With oil production projected for 2020, the coalition government would be foolish, both politically and economically, to wait until then to capitalize on its projected oil revenues. The time is ripe for government to collateralize Guyana’s God-given oil wealth for extensive but calculated borrowing on global financial markets.
We are talking about pre-production, resource-based borrowing to be repaid by future oil proceeds. Loans can be used by the administration to make early moves to boost growth-enhancing sectors, infrastructure development, social welfare and, yes, personal incomes of workers, as well as to implement comprehensive solutions to intractable problems such as D&I and the sugar industry.
The government indeed had the right mindset when Minister Trotman spoke in November 2015 of seeking upfront payments from ExxonMobil. While that horse did not run, other sources of advance financing are readily available.
To be sure, the record internationally on pre-production borrowing has not been heartening. And Ghana is offered as the most recent case to illustrate the economic mayhem associated with oil-induced cutting of corners and spending binges. Quickly after major oil finds there in 2007, Ghana moved to access global financing using its future oil revenues as collateral.
On the back of these loans, successive Ghanaian governments, among other excessive budgetary outlays, boosted public sector salaries and employment. When oil (and gold) prices dipped, however, the unabated overspending and pork-barrelling led to an economic crisis. In 2015, the IMF, with its bag of bitter pills, was invited in to bring order to the mess.
Meanwhile, Uganda whom Guyana has chosen as its mentor for oil sector development is touted as the model of patience and preparation. While onshore oil was discovered there in 2006, production is only set to begin in 2018, as the government took its time to put in place an array of petroleum legislation and institutions.
But patience has its limits; Uganda, in addition to increasing domestic borrowing, has recently entered into agreements with Exim Bank of China for multi-billion dollar loans to construct roads, railway and pipelines. As one report puts it, while Uganda may deny it is borrowing on its projected oil revenues, the generosity of its lenders is based solely on that calculation.
The bad experiences of developing countries with pre-production financing should not be seen as deterrents but as cautions. While Minister Trotman correctly stated a few months ago that “We have entered the petroleum industry at a conservative and watchful time”, these early financial opportunities should not however be missed.
Indeed, this year is the ideal time for Guyana to make its play, as several factors are in perfect alignment. For one, two sizeable deposits have already been found (Liza and Payara), with further appraisal and wildcat drilling scheduled before year end. Secondly, ExxonMobil has taken concrete steps towards production and further exploration investment (such as green-lighting a floating production and offloading platform). Thirdly, the oil price is recovering.
Fourthly, the intensified activity in Guyana’s offshore basin by other companies increases the likelihood of more finds and thus more government income. Fifthly, the country is soon to emplace legislation and other mechanisms for petroleum revenue management and oversight.
Given the political and economic stakes, the 2018 national budget should reflect major watershed decisions. The lengthy gestation time for large infrastructural and other growth-inducing projects demands no later a launch. Time will tell whether the coalition government intends to inch its way timidly towards 2020 or to make decisive and decent haste with its future oil revenues.