Caution
GUYANA has been told by the International Monetary Fund (IMF) to moderate the pace at which it is increasing its spending on various public investment projects to mitigate the negative impacts of spending too quickly on the economy.
The South American country plans to ramp up public investment in the coming years, fuelled by a bounty from its petroleum industry.
This was outlined in the GUY$530-billion budget that was passed in February (up 36.8 per cent from the GUY$387.3 billion budget that was passed in 2021), with GUY$96.1 billion or 18 per cent of the planned spending earmarked for improving the country’s infrastructure. Of that amount, GUY$76.7 billion was set aside for the development of roads and bridges. The sum for roads and bridges for the current fiscal year is 3.8 times the GUY$20.1 billion spent on those infrastructure in 2021.
Seeing that huge jump, IMF staff visiting the country in May said that, while the IMF “welcomes the emphasis on public investment and policies to sustain growth into the longer term”, it also recommends a more moderate increase in public spending going forward.
“While pressing development challenges still face the country, 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 might not be sustainable over the medium-term,” IMF staff said in the concluding statement for the Article IV Consultation with the country.
The IMF staff, in the concluding statement, urged the authorities to simultaneously strengthen the capacity to manage public investment based on recommendations from the 2017 Public Investment Management Act (PIMA) report. That report recommended that the Guyanese Government improve the efficiency of public spending by addressing weaknesses in the planning, budgeting, appraisal, selection, procurement, and implementation of capital projects.
The IMF staff also recommended that the Guyanese authorities set annual budgets within a fiscal framework that, over the medium term, constrains the annual non-oil overall fiscal deficit (after grants) to not exceed the expected transfer from the natural resources fund (NRF) to anchor fiscal policy in a sustainable way. Following this rule, the IMF staff argued, will also ensure that fiscal spending, including capital spending, is increased at a measured pace to address development needs without macroeconomic imbalances.
Guyana’s NRF is a type of sovereign wealth fund in which the principal source of financing is revenue derived from oil. The stated aim of the NRF is “to manage the natural resource wealth of Guyana for the present and future benefit of the people and for the sustainable development of the country, and for connected matters,” according to the Act. In 2022, withdrawal from the fund is expected to be GUY$126.7 billion to help plug a budget deficit. The authorities were praised for not making withdrawals from the NRF before the passage of amendments on how it is to be used.
At the time, the Guyanese budget was passed in February, the NRF stood at US$607.6 million or approximately GUY$127.1 billion (US$1 – GUY$209.16), which would make this year’s proposed withdrawal almost equivalent to the sums that were in the fund. The Government has projected US$957.6 million (GUY$200.3 billion) in total inflows for 2022.
Analysing the situation, the IMF staff also “recommend further analysis of the oil transfer rules to ensure the long-term sustainability of the NRF and intergenerational equity”.
Those issues aside, the IMF said its assessment concludes that Guyana’s medium-term prospects are more favourable than ever before, with increasing oil production having the potential to transform the country’s economy.
“Oil production is expected to increase significantly with the coming on stream of two large oilfields in the Stabroek Block during 2022-26,” it noted.
Guyana’s commercially recoverable petroleum reserves is estimated to be well over 11 billion barrels, the third largest in Latin America and 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.”
Guyana’s economy is forecast to grow by a record 47.5 per cent in 2022, driven mainly by production from its oilfields. Crude exports amounted to US$3.0 billion or 68.4 per cent of Guyana’s total exports in 2021. The country projects approximately 257,000 barrels of oil per day on average will be produced from two offshore oilfields — the Liza Destiny and Liza Unity floating, production, storage, and offloading (FPSO) vessels — this year.
Total exports from Guyana grew by 68 per cent in 2021 to US$2.6 billion due to the crude oil exports which more than compensated for sluggish performances in all other commodity exports. Exports are expected to maintain this momentum in 2022 at a forecast growth rate of 79.1 per cent as new production capacity is added to the oil and gas sector.
As the economy continues to rebound in 2022, inflation is expected to fall to 4.1 per cent from 5.7 per cent last year as the Government continues to moderate the pressure from imported food prices.
In response to the pandemic, the authorities reallocated expenditures toward cash grants and transfers and shovel-ready public investment projects, primarily improving road networks, providing affordable housing, and easing the tax burden on the most vulnerable. Public debt stood at 42.9 per cent of gross domestic product (GDP) at end-2021, one of the lowest in the region.
The authorities’ goals to transform the economy, address development needs in an inclusive way, and protect the long-term economic well-being of the country found support from the IMF staff. Also finding support is the effort by Guyanese authorities to reduce electricity costs, improve transport infrastructure, diversify the economy, improve access to and quality of social services, and advance more broadly towards the UN Sustainable Development Goals. Commendations were also given for the authorities’ efforts outlined in the Low Carbon Development Strategy 2030 to maintain the country’s forest coverage and address climate change challenges by shifting towards renewable energy sources, while entering the international carbon credits market.