– Sounds warning on sugar
THE International Monetary Fund (IMF) says Guyana has weathered the impact of the global crisis well by regional and global standards and it has sustained a solid macroeconomic performance supported by prudent policies. The fund’s Executive Directors, following the IMF’s latest assessment last month, commended the commitment of local authorities to further entrench macroeconomic stability and fiscal sustainability, while promoting long-term growth and development to improve the country’s standard of living and reduce poverty.
In a press release, they observed that the strong fiscal consolidation in 2009 provides space for a more gradual tightening over the near term to support infrastructure investment and growth.
“A cautious fiscal stance remains nevertheless warranted given remaining vulnerabilities. Directors therefore supported the authorities’ commitment to maintain prudent expenditure policies and to continue implementing structural reforms aimed at safeguarding fiscal sustainability”, the fund said.
The IMF Executive Directors welcomed Guyana’s efforts to achieve sustainable long-term growth, including under the Low Carbon Development Strategy (LCDS).
They noted that continued modernization of the sugar sector and diversification of Guyana’s productive base are key to sustaining growth.
But sounding a warning, they, in this context, stressed the importance for the Guyana Sugar Corporation (GuySuCo) to implement its recovery measures and ensure that the new plant at Skeldon becomes fully operational in the near term.
The sugar industry has been recently hit by industrial disputes and government spokesmen have cautioned against unnecessary disruptions that could hamper its recovery.
The IMF said slower progress than expected with the modernization of the sugar sector could also complicate the outlook for positive growth, particularly in light of the recent phasing out of the preferential sugar prices by the European Union, which will increasingly expose Guyana to world-price volatility.
It reported that upside potential is related to the full implementation of the LCDS, the eventual exploitation of Guyana’s oil reserves and the sound completion of key large public-private investment projects over the next few years.
It noted that the LCDS could help Guyana benefit from external resources in exchange for the preservation of its rainforests in the world’s carbon credit markets — including through a model agreement signed with Norway, whose resources will allow, among others, the development of non-traditional economic sectors and the conversion of Guyana’s energy sector.
According to the IMF, Guyana’s outlook remains positive in the near and medium term, although some important challenges remain.
Growth, it said, is expected to benefit from the global recovery, the modernization of the sugar sector and the start up of investment projects, which could spur average growth to 4-5 percent in the medium term.
“The current account would widen somewhat in 2010 with the uptick in domestic demand and the increase in fuel prices, but would narrow gradually over time. Nonetheless, challenges remain, particularly if the upturn in world economic activity was slower than envisaged; or if oil prices were to rise more sharply than projected”, it noted.
Directors commended Guyana’s intention to continue seeking highly concessional terms when contracting debt and to minimize fiscal risks from public investment and public-private-partnerships (PPPs), paying close attention to international best practices.
They welcomed the efforts to continue to enhance the quality of the assessment and fiscal accounting of public investment.
The fund said its directors commended the commitment by Guyana to reflect any firm or contingent liabilities related to PPPs in the public debt statistics.
They also commended the authorities’ prudent monetary policy aimed at maintaining low inflation, noting that the exchange rate appears broadly aligned with fundamentals, and that the current exchange rate policy has served the country well.
“Looking forward, some directors supported a gradual approach toward greater exchange rate flexibility, while others considered that a more detailed assessment of the advantages and disadvantages of greater exchange rate flexibility in Guyana is needed”, the release said.
The directors pointed out that Guyana’s financial system has not been directly affected by the global crisis and welcomed ongoing efforts to further strengthen supervision and enhance the banking system’s resilience.
They encouraged the Guyanese authorities to require banks to increase provisioning, monitor asset quality, and further tighten the legislation on the exposure to large borrowers and related-party lending.
“They commended the recent amendment to bring insurance supervision under the purview of the central bank, and recommended gradually bringing all non-bank financial institutions under a similar regulatory perimeter”, the release said.
The directors commended the continued upgrading of Guyana’s statistical capacity and welcomed the completion of the national accounts rebasing exercise, which resulted in a significant upward revision of GDP data. They also welcomed the authorities’ intention to review the requirements of the General Data Dissemination System (GDDS).
In addition, they supported the forthcoming publication of the Poverty Reduction Strategy Paper to underpin this country’s long-standing commitment to poverty reduction and reaching the United Nations Millennium Development Goals.
The IMF noted that structural reform has continued to focus on further reducing vulnerabilities and entrenching long term growth.
On the financial sector, the assessment found that Guyana has consolidated insurance and bank supervision at the central bank, incorporated risk-based supervision, issued new guidelines on risk management and enacted the Anti-Money Laundering/Combating the Financing of Terrorism legislation and the Money Transfer Agencies Act.
“In the fiscal area, a modern chart of accounts for capital expenditure has been introduced into the integrated financial management system, enhancing the accounting and transparency of public investment. Efforts to further strengthen the Guyana Revenue Authority also continued, including consolidating the new functional organization, completing the rolling out of the integrated tax information system, and improvements in the filing, refund, arrears collection and audit functions”, it said.