AS Guyana prepares for oil production in 2020, Finance Minister Winston Jordan has said it would have to guard against the Dutch disease by using economic and financial policies to prevent any major appreciation of the local currency.

Speaking Friday with reporters, Jordan said it is accepted that with the budding industry and the expected large inflows of US dollars from oil on the horizon, there could be appreciation of the Guyana dollar, but noted that it all depends on the pace of development and how much of the oil money seeps into the formal economy.

He made the statement against the backdrop of establishment of the Sovereign Wealth Fund (SWF) which is geared at holding revenues derived from the oil and gas sector.
“It is like the special account for the signature bonus… but it will seep into the economy, but it depends on what rate—what rate depends on our capacity to absorb,” Jordan explained.

He noted that with a population of 750,000 people, there is a great need for capacity-building. He said oftentimes, there is money available to be spent, but cannot [be spent] because there is a lack of capacity to do so.

“I want us to guard against, in that case, people wanting to consume it as opposed to having it invested in the public sector and other investment programmes. We don’t have the capacity, we need to start building it — not only in the public sector but also in the private sector,” the finance minister said.

He gave the example of when Guyana celebrated its 50th independence anniversary in 2016. Then, there was a large influx of foreigners to Guyana and a high circulation of foreign money (US dollars). During that period, he said the rate appreciated.
“The rate appreciated, because you have far more supply of US dollars than people are demanding, so to get rid of the US dollar or for the market to clear the rate appreciated [price had to drop]. Appreciation in small economies like ours is not very good, because it has issues of competitiveness of products that you sell,” Jordan explained.

But with the country’s oil and gas sector expecting to take off in 2020, the value of the Guyana dollar will increase against the US dollar.
However, while he made this clear, the minister was not prepared to provide an estimate of that increase.

He also declined to state what the country’s net earnings are likely to be during the first year of oil production.

RUNNING MODELS
“There have been various runs on that. I don’t at this stage want to disclose what it is. Right now, we are running some models,” he stated.

Asked whether he believes there will be a need for subsidies to cushion some sectors, the minister said he personally dislikes subsidies as they (subsidies) in his opinion distorts resource allocation, has the potential to result in mismanagement, and the people who should be the beneficiaries are oftentimes not.

Meanwhile, asked what plans Guyana has to avoid falling victim to the Dutch disease and the depreciation of the local currency, Jordan said this has a lot to do with what the government is doing legislatively and otherwise to ensure that Guyana does not suffer from the Dutch disease.

He pointed to the SWF where all the money that comes from oil will be placed.
“We get out of that fund, based on the rules we are putting in place, enough to drive our developmental agenda,” he stated.

According to the finance minister, to avoid the Dutch disease “we have to make certain that the dependence on oil is not a new dependence” as was the case with sugar and bauxite at one point.

In neither of those cases (sectors) was a SWF created, but Guyana was receiving premium prices for its products.
Jordan also pointed to the Green State Development Strategy, his government’s blueprint for development over the medium term.

CAPACITY-BUILDING
That aside, he said tremendous focus must be placed on capacity-building and currently, efforts are being made to create units to build capacity for macro-economic analyses, statistical development and management by the Bank of Guyana in relation to the SWF and monies that would be coming to reserves itself.

“Quite a bit of work that is taking place. Personally, I would love it to go faster, but that happens when you don’t have money and you have to depend on arrangements like multi-lateral lending [of] money and so forth,” said Jordan.

Additionally, the minister pointed to the unit being established within the Guyana Revenue Authority (GRA), pieces of petroleum legislation, fiscal legislation, as well as local content all being in place “so we can move to the next stage”.
“It is a process and there is still some time, we have the whole of this year and the whole of next year at least before we get oil. Within that space of time, we will have to build capacity.”

In the case of GRA, some work has already begun to put the unit together. The said unit he said, has received technical assistance from the World Bank as well as support from the International Monetary Fund (IMF).

“… it will take some while to get up and running,” he told reporters, while noting that some persons have already been identified for the unit, but many have to be found from outside of the revenue authority because those there do not have the skills set required to run such a unit.

“They have people they have targeted and who could be sent off for training [and] who could be part of that,” he stated.

All in all, the minister said he does not fear the Dutch disease. “I am not afraid of Guyana being prone to Dutch disease, some of our industries are fairly well established so to speak and many of them require significant injections of funding to really become competitive.

Bauxite industry is not going to close overnight – agriculture has not reached the stage where people will walk away from it—[and] we have commitments for sugar, rice.”
Additionally, Jordan said he is continuously engaging the IMF and other stakeholders and examining all recommendations put to Guyana.

“I have in front of me a Petroleum Fiscal Regime which they would like to see us put in place,” he said, adding “Yes, we must work on the other pieces of legislation— I am talking to the IMF and I am relaying to Cabinet what they are requesting.”

He said too that Guyana will benefit from a US$20M loan for oil and gas development. One aspect of the loan, he said, will be to look at the pieces of legislation that are required to be put in place to improve the country’s architecture for the oil and gas sector.

“Right now, we have, except for the existing piece of legislation; we have no legislation like the local content, the SWF, Petroleum Commission, the Petroleum Fiscal Regime legislation — all of these different pieces of legislation. Plus, we don’t have people to draft them, so under this loan we have to bring people to draft… to help us draft the different pieces of legislation,” Jordan stated.