Introduction
For readers’ benefit today’s column is devoted to providing careful reporting on the queries and policy prescriptions on offer in the first three chapters of the World Bank’s Staff Guyana SCD Report,2020. The remainder chapters [4-6] will be similarly presented following this. To avoid unintended mis-representation I shall stick to paraphrasing and quotes for controversial phrasing.
Chapter 1 Situating the Oil Sector
The first Chapter is largely introductory. Methodologically, it poses the main problematics or contradictions between challenges and opportunities facing Guyana at the time of world class oil and gas discoveries; and, the remaining Chapters exploring how these might be resolved. Recall also that this took place in 2020 when “official resources” holdings stood at 8 billion barrels of oil equivalent, boe.
Nevertheless, with hindsight, the SCD is strong and indeed forward looking in declaring that Guyana finds itself at the “threshold of a new era”; which is inextricably linked to its recent finds of offshore oil and gas resources that are accompanied with a rapid startup in production and export. Despite hiccups, by 2020 the country was declared as “poised to fundamentally transform the structure of [its] economy and generating an influx of fiscal revenues”.
Before Guyana’s First discovery [2015], extractive industries [bauxite, alumina, sand/ silica and forestry] along with commodity exports [rice, coconuts and citrus] were already dominant in Guyana’s economy and its provision of public finances. However, the then mining sector had created limited job opportunities and also had a quite limited impact on poverty reduction in the country.
At this conjuncture, the rise of the oil and gas sector poses unprecedented macro-fiscal management challenges, even as it offers new opportunities to address longstanding development constraints. Regrettably, the historical record shows that the development of oil-producing countries often comes at a high cost of environment and climate change. And, this needs to be balanced. In addition, over the years 2020 to 2023 Guyana has been facing challenges due to the COVID-19 pandemic. This will stretch the public health systems and highlight inadequacies of testing and treatment facilities.
Chapter 2 Oil and Intergeneration Equity
As the title indicates this Chapter focuses on the intergenerational tradeoffs. This is considered in terms of key macro variables like government spending, investment, savings especially as they largely determine economic growth, levels of employment, as well as income and wealth distribution. Government revenues are projected as a function of oil prices, costs, volumes exported, and of course the terms of the applicable PSA.
The SCD Report models likely outcomes and trends based on less than a year of actual production and export performance in Guyana. In my recent April 6 and13 columns, I reported fully on the record-breaking official macroeconomic and microeconomic data for the three full years 2020 to 2022 as cited in the Guyana National Budget 2023.
The Chapter notes the key risks at this juncture. These point to Government spending windfall oil revenues too quickly as the principal one. This entails three main threats; namely 1] rapid spending of windfall revenues overwhelming the efficient delivery capacity of the state bureaucracy 2] distortion of market prices and 3] impairing incentives. The latter two undermine the role of markets and competition
Finally, choices in relation to climate change risks and development threats posed by the resource curse and Dutch disease are addressed.
Chapter 3: Governance and Institutions
This chapter posits that, 1] “while good governance and strong public institutions are vital to the long-term growth of all resource-rich countries [regrettably however] Guyana faces an array of governance and institutional challenges”.
2] By institutions, the SCD refers to organizations, laws, rules, practices and systems overseen or implemented by the state’s civil service to implement public policies, laws and delivery of public goods and services.
3]Consequently, key priorities include: (i) improving the quality, accountability and transparency of government ii) designing appropriate policies, legislation, and institutions to underpin the development of the oil sector; and (iii) elaborating the rules governing a sovereign wealth fund.
The chapter addresses these challenges. Mainly, this entails measures to attract and retain skills; but instead planning, budgeting and other skill deficiencies undermine the effectiveness of Guyana’s public institutions. Public fiscal risk management, multiyear budgeting, public procurement, public investment management, and financial reporting are weak. This limits its ability to “advance Guyana’s development objectives”. Further, “trust in institutions and rule of law remain low”.
Deficiencies in planning and budgeting undermine Guyana’s public institutions. Its public financial management system suffers from weak fiscal risk management, multiyear budgeting, public procurement, public investment management, and financial reporting. Limited cash planning, repeated overdrafts usage, inadequate commitment controls, and insufficient information on arrears abound. Governance scores are in the bottom half of global rankings.
Specific measures will be needed to ensure the successful management of the oil sector and the fiscal revenues it generates. The government will need to develop: (i) an adequate policy, regulatory, and contractual framework for the oil sector, (ii) oversight institutions and improved fiscal policy design and administration agencies, and (iii) robust revenue management and distribution processes. While Guyana has made progress in building the capacity to manage its nascent oil sector, further efforts will be needed to reach the levels of regulatory quality and efficiency of other emerging oil producers.
Strengthening public investment management is critical given the inflow of windfall oil revenues. For this a sovereign wealth fund, SWF, was recommended and is now enforced as the Natural Resource Fund [Guyana NRF Act].
Conclusion
Next week’s column reports on chapter 4.
