Economy expanding but growth slow, uneven

- IMF

Buoyed by “large increases” in gold production, Guyana’s economy has continued to expand, although growth has been slower than expected and uneven, according to the preliminary findings of a recent International Monetary Fund (IMF) mission that visited earlier in the month.

According to the concluding statement issued yesterday, following the March 6 to March 17 visit for Article IV consultations, “subdued agricultural commodity prices” and “adverse weather conditions” resulted in a contraction of agriculture, with “negative spillovers” in manufacturing and services. Delays in public investment, the statement added, continued to be a drag on construction.

“Nevertheless, GDP [Gross Domestic Product] was buoyed by very large increases in gold output, including from new mines, with total real GDP increasing by 3.3 percent despite a contraction in non-mining GDP,” it said, while noting that the mission projects real economic growth of 3.5 percent this year.

Marcos Chamon

According to the IMF team’s forecast, the growth will be driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in rice production.

It said that despite slower than expected growth, fiscal revenue increased due to improvements in tax administration and higher royalties from the mining sector. “Expenditure increased less than projected mostly due to lower than budgeted public investment. In 2017, the deficit is projected to increase to about 7 percent of GDP, due in part to delayed capital spending from 2016 and the reclassification of subsidies to state owned enterprises as financing instead of revenue to the receiving enterprise,” the statement explained.

Sustaining growth, the team said, hinges upon improvements to the business climate, private sector confidence, reinvigorating construction activity and productivity-enhancing reforms in key sectors, including agriculture. The mission welcomed the progress in liberalising the communications sector, and the authorities’ plans to increase the contribution of low cost renewables to the energy matrix, improve transportation links, and modernise the payment system. “Addressing these long-standing structural impediments will stimulate construction, help raise productivity in traditional sectors, facilitate diversification into higher added-value activities, and make growth more inclusive,” it said, while adding that the mission encouraged the authorities to press ahead with the overhaul of the sugar industry, while being mindful of “the large social impact” and “providing a safety net” to protect those affected by that process.

According to the IMF team, fiscal consolidation would help slow debt accumulation before the onset of oil revenues, which are expected to provide a significant boost to exports and official reserves in the medium-term. The debt-to-GDP ratio, it noted, is projected to reach 61 percent of GDP by 2019. Nonetheless, it said debt sustainability risks remain moderate. “Authorities noted that the debt to GDP ratio will decline rapidly after the start of oil production, dropping to under 50 percent by 2020,” it pointed out. The team recommended fiscal adjustment to safeguard against downside risks. It said the adjustment could be achieved by curtailing the growth of current expenditure, supported by public enterprise reform.

The team welcomed the Value-Added Tax (VAT) reform, which it said broadened the tax base while reducing the rate from 16 to 14 percent, and encouraged authorities to continue to strengthen tax administration.

The statement pointed out that despite weather-related shocks to food prices and excess demand during the Golden jubilee celebrations last year, inflation remained subdued at 1.5 percent at end of 2016, and it is expected to be around 2.5 percent at end of this year. It added that the monetary policy stance should remain accommodative given low inflationary pressures and weakness in economic activity. “However, pass-through from the VAT reform to inflation should be closely monitored,” it cautioned, while noting that Guyana remains vulnerable to external shocks due to its dependence on imported oil and the concentration of exports on a few commodities. The mission noted the recent increase in exchange rate flexibility, which should facilitate adjustment to external developments, and safeguard reserves. “The inter-bank foreign exchange market appears segmented and illiquid, and could be further developed, including by enhancing the transparency of market activity,” the mission said, while recommending that official foreign exchange purchases and sales use a market mechanism similar to the one used for auctioning treasury bills.

The statement added that the mission also welcomed the authorities’ interest in issuing a long-term domestic bond to substitute for short-term domestic financing, and help develop capital markets. “The mission stressed the importance of settling government balances at the Bank of Guyana (BoG). Going forward, authorities are encouraged to consolidate government accounts at the central bank and establish a Treasury Single Account in line with international best practices,” it added.

The IMF mission, which was led by Marcos Chamon, met with Finance Minister Winston Jordan, Natural Resources Minister Raphael Trotman, Public Infrastructure Minister David Patterson, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, the opposition party, labour unions, and other stakeholders, the statement said.

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