— CDB economist tells gov’t, other stakeholders

DIRECTOR of Economics at the Caribbean Development Bank (CDB) Dr Justin Ram has urged that local stakeholders, particularly the government working in tandem with the private sector, to be wary of typical pitfalls of the oil and gas industry.

Speaking at the launch of the Georgetown Chamber of Commerce and Industry (GCCI)’s Business Guyana magazine, Dr Ram noted that the oil and gas, or petroleum industry, is one which allows for significant revenues to flow into a country. But, he said that this inflow can also lead to serious ramifications if not managed well.

“The oil industry is going to be booming. Those working in the oil industry… will be earning more money because they are internationally competitive, but when these folks get money in their pockets, they will want to buy things in society and people will know they have money, so prices are likely to rise,” he said.

However, he went on to explain that the rise in prices will pressure employers to increase the wages they pay their employees in other sectors, aside from oil and gas. Subsequently, he said, this increase in wages does not always equate to an increase in productivity and as such, those other non-petroleum sectors in the economy can start to become uncompetitive in the regional and international markets.

“Those wages need to be kept in step with productivity,” he stressed, and later added, “If productivity is improving at the same rate that your wage is improving, then I have no problem. But I know the history especially in oil-producing country tells us, is that this doesn’t usually happen.”

KEEN ATTENTION

According to the CDB representative, foreign exchange policies and government investment priorities are two typical areas of policy shortfall that should be given keen attention.

With the foreign exchange policy, there is usually a high local demand for foreign currency which would lead to either a decline in reserves or a slowed accumulation of the currency. What governments would usually do is avoid devaluing the currency to protect importers instead of doing something ideal, which is to adjust the currency to remain in line with the change in relative value.

On the investment priority side, he noted that there will be significant government revenues and surpluses and suggested that the government invest in labour productive capacity (such as building factories to create more jobs), instead of investing in “flashy” infrastructural and high-end housing schemes, as is typically done.

“You want to be investing in other forms of capital that would add to the productive capacity of the country,” he said. Dr Ram also posited that Guyana needs to ensure economic growth by facilitating diversification and prudent fiscal management.

The CDB representative highlighted that particularly with resource extraction, policy makers need to ensure that the country is well compensated. He suggested that persons be cognisant of the Net National Product (NNP), which he explained is the rate of return on all assets of the country.

These assets, summarised by Dr Ram, include the human capital, man-made capital, social capital, financial capital and environmental capital, which includes the oil resource.

And according to him, if Guyana wants to ensure that the NNP is growing over time, then it has to ensure that its asset base is maintained.

“If you are going to be depleting the environment [capital], you need to ensure that whatever money you are getting from that, you are investing in other forms of capital so that your overall capital base remains the same, or is increasing and that will protect NNP,” he said.

Other policy areas that can be improved to boost Guyana’s economy, in the wake of the emerging oil and gas industry, according to the CDB representative, include: improving the ease of doing business, managing inflation, managing the exchange rate, engaging in sustainable expenditures, government saving for stabilisation and posterity and effectively managing the non-oil deficit to safeguard from the ‘Dutch Disease’.

He also suggested that the Natural Resources Fund make some provisions for small and micro enterprises, in an attempt to spur entrepreneurial activities and deepen the capital market available for them.