Guyana’s economy is expected to grow “extremely fast” this year at 38%, the IMF said yesterday as oil production ramps up but it issued several cautions and also recommended a review of the exchange rate framework.
Following its Article IV visit this week here, the International Monetary Fund (IMF) team issued a concluding statement yesterday in which it lauded the authorities on fiscal and monetary policy but also raised concern about inflationary pressures.
It said that the outlook for medium term growth was better than ever before.
“Oil production will continue to expand rapidly as three new approved fields will come on stream between 2024-27, and a sixth field is expected to come on stream in the first half of 2028. Sustained real non-oil GDP growth of 5.5 percent is projected, as the government continues its ambitious plans to address developmental needs”, the IMF said.
It however cautioned that the favourable medium-term growth prospects are accompanied by upside and downside risks.
“On the upside, further oil discoveries would continue to improve growth prospects. Construction growth and strong public investment may support higher than expected short-term non-oil growth but could also lead to inflationary pressures and the appreciation of the real exchange rate beyond the level implied by a balanced expansion of the economy, overheating, and the crowding out of credit to the private sector. Adverse climate shocks, and volatile or lower than projected commodity prices, may also negatively impact the economy”, the concluding statement said.
It said that the growth in the non-oil sector is being supported by the implementation of a fast-paced public investment programme focused on providing transportation, housing, and flood management infrastructure, and raising human capital. Further, spillovers from oil and construction are supporting growth in the services and supplies sectors, while agriculture, mining and quarrying are also performing well. After a strong 2022, in the first half of 2023 real non-oil GDP grew by 12.3 percent. Consumer Price Index inflation reached 7.2 percent at the end of 2022, in line with other countries in the region, and declined to 1.2 percent on a year on year basis in July 2023 following the decline in transportation and communication prices. It added that external current account moved into a large surplus in 2022, of 23.8 percent of GDP, and another large surplus is expected this year, adding that banks are well capitalized and liquid.
The concluding statement said that staff view the current expansionary fiscal policy stance as appropriate, given the country’s development needs and the existing slack in the economy.
Unemployment
“Although there was robust employment growth in the oil, services and construction sectors, the unemployment rate was 12.4 percent in 2022, and staff estimates show that the output gap remains negative. Monetary policy appropriately balances the expansionary fiscal stance. The increase in broad money of about 10 percent until June 2023 (since December 2022), and in credit to the private sector of about 5 percent in the same period, remain below the nominal growth of the non-oil economy”, the IMF said. It added that although credit to the government is also increasing, it is not crowding out credit to the private sector.
Over the medium-term, the IMF said that moderating fiscal impulses are projected to achieve a zero overall fiscal balance by 2028.
“This will allow for an expansion of the economy (real GDP growth on average of 20 percent per year during 2024-28) without creating macroeconomic imbalances”, the IMF said.
It added that public investment is expected to be financed primarily by oil revenues in the medium term and that public sector debt is projected to reduce gradually as a share of GDP over the medium term (after declining to 26 percent at end-2022, from 43.2 percent of GDP in 2021).
“The real exchange rate is expected to appreciate, and inflation to increase, as the economy closes its development gap. Gross international reserves (excluding the National Resource Fund) are expected to continue to accumulate, with reserves coverage indicators continuing to strengthen. At the same time, substantial savings will accumulate offshore in the medium term in the Natural Resource Fund (NRF)”, the IMF projected.
Welcoming the policies to sustain growth into the longer term while maintaining debt sustainability and a balanced growth path, the IMF recommended continuing close monitoring of macroeconomic and financial indicators, tightening monetary policy stance and using macroprudential tools as needed (e.g. loan-to-value ratio or debt-to-income requirements).
Exchange rate
“In the medium term, staff recommends a review of the exchange rate framework to ensure that it best serves the economy”, the concluding statement added.
The IMF team also proposed a Medium-term Fis-cal Framework (MTFF), together with further modernizing of the public investment management and public financial management frameworks. It said that the MTFF would contain a clear medium-term fiscal anchor, a transition path, and an operational target.
“As a fiscal anchor, staff recommend setting a path for the non-oil primary balance (as a percent of non-oil GDP) that is consistent with the NRF ceilings on withdrawals of oil revenues and ensuring inter-generational equity. Staff recommend periodic expenditure reviews to ensure macroeconomic stability and preserve competitiveness by setting the pace of public investment to take into account absorption and institutional capacity constraints of the economy”, the concluding statement advised.
It contended that macro-financial risks are well monitored with a broad spectrum of indicators, including credit-to-GDP ratio and the systemic risk matrix.
The staff welcomed the Bank of Guyana’s asset quality reviews, the pro-gress in conducting stress testing exercises, and the authorities’ strategies to promote financial inclusion and strongly supported the authorities’ commitment to complete the implementation of the 2016 Financial Sector Assessment Program recommendations, including closely monitoring sectoral lending exposures, related party lending, banks’ ownership structure and increasing competition in the banking sector.
“Improving data collection and statistics on corporate and household balance sheets and real estate prices will also be critical to support strengthening banking supervision as well as the move towards broad-based risk-based supervision”, the IMF stated.
The IMF Staff commended the authorities’ progress in strengthening Anti-Money Laundering/ Countering the Financing of Terrorism (AML/CFT), governance, anti-corruption frameworks and supports further advances in their effective implementation.
“Several pillars of the anticorruption framework have been further strengthened, including the Inte-grity and Public Procure-ment Commissions and the National Procurement and Tender Administration Board. The efforts of the Integrity Commission led to a significant increase in the number of timely asset declarations of public officials. Moreover, Guyana’s authorities are working to further strengthen their anti-corruption efforts, undergoing a review of the United Nations Conven-tion Against Corruption (UNCAC) and the 6th round in the Follow-Up Mechanism for the Imple-mentation of the Inter-American Convention against Corruption”, the IMF stated.
On the management of oil wealth and its fiscal transparency, the IMF said that the Natural Resource Fund Act, amended in 2021, enhanced transparency and accountability of the use of oil revenues. In 2022, it said that the governance of the NRF was strengthened with the appointment of three critical bodies: the NRF Board of Directors, the Public Accountability and Oversight Committee, and the Investment Committee. The use of the funds is reported in the budget documents, and all receipts are published. The authorities also made progress in implementing the recommendations of the 2019 Extractive Industries Transparency Initiative (EITI) reports, notably on the reconciliation with the fiscal regime.
“Staff support the authorities’ efforts to address remaining gaps, including in moving towards electronic disclosure and adequate follow-up”, the statement added.
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit. A staff team led by Alina Carare, held discussions during August 28 – September 11 for the 2023 Article IV Consultation. The team met with Vice-President Bharrat Jagdeo, Finance Minister Dr. Ashni Singh, Minister of Parliamentary Affairs and Governance Gail Teixeira, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, banks, labour unions, and other stakeholders, the IMF said.
