IMF projects 3.5% growth –recovery in rice production

–encourages overhaul of sugar industry but calls for safety net for those affected

THE International Monetary Fund (IMF) has projected a 3.5 per cent real economic growth for Guyana this year, reporting that the local economy expanded in 2016, although growth was uneven.
A mission from the bank in a statement on a recent visit here said that last year subdued agricultural commodity prices and adverse weather conditions led to a contraction of agriculture with negative spillovers to manufacturing and services.
In addition, delays in public investment remained a drag on construction, but Gross Domestic Product (GDP) was buoyed by very large increases in gold output, including from new mines.
The total real GDP increased by 3.3 per cent, despite a contraction in non-mining GDP. This year, the mission projects real economic growth of 3.5 per cent, driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in rice production.
Despite weather-related shocks to food prices and excess demand during Guyana’s Golden Jubilee, inflation remained subdued at 1.5 per cent at the end of 2016, and is expected to be around 2.5 per cent at end-2017.
The mission also noted that in 2016, the current account balance improved to 3.5 per cent of GDP from a 5.7 per cent deficit in 2015, reducing the overall Balance of Payment (BoP) deficit.
It said reserve coverage remained at about 3.5 months of imports and the anticipated start of oil production in 2020 will provide a significant boost to exports and official reserves in the medium-term.
“The 2016 non-financial public sector deficit is estimated at 2.9 per cent of GDP, lower than the budgeted 5.5 per cent. 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 seven per cent 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.”

STANDS READY
Guyana is preparing draft legislation for a fiscal regime for oil revenues, and a Sovereign Wealth Fund and the IMF says it stands ready to provide technical advice in these areas.
The mission commended the authorities for refraining from non-concessional external borrowing against future oil revenue and urged them to continue to maintain a prudent external debt stance.
It also encouraged the authorities to continue to strengthen public procurement and public investment management in line with international best practices.
Improving the appraisal, selection and execution of projects could enhance the efficiency, timeliness and quality of public investment, the mission said.
Meanwhile, Guyana’s debt-to-GDP ratio is projected to reach 61 per cent of GDP by 2019, but the mission said debt sustainability risks remain moderate.
The Government, the mission said, has affirmed that the debt-to-GDP ratio will decline rapidly after the start of oil production, dropping to under 50 per cent by 2020.
The mission recommended fiscal adjustment to safeguard against downside risks, pointing out that the adjustment could be achieved by curtailing the growth of current expenditure, supported by public enterprise reform.

VAT REFORM
The mission welcomed the VAT reform which broadened the tax base, while reducing the rate from 16 to 14 per cent, and encouraged the authorities to continue to strengthen tax administration.
It also welcomed Guyana’s 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) and going forward; local authorities were encouraged to consolidate Government accounts at the Central Bank and establish a Treasury Single Account in line with international best practices.
Guyana’s progress in liberalising the communications sector and the plans to increase the contribution of low-cost renewables to the energy matrix, improve transportation links, and modernise the payment system were also welcomed.
“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,” the mission said.
The mission also encouraged the Government 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.
However, it noted that the pass-through from the VAT reform to inflation should be closely monitored. Guyana, it said, remains vulnerable to external shocks due to its dependence on imported oil and the concentration of exports on a few commodities.
The mission also noted the 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, and recommended that any official foreign exchange purchases and sales use a market mechanism similar to the one used for auctioning treasury bills.

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