Economic growth slowed in 2017, but became more broad-based, according to the Concluding Statement of the recent 2018 Article IV International Monetary Fund (IMF) mission here.
According to a media release from the IMF Communications Department, other findings of the official IMF visit to Georgetown from 23 April to May 3, conclude that Guyana’s medium-term prospects are favourable; inflation remained subdued at 1.5 percent at the end of 2017; debt sustainability concerns are attenuated by future oil revenues, but the financing of short-term deficits should be carefully managed, and the IMF supports the continued efforts by the authorities to enhance the quality and efficiency of government expenditure and tax administration.
Economic growth slowed in 2017, but became more broad-based, as Real GDP grew by 2.1 percent, down from 3.4 percent in 2016, on the account of weaker than expected mining output and weak performance in the sugar sector, the IMF release stated. Nonetheless, non-mining growth rebounded to 4.1 percent following a contraction in 2016. Construction expanded significantly, buoyed by higher public and private investments, and rice production recovered from weather-related shocks in the previous year.
In 2018, the mission projects real economic growth of 3.4 percent, driven by continued strength in the construction and rice sectors, and a recovery in gold mining. Inflation remained subdued at 1.5 percent at the end of 2017, largely driven by food items, while core inflation was close to zero.
Weaker than expected export growth and higher oil prices contributed to the current account balance turning negative, the IMF statement noted. In 2017, the current account recorded a deficit of 6.7 percent of GDP from a 0.4 percent surplus in 2016. That deficit was largely financed by Foreign Direct Investment (FDI), particularly in the oil and gas sector, and higher loan disbursements to the public sector. Reserves stood at 3.2 months of imports, and the mission projects it to remain around that level in 2018–19.
The IMF mission found that central government’s fiscal deficit was 4.5 percent of GDP, lower than the budgeted 5.6 percent, and remained stable in 2017. This better than expected outturn was largely supported by higher revenue arising from improvements in tax administration. In 2018, the deficit is projected to widen to 5.4 percent of GDP due to the cost of restructuring the sugar industry, including severance payments to displaced workers, as well as an increase in infrastructure-related capital expenditure.
The commencement of oil production in 2020 will be a turning point, making Guyana’s medium term prospects favourable, the IMF release concluded. The main direct effect on the domestic economy will be through higher fiscal revenue, and spillovers to supporting activities. The balance of payments will swing sharply to positive after 2020. Oil revenue significantly improves the fiscal outlook, and is expected to place the public debt on a downward trajectory. The mission welcomed the progress made on establishing a comprehensive fiscal framework for managing oil wealth.
Debt sustainability concerns are attenuated by future oil revenues, but the financing of short-term deficits should be carefully managed, the IMF statement warned. The mission supports the authorities’ prudence towards private external borrowing and the authorities were encouraged to rely to the extent possible on Development Banks, including non-concessional financing, and to follow-up on their plans to develop the domestic bond market. The mission stressed the importance of settling government balances at the Bank of Guyana, which will be achieved by the issuance of Treasury Bills.
The continued efforts by the authorities to enhance the quality and efficiency of government expenditure and tax administration drew the support of the visiting IMF team. It commended the steps taken in response to the Public Investment Management Assessment (PIMA) in 2017, but cautioned that scaling up public investment without addressing remaining shortcomings could undermine its effectiveness. The mission also recommended moderating spending increases and the consideration of an expenditure review which could provide opportunities for safety net reform and more effective action on inclusive growth. The mission welcomed the authorities’ intent to conduct their third Public Expenditure and Financial Accountability (PEFA) assessment during 2018. In addition, reforms to modernize revenue administration and strengthen public financial management capacity ahead of oil production remain critical near-term priorities for the authorities, and are being supported by IMF Technical Assistance.
Exchange rate appreciation
Infrastructure bottlenecks and high energy costs remain obstacles to growth, the IMF mission concluded. Meanwhile, notwithstanding significant upside benefits, the prospect of revenue from the oil sector could lead to real exchange rate appreciation, eroding competitiveness in some sectors. Therefore, regulatory and administrative measures should aim to reduce the relatively high costs of doing business in Guyana. The mission noted the small improvement in the World Bank’s Doing Business indicator that measures the Distance to Frontier of regulatory best practice. Accessing Guyana’s natural gas for power generation could provide a cleaner and more affordable energy alternative, meeting immediate needs while renewable energy initiatives are pursued. The reduction of economic and social disparities between the coast and the Hinterland remains a priority for the authorities. The mission welcomed the ongoing restructuring of the sugar sector, but underscored the importance of training displaced workers and providing an adequate safety net to contain the short-term economic and social costs.
The IMF team considered the Central Bank’s monetary policy stance as appropriate amid the slowdown in economic activity in 2017. However, as the economic recovery strengthens, monetary policy should gradually revert to a neutral stance. Exchange rate flexibility should continue to help cushion external shocks.
The mission noted that significant progress has been made in the implementation of the 2016 Financial Sector Assessment Programme (FSAP) recommendations, including enhancing the supervisory power of the Bank of Guyana and establishing an emergency liquidity assistance framework, a national payment system and a deposit insurance scheme. The mission welcomed the establishment of a Financial Stability Unit within the Central Bank to assess macro-financial vulnerabilities.
The IMF team which was led by Marcos Chamon met with Finance Minister Winston Jordan, Natural Resources Minister Raphael Trotman, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, the opposition party, labour unions, and other stakeholders. The IMF Executive Board is expected to meet in June discuss the report generated by the preliminary findings of Guyana’s Article IV consultation.