden on the most vulnerable.
The team expressed its strong support for the Government’s goals of transforming the economy, addressing development needs in an inclusive way, and protecting the long-term economic well-being of the country. These include reducing electricity costs; improving transport infrastructure; diversifying the economy; improving access to and quality of social services; and advancing more broadly towards the Sustainable Development Goals. The team also commended the Government’s efforts to maintain the country’s forest coverage and to address climate change challenges by shifting towards renewable energy sources. However, the team might have overlooked the Government’s stated position of encouraging oil companies to produce as much oil as possible before the deadline for the Paris Accord on climate change reaches for switching to renewable sources of energy. This approach runs counter to any genuine and sincere attempts to address the issue of climate change.
The current account deficit widened significantly in 2021 partly due to increased capital imports. However, the foreign exchange reserve position improved because of the new Special Drawing Rights (SDR) allocation. The public debt stood at 42.9 percent of GDP at end of 2021, one of the lowest in the Region.
The team agreed that exchange rate stability currently serves Guyana’s needs best. As the country becomes a major oil producer, it expressed support for the Government’s aims to deepen financial markets.
Accordingly, the team recommended revising the monetary policy framework to ensure that it is well suited for the economy’s needs, including allowing the exchange rate to absorb shocks and increasing flexibility to maintain competitiveness.
Financial sector performance
The team considered that the financial sector is well capitalized and stable. Macro-financial risks are well monitored using eight indicators, including credit to GDP measures and the systemic risk matrix. The capital to risk-adjusted assets ratio of about 29 percent is much higher than the regulatory minimum of eight percent.
The Bank of Guyana has made some progress in major reform areas, especially in relation to revising the guidelines of asset quality reviews and implementing some pillars of Basel II and III. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Basel II requires financial institutions to maintain enough cash reserves to cover risks incurred by operations; while Basel III introduces a set of reforms to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand.
Non-performing loans declined from 10.8 percent at the end of 2020 to 6.75 percent as of March 2022.
Pace of public investment
The team urged the Government to exercise caution over the pace of public investment, as ‘[a] large surge in public investment could add inflationary pressure, affect competitiveness of the non-oil economy, lead to an eventual loss in foreign exchange reserves, and may not be sustainable over the medium-term’. It recommended a feasible and moderate increase in public investment while at the time strengthening further the medium-term framework for fiscal policy. The team also urged the Government to simultaneously strengthen the capacity to manage public investment, based on recommendations of the 2017 Public Investment Management Assessment (PIMA) report.
The PIMA framework assesses infrastructure governance practices by evaluating the various institutions that are involved in the three key stages of the public investment cycle: planning of sustainable investment across the public sector; allocating investment to the right sectors and projects; and implementing projects to deliver productive and durable public assets. A key recommendation of the 2017 PIMA relates to the need to improve the public procurement system and to bring it in line with international best practices, as this is likely to enhance the quality of public investment.
By way of comment, public procurement over the years has been tainted with allegations of corrupt behaviour and favouritism, and there is the absence of the desired level of independence from the Executive of key institutions involved in the procurement process, especially the National Procurement and Tender Administration Board (NPTAB). As regards the Public Procurement Commission (PPC), it took more than two years for the new Commissioners to be appointed, the previous Commission’s life having expired in October 2019. Prior to then, no Commission was in place, despite the requirements of the 2001 constitutional amendments for such a Commission to be established. This was due to the reluctance of the Cabinet to give up its involvement in the procurement process. To date, the position remains unchanged.
Concerns have also been expressed about the formula being used for selecting members of the Commission – three nominated from the Government side and two from the Opposition – which was never the intention. Rather, the selection should have been made based on public advertisement, shortlisting of candidates and interviewing by the Public Accounts Committee (PAC) to determine which candidates are most suited for the position, having regard to their technical and professional training as well as experience in public procurement. Because of the requirement for the selection to be ratified by two-thirds of the members of the National Assembly, the Authorities took the least line of resistance, and in the process have politicised the selection process. Is it any wonder that the work of the last Commission left much to be desired?
The team recommended setting annual budgets within a medium-term fiscal framework and ensuring that the annual non-oil overall fiscal deficit does not exceed the expected transfer from the Natural Resource Fund (NRF). This approach will ensure that fiscal spending, including capital spending, is increased at a measured pace to address development needs without creating macroeconomic imbalances.
Natural Resource Fund Act
The team stated that it welcomed the recent amendments to the NRF Act that set clear ceilings on withdrawals from the Fund for budgetary spending and promote transparency in the management and use of oil resources. It also commended the Government for thoroughly reviewing the predecessor Act before making amendments and for the exercise of the restraint in using any oil revenues before the passage of the amendments. Some commentators may disagree with this assessment, considering how hurriedly the related Bill was passed in the Assembly without the benefit of detailed scrutiny by a Select Committee of the Assembly.
There was also no mention of the unutilized US$20 million loan from the World Bank for enhancing the legal and institutional frameworks and strengthening the capacity of key institutions to manage the oil and gas sector. The team nevertheless recommended further analysis of the oil transfer rules to ensure the long-term sustainability of the NRF and intergenerational equity.
Amendments to AML/CFT Act
The team referred to the strengthening of Anti-Money Laundering and Countering the Financing of Terrorism Act (AML/CFT) and recommended further advances in this area. It noted that Guyana has been removed from the Caribbean Financial Action Task Force (CFATF) and the European Commission’s money-laundering blacklists. In a previous article, we had stated that six amendments were made to the Act, five of which were initiated by the previous Administration. The last amendment was in September 2018.
The team also noted that the National Risk Assessment has been completed; and the Bank of Guyana is working on its recommendations with support from the Caribbean Regional Technical Assistance Center.
Anti-corruption measures
The team commended the Government for its progress in strengthening the anti-corruption framework and fiscal transparency and urged further advances. Several pillars of the framework have been recently strengthened, including the Integrity Commission, the PPC, the NPTAB, and the availability of the audited public accounts. There was, however, no mention of the functioning of the PAC that has six years of backlogged public accounts (2015-2020) on which to report.
The team noted that asset declarations of a large number of public officials are submitted annually; public procurement tenders are streamed live; and progress in implementing the recommendations of the Extractive Industries Transparency Initiative reports, notably the reconciliation with the fiscal regime. Some progress was also made on information sharing, publication of extractive industries’ financial statements, and the strengthening of capacity to address remaining gaps, including in moving towards electronic disclosure and adequate follow-up.
By way of additional comment, the Integrity Commission functioned without the services of the three Commissioners for more than a decade. It was not until February 2018 that members were appointed. After their tenure of office expired, it took another 15 months for new members to be appointed. It is just not enough for the Commission to monitor the submission of annual declarations and issue periodic statements to this effect. It needs to impose sanctions for failure to make declarations, as provided for by the Integrity Commission Act. The Code of Conduct is also meaningless unless the activities of the declarants are closely monitored to ensure that there are no violations, especially as regards conduct in public life and conflicts of interest. More importantly, the Commission needs to critically examine the declarations using the skills of forensic auditors in collaboration with the Guyana Revenue Authority, to ascertain the completeness and accuracy of the returns as well as possible mismatch with observable lifestyles of declarants, especially politically exposed persons.
Medium-term prospects
The team considered that the medium-term prospects are more favourable than ever before, with increasing oil production having the potential to transform Guyana’s economy. Oil production is expected to increase significantly with the coming on stream of two large oilfields in the Stabroek Block during the period 2022 to 2026. According to the team, Guyana’s commercially recoverable petroleum reserves is estimated to be well over 11 billion barrels, the third largest in Latin America and the Caribbean, and one of the highest levels of oil reserves per capita in the world. This could help Guyana build up substantial fiscal and external buffers to absorb shocks while addressing infrastructure gaps and human development needs. However, increased dependence on oil revenues will expose the economy to volatility in global oil prices. A slowing global economy and the repercussions from the war in Ukraine could also adversely affect non-oil exports. On the other hand, higher global oil prices and additional gas and oil discoveries could significantly improve Guyana’s long-term economic prospects.
No mention was, however, made of the need to renegotiate the agreement with ExxonMobil’s subsidiaries to ensure that Guyana gets a higher share of the oil revenues. In its November 2017 report titled ““Guyana: A reform Agenda for Petroleum Taxation and Revenue Management”, the IMF stated that the agreement is weighted generously in favour of the U.S. oil giant in relation to the rate of royalty, ‘ring-fencing’ of costs, taxation, and profit-sharing; and there are too many loopholes in the agreement, if not plugged, could result in Guyana losing significant amounts of revenue.
