THE International Monetary Fund (IMF) has noted that with the development of oil resources here coupled with public investment, Guyana’s economy will continue to grow.
In its Article IV consultation report, the IMF noted that economic growth is projected to hover around 3½-3¾ per cent during 2017–19 and will be driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in rice production.
“This assumes that oil production starts in mid-2020 at 100,000 barrels per day for up to 8 years, before gradually declining.

The prospects of the other fields (Liza-2, Payara and Snoek) are still in the exploration stage and could substantially increase oil production and proven reserves,” the report stated. The IMF was quick to point out that the long-term outlook hinges on the government’s ability to improve the business climate and use the oil windfall to increase potential growth through productivity-enhancing reforms and economic diversification.
It was noted too that inflation is expected to be around 2½-3 per cent over the medium term. “The external outlook remains broadly favorable, and will improve with the start of oil production. A current account deficit of 3 per cent of Gross Domestic Product (GDP) is projected for 2017, with low oil prices and increased gold exports continuing to offset weak sugar exports.”

That deficit is likely to widen to 5 percent of GDP by 2019, as import growth outpaces export growth and will be financed largely by investment inflows and donor-supported investment. The start of oil production in 2020 will swing the current account into a persistent surplus, boosted by a significant increase in exports, the IMF report stated. As such, it is expected that there will be a significant increase in official reserves.
Meanwhile, continued expansionary fiscal policies will increase the public debt. The non-financial public sector (NFPS) deficit is projected to increase to 7.2 percent of GDP in 2017 (due in part to delayed capital spending from 2016), and to gradually narrow to 4.3 percent by 2022.

The baseline outlook includes continued spending in the State-Owned Enterprise (SOE) sector, including 1½-2 per cent of GDP per year on subsidies to GuySuCo, while financing needs will remain relatively high, which may raise borrowing costs. The public debt-to-GDP ratio is projected to increase from 49.6 percent in 2016 to about 61 percent in 2019 and gradually decline with oil-related revenues, the IMF added.

“As Guyana grows richer, it could lose access to grants and concessional financing, which are projected to taper off with the start of oil production,” the IMF noted while FSAP stress tests show that some domestic banks are vulnerable to severe downside risks.
High profitability and capitalization levels support the banking system’s ability to withstand adverse shocks. However, their role as a cushion is undermined by inadequate provisioning, high related-party lending and loan classification issues, the report stated.
“Under an extreme stress scenario, some institutions would require recapitalizations of up to 4.5 per cent of 2016 GDP. Banks’ large holdings of CARICOM securities (about 30 percent of the banking system capital) could also account for significant valuation losses in the event of fiscal stress in the region.”

All in all, the report noted that “risks are tilted to the downside in the short-term but to the upside over the medium to long-term”. Losses of CBRs continue to be a concern, which could impact the economy through trade finance and remittances, and increase the financial stability risks in the affected banks. Weak global growth can weigh on commodity prices.
However, it is believed that a strong US dollar can erode external competitiveness in the absence of greater exchange rate flexibility. Lower energy prices would also provide further relief to Guyana’s oil import bill, but could delay the development of its oil fields, the IMF report noted.

The report noted that among the domestic risks are the contingent liabilities from Public Private Partnerships (PPPs), the ailing sugar industry, undercapitalized banks and the National Insurance Scheme. Over the medium and long-term, risks are tilted to the upside, given the potential for further oil discoveries.