GUYANESE need to temper their expectations of the emerging oil and gas sector despite the fact that the country stands to earn significant revenues from the new commodity.
Economist Rawle Lucas in an interview with the Guyana Chronicle recently explained that Guyana, being an open economy, is highly dependent on trade for its income and the goods and services consumed.

What that means, in essence, is that without international trade, Guyana would have much difficulty surviving.
Guyana depends heavily on the exports of primarily primary commodities, so the addition of oil to the equation would mean the addition of an additional primary product to the country’s exports.

This, he said, does not really change Guyana’s export profile.
Lucas said, too, that because Guyana is unlikely to get into downstream operations of oil production in a hurry, “it means that all oil will do for us, at least in the immediate future, is add or expand our production structure.”

A GAP-FILLER
But, even as oil expands our production structure, it would be playing two roles, the economist said. One is the role of a gap-filler, and the other that of adding to the country’s Gross Domestic Product (GDP).

Explaining what he means by gap-filler, Lucas said he’s speaking in the context of the transformation occurring in the agriculture sector, bearing in mind that sugar is no longer operating at the level it used to years ago, and as such, Guyana will lose income, GDP from the lower sugar output.

What it also means, he said, is that the country will be losing foreign reserves from lower sugar exports, but with the advent of oil, some of that slack would be picked up.
“So, our GDP situation should at least be stabilised where oil is concerned. But in my view, it is likely to expand it simply because oil may be an additional commodity that we are selling,” Lucas said, adding that a substantial part of Guyana’s imports is made up of fuel and lubricants, which, more or less, is oil.

He said given that Guyana is unlikely to be involved in downstream operations such as refining etcetera, it means that Guyana would have to import refined oil.
“The amount we import, or the way it is reflected in our balance of payments,” he said, “largely depends upon how the agreement with respect to domestic oil demand is handled in the contract with Exxon.

“Whatever is our share of the revenue, some of that will have to go to compensate for the refined product that we would have to import.”

DEMAND AND SUPPLY
That aside, he made it clear that not all of the oil revenues would be immediately available to Guyana, since oil, being a primary commodity, means it is dependent on demand and supply.

“It means that the price we get for oil will move up and down like any other commodity. Assuming that prices are significantly buoyant, then clearly our revenues will increase, to the extent that it falls, our revenues will decline,” he stated, while noting that unless there could be some control over the cost of production, then expectations from oil should not be too inflated.

“No doubt we will get additional revenues, because we are adding an additional product to our export basket,” Lucas said, adding: “But still, prices as we saw a few years ago can fall significantly, and therefore undermine production and the revenues that are generated from that.”

As it relates to adding to the GDP, Lucas said what one needs to remember is that oil is a new item in the country’s basket, or production structure, so it therefore stands to reason that it will do so.
But the burning question now is: What will the revenue derived from production be used for?

And his response was: “It is likely that oil revenues can increase rapidly. And since we are not investing any of that revenue in downstream activities, it means it will essentially remain as cash in our hands.
“A large infusion of cash without a commensurate increase in goods and services will lead to inflation.”

INFLATION CONTROL
In the circumstance, he said, it is critical for the government to focus on controlling inflation, and one such means to do so is the creation of the Sovereign Wealth Fund (SWF). The SWF is a means of taking some of the money out of the economy and placing it into savings. In this regard, Central Bank can, if there is too much money circulating, use open-market mechanisms or otherwise to control the situation.

Central Bank, as a matter of fact, would need to persuade persons to put their money into the bank so as to control circulation. According to Lucas, if circulation is rapid, people are going to spend; and if they are spending faster than production, then inflation will occur.
Another area to pay close attention to, he says, is the foreign exchange earnings and the exchange rate.

As he explained, with exchange being based on open-market operations, the demand for goods and services produced by Guyana will also have an important influence here.
And what this means, in essence, is that the more people demand Guyanese currency, then the higher the value of the currency, which means that local currency in the future is likely to appreciate against the U.S. dollar.

“For that to happen, it means Guyana has to be producing goods and services that people want to buy abroad,” Lucas said.
And he is confident that there will be significant growth in direct investment in the economy; and this optimism is founded on the discovery of gas here.

He said that Guyana is likely to derive some benefit, as instead of importing gas or burning it, the gas that is available to Guyana would aid in reducing the cost of production significantly.

“As a consequence,” he said, “producing in Guyana could become very competitive, which means, therefore, you are likely to see more and more manufacturing operations being established in Guyana, because of the access to cheap energy.
“What that means is that other parts of our economy will become very important, particularly agriculture; some aspects of mining, and some aspects of our industrial raw materials like bauxite… because most of these, or all, serve as inputs into our production process.”

VIABLE EXPORT MARKET
However, that will only happen if Guyana has the export market to support such production, because Lucas believes part of the country’s problem now is that the internal market is too small to support the economy.

Said he: “The ways in which oil and gas would help us would be through access to cheaper energy, which will make it possible for the more enterprising among us to invest in agro-processing, manufacturing. The indirect spinoff of the industry would also be reflected in the construction sector; and this is where infrastructural development becomes very important.”

In that case, he pointed to the need for housing for companies such as ExxonMobil, as they are likely to remain in Guyana for the long haul; as much as 40 years, and would be in need of permanent facilities to operate their businesses and to live.
But, there’s a catch. “Nobody is going to go and invest in an area that doesn’t have infrastructure,” Lucas said.

“Either Exxon would put in its own infrastructure, as was the case with the bauxite industry and sugar industry…
“So now what you have is more than one party with an interest in infrastructural development, not only the government.”

Notwithstanding that the beneficiaries would be limited, as it is likely to be those participating as direct employees or other stakeholders in the oil industry. As a result, of the aforementioned, it is expected that there would be an increase in private investment in other areas such as health and education, though this does not mean greater access for Guyana, but greater competition instead.

“Because not all of us would be able to afford to send our kids to those schools. The government itself would have to maintain a high level of investment in education; the same thing in health care,” Lucas noted.

The government, he said, has to be conscious of the limitations that are associated with the aforementioned. “A lot of this does not take place in a vacuum; Guyana is highly dependent on trade, and the trading environment, therefore, becomes very important to what we can do; the extent to which our focus is influenced by the mercantilist view of trade or the liberalist view of trade could also be an influence.”

MERCANTILISM VS LIBERALISM
Lucas made it clear that he is unaware of the government’s thinking on this matter or what they are likely to do in the future, but said the mercantilist view has its advantages and disadvantages. The mercantilist view speaks directly to whether there is a trade surplus, which is good; or a trade deficit, which is bad.

While it may not be the most appropriate way to look at situations, if the focus is on increasing foreign exchange and influencing international reserves, then that view is likely to prevail, because the aim is to obtain more revenue.
However, if the goal is to increase access to goods and services to intermediate consumption goods; expand the welfare of the society, then the liberalist view may be the one to adopt.

“I don’t know what position government will adopt, but the advantage of the liberalist view, If you don’t worry too much about the trade deficit or balance, then one of the things you’d be ensuring is that people have access to [as] wide [an] array of goods as possible, so if the emphasis is on consumption, then that liberalist view works.”
The liberalist view, he stated, is “where the world is today,” despite trends that suggest same could be rolled back.

Lucas opined that to the extent that Guyana does not roll back the progress that has been made over the years, then it is more than likely that the government would need to look in that direction.

“All of that is aimed really at helping to expand GDP. The income that we get as a nation, and to the extent that our GDP expands and goes beyond the definitions used by multilateral agencies to provide assistance to countries like ours, then Guyana would be graduated out of the soft and concessional and reasonably priced loans of these multilateral institutions such as the World Bank, the IDB and regional banks,” he explained.

It means, therefore, that Guyana’s economy would have to depend on the capital market, of which there are two: Domestic and international capital markets.

CAPITAL MARKET
Lucas described Guyana’s capital market as “rudimentary”. Capital market refers to securities such as bonds, stocks and shares.

However, Lucas explained that while the Central Bank sells treasuries, the market is not organised. “So I can’t say there is an active financial capital market in Guyana.” He said, too, that the local economy can only accommodate a limited amount; that if there is a major project standing hypothetically at US$850M and the government were to reach out to the local banks,[it is] more than likely they will not have the money to lend anyone.

“Clearly, we would have to go looking for that money in the international arena; clearly, the international market becomes important, which means that you have to have very good credit worthiness,” he stated, while noting that it is an area in which Guyana has limited experience. This however is not limited to the government, but applies to all investors.

“My expectation is that Guyana will see its financial sector increasing widely as a result of the inflow of cash. We have to maintain a focus on the key variables: of interest rate, foreign exchange rate and inflation rate. We have to maintain that. Our policy position would clearly be influenced by the market conditions that we face at that time,” he told the Guyana Chronicle.