Dear Editor,

DESPITE the relatively large forex earnings from the petroleum sector, the capital account and net services and unrequited transfers continue to record large deficit balances (forex outflows of US$7.6 billion), resulting in a relatively small surplus balance in 2022, which represented 0.9 per cent of GDP (2022). This is one of the factors responsible for the exchange rate stability that prevails.

Of recent, several writers, both locally and regionally and from within the Guyanese Diaspora have been advancing the argument on whether the Guyanese currency should be revalued. This notion is against the backdrop of the foreign exchange (FOREX) earnings from the country’s oil and gas resources.
More specifically, the Peeping Tom column of the Kaieteur News edition of August 12, 2023, questioned why the exchange rate has not appreciated substantially as yet, given that earnings from the oil resources is pegged at US$1 billion for this year, and export earnings in 2022 increased from US$1.56 billion in 2018 to US$11.2 billion at the end of 2022.
The author of the Peeping Tom column intimated that the dominant players in the forex market control the exchange rate. This notion, however, is partially correct. The columnist then concluded that it is in the government’s interest to maintain the exchange rate at around the present levels.

In theory, large inflows of foreign exchange tend to trigger a substantial increase in the exchange rate, especially where there is a floating exchange rate regime. In the case of Guyana, the exchange rate regime can be characterized as a managed float.

A substantial appreciation of the exchange rate would necessitate a change in relative prices; considering that Guyana imports about 80 per cent-90 per cent of consumer, intermediate and capital goods.

This description is precisely what is known as the “Dutch disease”, a paradox which the government must avoid at all cost. So, when Peeping Tom argued that it is in the government’s interest to maintain the exchange rate at current levels, he is partially correct as well. In fact, it is more so in the country’s interest to maintain a stable exchange rate environment.
A sharp appreciation of the exchange rate can cripple the export/manufacturing sectors at the expense of the importers. In other words, imports will become far cheaper, while export commodities will become more expensive, hence, a loss of international competitiveness in global markets.

That said, let’s examine why there is no major appreciation of the exchange despite massive increases in exports on account of the petroleum sector (crude oil export), and the forex earnings to the Natural Resource Fund (NRF).

The answer to this question resides in analysing the sources of inflows and outflows of forex, to derive the net flow of forex, together with the foreign reserve balances of the country, and net foreign assets of the banking sector. This is shown in the balance of payment account summary.
First, it is important to understand that the external trade balance which is a surplus of US$7.65 billion (the difference between exports and imports) at the end of 2022 is an accounting balance. The reason for this distinction is because the total export earnings include export of crude oil which reflects 100 per cent of the crude oil produced in Guyana. But the country does not earn in actuality, 100 per cent of the forex from crude oil sales.

Notably, 75 per cent of this sum is cost oil, of which local content spend in country for 2022 represents seven per cent of total crude oil exports, and the oil companies’ share of profit would be recorded as outflow payments in the balance of payment account.

The government’s share is in the form of the 50 per cent profit and two per cent royalty payments. The outflows attributed to the oil and gas sector for cost recovery and other operating expense such as operating lease payments, are recorded in the balance of payment account under the “Net Services and Unrequited Transfers”, in the Current Account.
Therefore, to understand the fullness of the issue, one has to analyse the balance of payment account of which a summary is presented in the above table.
Second, the government’s share as alluded to above, is deposited into the NRF that is held outside of the country at the Federal Reserve Bank.

As illustrated in the foregoing table, the non-oil exports at the end of 2022 amounted to US$1.445 billion, imports amounted to US$3.624 billion, giving rise to a non-oil trade balance deficit of US$2.179 billion; and the Net Services and Unrequited Transfers recorded a deficit balance of US$3.8 billion, giving rise to a Current Account surplus balance of US$3.8 billion.
The Capital Account recorded a deficit balance of US$3.65 billion, which was offset by the Current Account surplus balance, giving rise to an overall surplus balance of US$121 million. This surplus led to the increase in the foreign reserve held by the Bank of Guyana to US$932 million at the end of 2022, representing three months’ worth of import cover. This is an improvement in the country’s foreign reserve over from its 2018-2020 levels which represented less than two months import cover.

The Capital Account registered a net private sector balance, inclusive of foreign direct investment (FDI), of US$3.110 billion recorded as an outflow payment. Of this sum, US$3.053 billion represented payment for the acquisition of the Liza Unity FPSO in 2021. Net remittances for the period amounted to US$22 million, forex inflow from external debt disbursements amounted to US$261 million and outflow for external debt service payments amounted to US$85 million.

Additionally, the NRF balance as of the end of 2022 stood at US$1.272 billion; NRF withdrawal amounted to US$608 million that was transferred to the Consolidated Fund; the net international reserve at the Bank of Guyana stood at US$932 million; the commercial banks net foreign assets stood at US$432 million, giving rise to a total net foreign asset position of US$2.636 billion.

Put simply, this means that despite the relatively large forex earnings from the petroleum sector, the Capital Account and Net Services & Unrequited Transfers continue to record large deficit balances (forex outflows of US$7.6 billion), resulting in a relatively small surplus balance of US$121 million, representing 0.9 per cent of GDP (2022).
This is one of the factors responsible for the exchange rate stability that prevails. The other factors that contribute to the exchange rate stability are attributed to the following:
i) The commercial banks invest between 70 per cent – 90 per cent of their net foreign assets in financial markets abroad,
ii) The Bank of Guyana’s net foreign assets are held outside of the jurisdiction, and
iii) The NRF is also held in an account outside of the jurisdiction.

As such, the domestic market is not flooded with forex, all of which helps integrally in maintaining a stable exchange rate. And this is far more important for the economy than revaluation of the currency at this time.

The exchange rate has been appreciating―albeit not substantially, but incrementally, as shown in the chart below.
By and large, the average market exchange rate has been stable over the last 15 years, thus enabling macroeconomic stability. During the period 2015-2020, the exchange rate depreciated by $7.97 or 3.8 per cent. Conversely, for the period 2021-2022, the exchange rate appreciated by almost the same level of 3.8 per cent, thereby reverting to its pre-2015 level. With increasing inflows of forex from the NRF and the oil and gas sector, the exchange rate is projected to appreciate marginally over the medium term.

Yours respectfully,
Joel Bhagwandin