Last week, I sat down with the President of Guyana Dr Mohamed Irfaan Ali to discuss, among other things, the challenge his country is sure to face in managing the inflow of large amounts of US dollars from the massive discoveries that have so far, and I stress on so far, been made by US energy giant Exxon.
Even with a less than satisfactory deal with the US major, the size and frequency of the discoveries are such that it is very difficult to comprehend the extent of resources that will be coming the way of Guyana, which for many years was one of the weakest economies in the region.
By most estimation, by the end of the decade, Guyana will be producing close to a million barrels of oil per day. It will likely receive between US$8 and $10 billion a year in revenue from the oil sector alone and when you add the rest of the economic activity that is sure to be driven by this new found wealth, Guyana’s annual earnings could be twice that of T&T.
One of the greatest challenges that small economies like Guyana and T&T face is when there is such a large inflow of cash and when economic activity increases dramatically there is a question over the absorptive capacity of the economy. In other words, how can the economy absorb the additional activity without over-heating and therefore avoid an inflationary spike.
I was particularly impressed by what the Guyanese President had to say about the way his government plans to manage the windfall.
We have seen time and again, successive governments in T&T, including this administration, say the right things and then never implement their own policies.
But if we are to take President Ali at face value, it is clear that Guyana’s government is seeking to avoid the pitfall of being awash with cash and unable to manage it well.
Already the country has set up its version of the Heritage and Stabilisation Fund and Ali is promising to spend money on the productive sector and avoid what is a legitimate call for more money and jobs to go into the hands of ordinary Guyanese through transfers and subsidies.
He is not only dealing with the inflationary risk due to overheating of the economy but the imported inflation that the world is battling with due to supply chain challenges, climate change, the war in Ukraine and high energy prices.
Ali was asked how he plans to navigate such a scenario.
He said, “That is where the balance in management comes in. You can get carried away easily when you have resources coming in your way, and go on a massive expansion plan or expenditure plan that can cause exactly what you are speaking about, hyper inflation, overheating and especially operating in the conditions we are operating in now, where globally you have rising cost of food as a result of the war in Ukraine, we have the supply side crisis, we have the cost of energy going up; all of this is creating inflationary pressure because there is a lot of imported inflation.”
President Ali added, “One of the things you do is curb the money supply, but we have a private sector that is booming, a private sector that is seeing tremendous transformation, we have an investment portfolio that must be implemented if we are to deliver the housing programme that we are to deliver. If you are to open up new lands for agriculture, if you are to open up new highways, so that we can build the industrial parks and industrial development that we want to do. So there are some expenditure that we cannot avoid, but the question is how much of government expenditure can be curtailed at this time?”
We have seen this play out with T&T in the early 2000s when the price of a decent house moved from $400,000 to over a million because of the spike in the cost of all construction materials and the spike in the price of labour.
We remember only too well how hard it was to get tradesmen and tradeswomen to do repairs and how people were passing themselves out to be skilled workers when they had neither the experience nor the know-how to be considered skilled, and we were left out of pocket ruing our loss and the shoddy work?
This was a time when natural gas production was increasing dramatically and LNG production and prices were such that it led to significant inflows of revenue into an economy, unable to sufficiently absorb it.
In such circumstances the risk of cost overruns, corruption, inefficiency and poor economic management significantly increase and we have the evidence to show for it.
It is why leadership is so important. T&T failed to manage that period of excess by allowing inflation to get out of control, by seeking to so quickly develop the country that we missed the opportunity to orderly and thoughtfully deal with the economic and infrastructure challenges and now we are in a position where we are pretending that a windfall is likely to lead to long term prosperity and not seeing that we are being given another chance to get our house in order.
We must clearly understand what has happened in this economy over the last 12 months, so that when the Minister of Finance comes in a few weeks and triumphantly says the country’s economy has turned around, we know the true story.
There has been a confluence of factors that has led to economic expansion in T&T. The crucial factor is that we have seen huge increases in the prices of every single energy commodity that this country produces.
The buoyant prices has meant higher revenue for the government via taxes on energy companies. These taxes are paid mainly in USD, but ironically the net official foreign reserves are down by US$300 million when compared to the same time last year.
So there is no doubt that we will see growth in energy revenues, but the fundamentals of the energy sector show declining production in both oil and gas and the knock-on effect it is having on the petrochemical sector.
The energy sector remains weak, limited investment is happening in the sector. By all reports the bids for the deep-water blocks are weak, there has been no exploration success of late and projects in the immediate pipeline are likely to only improve reliability, not make a real difference in output.
The country’s largest natural gas producer, bpTT, continues to flounder and is the main reason for the huge decline in production, which as of May this year averaged 2.5 billion standard cubic feet per day.
So let us not be fooled into believing the economy has miraculously turned a corner.
The Government must make fundamental changes and show leadership if the country is to emerge from the edge of the proverbial cliff we find ourselves and get on a sustainable economic footing.
We must know that economic development is a continuous process.
Empirically, economic growth within countries is extremely volatile, with one decade’s growth rarely looking much like growth the decade before. The correlation in mean growth across consecutive decades within countries averages only 0.3 in the world sample (Easterly et al 1993) with countries regularly experiencing substantial medium-run growth accelerations and growth collapses (Hausmann et al 2005, Jones and Olken 2008).
It is only leadership, discipline and a clear vision for the future that will help us move forward. Picong, bussing mark, or being able to deal, or not deal, with infidelity should not be our focus.
