IMF wants transparent fiscal framework here for extractive industries

-cites need for more inclusive growth

The International Monetary Fund (IMF) has recommended that Guyana put in place an effective and transparent fiscal structure for the extractive industries.

In a statement yesterday on its Article IV Consultation with Guyana which was conducted on November 9, 2012, the IMF said the structure should include a sovereign wealth fund (SWF) and compliance with the Extractive Industries Transparency Initiative (EITI).

An SWF comprises money from central bank reserves that build up as a result of budget and trade surpluses and also includes revenue generated from the export of natural resources and other areas.

Under the 2009 forest protection deal with Norway, Guyana is supposed to show evidence of its decision to enter a formal dialogue with EITI or an alternative mechanism agreed by the two countries. It is unclear how far this has proceeded. Resource-rich countries like Guyana usually face numerous questions over decision-making and as such a relationship with EITI is recommended. There has been a significant expansion here of metal mining and oil exploration in recent years.

In its assessment of the local economy, the IMF applauded the authorities’ policies which it said have supported macroeconomic resilience and sustained growth. “Nonetheless, Directors noted that policy challenges remain for the near and the medium term, and encouraged the authorities to persevere with fiscal consolidation and structural reforms to strengthen debt sustainability and make growth more inclusive”, the IMF added.

The Fund welcomed the government’s continued emphasis on fiscal prudence. The Directors “concurred that sustained budgetary adjustment is needed to avoid policy pro-cyclicality and rebuild buffers.”

It said that while a number of Directors suggested a more ambitious fiscal drive in the period ahead, others underlined the “importance of better balancing of medium-term fiscal objectives with the need to support growth in the near term.”

The statement cited the need to make public enterprises more efficient and to ensure that the planned Amaila Hydropower Project is economically-viable.

Monetary policy

Directors were also of the view that monetary policy must remain alert to price developments and the “emergence of excessive leverage in the financial system.” The Fund said that  “tightening the monetary stance in the period ahead could rein in credit growth and safeguard foreign exchange reserves.”

Directors adverted to the staff assessment that although Guyana has benefitted from a relatively stable exchange rate, greater exchange rate flexibility over the medium term could alleviate “external shocks as commodity exports expand”. Some directors were, however, not convinced that greater exchange rate flexibility is desirable, the Fund said.

The statement added that directors lauded “the continued improvements in financial sector soundness and oversight. Guyana’s banks remain liquid and prudential indicators have been strengthening.” In light of this, Directors encouraged the authorities to act “preemptively should rapid credit growth undermine asset quality and inflation risks mount.”

Directors supported efforts to modernize traditional sectors, notably sugarcane cultivation, and to improve the business climate. They also encouraged the authorities to consolidate Guyana’s subscription to the Fund’s General Data Dissemi-nation System by further improving the timeliness of data provision and dissemination.

2011

The IMF noted that Guyana recorded another year of robust growth in 2011 supported by more propitious external conditions, rising foreign direct investment and low inflation. It said that following general elections last year, the political situation “became more complicated, but investor interest has remained strong and confidence generally positive.”

In 2011, output expanded by 5.4 percent, buoyed by increased activity in the gold, agriculture and services sectors.

It said that prudential indicators through end-March 2012, continue to improve, with rising capital asset ratios and falling non performing loans. It added that banking system liquidity remains adequate and steady progress has been made in meeting the Millennium Develop-ment Goals.

It declared that the macroeconomic outlook for 2012 and the medium term remain generally positive with real GDP projected to grow by around 3.7 percent this year, roughly in line with what was projected in the 2012 budget (4.1 percent), but lower than the result in 2011 (5.4 percent). Inflation is projected to pick up to about 4.6 percent by year-end, from 3.3 percent in 2011 as a result of higher energy and food prices, the Fund said.

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