In an environment of heightened uncertainty and downside risks in the global economy, Guyana remains vigilant and focused on strengthening macroeconomic and financial resilience.
According to the Ministry of Finance, Guyana’s economy continues to benefit from strong macroeconomic policies and a strategic reform agenda designed to promote environmentally sustainable and inclusive growth.
Beyond the short term, the Ministry noted that measures include structural reforms to raise productivity and labor participation, strengthening institutions and physical infrastructure, and further advancement of regional and global integration.
Economic Developments and Outlook
Despite numerous challenges and a difficult external environment, the Finance Ministry says that Guyana’s economy remains resilient, as evident by a decade of steady growth.
It noted that the decline in oil prices has had a significant positive effect on the economy. Along with accelerated activities in the rice, sugar, gold and construction sectors, this has renewed optimism and confidence in the business community. In addition to this, the International Monetary Fund (IMF) projects that the Gross Domestic Product (GDP) growth would increase to 4 percent in 2016 from 3 percent in 2015.
However, the authorities here are of the view that growth would accelerate at a faster pace this year to at least 4.4 percent, as the impact of the services sector is being underestimated by the IMF officials in their assessment.
The public investment program is expected to provide a significant boost to the construction and manufacturing sectors.
Despite the decline in contribution from the rice and sugar industries as a result of external shocks, the authorities are currently assessing the viability of diversifying these sectors towards downstream value added products, which can boost GDP growth over the medium term and become an important source of fiscal revenue.
Pertaining to the significant oil and gas discoveries off the coast of Guyana, the Government took the initiative to undertake exploration and other capacity building efforts.
They are currently assessing the feasibility of developing an LNG facility to refine the gas. This investment is expected to bring fruitful rewards to the Guyanese people through increased fiscal revenues, employment and income, which will propel Guyana towards achieving sustainable development goals and mitigate the country’s exposure to any subsequent increase in oil prices.
In addition, an Oil and Gas Committee was established in February 2016 and charged with developing the sector. Also, external assistance is being sought to establish a Sovereign Wealth Fund and supporting legislation. It should be noted that the authorities have taken an extremely conservative stance and have not factored in the possible future revenues from oil and gas into their medium-term framework.
On the external front, reserve coverage is expected to remain broadly adequate and the authorities agree with IMF staff that the current account deficit is broadly in line with its norm and that the real exchange rate is appropriate.
The Finance Ministry also notes that the current exchange rate regime has served the country well. In this regard, it noted that the exchange rate is market determined and the Bank of Guyana (BOG) intervenes on occasion, but only to smooth excess volatility in the foreign exchange market.
Furthermore, the Government is also determined to promote robust economic growth while committing to prudent fiscal policies. Towards this end, it was related that Guyana’s fiscal balance improved considerably in 2015, underpinned by the rebound in revenue collection.
Given the ambitious development agenda undertaken to bridge the significant infrastructure gap and address unmet social needs, the Government intends to carefully calibrate their consolidation strategy to limit the adverse impact on the debt-to-GDP ratio, without forfeiting their objectives.
They continue to improve their debt management strategy and emphasize that they will refrain from utilizing non-concessional external borrowing.
Also, Private sector funding would be mobilized through the increased use of well-designed private public partnerships.
The Ministry of Finance has since instituted a macro-fiscal framework to aid in the fiscal diagnosis of the economy and to enhance projections for the real sector over the medium term.
The outlook is positive for the coming years. Prudent and targeted expenditure, coupled with more effective revenue collection and a sustainable debt position, will continue to underpin fiscal policy, the Ministry said.
The government is determined to push ahead with its diversification drive in all sectors of the economy, upgrade infrastructure and promote structural reforms, to lay the foundation for progressively higher and inclusive growth. These measures will also mitigate the country’s exposure to volatile global commodity prices and climate-related challenges.
Additionally, the authorities stressed their plans to strengthen tax administration. While they acknowledged that some tax measures approved in 2015 and envisaged for 2016 would decrease revenue, they expect the effect to be small and offset by improvements in tax administration. The authorities also noted that they expect stronger growth over the medium term, which will raise revenue. The authorities also indicated their wish to have technical advice from staff and signaled their intent to solicit CARTAC support to conduct a detailed review of the application of the VAT since its inception to present with a view of benefitting from the resulting recommendations.
The Government noted that the large increase in current expenditure is due to one off reclassification changes and an adjustment in wages. In respect of the former, they clarified that the increase in transfers was due largely to a consolidation of expenditure items of constitutional agencies into a single category and higher capital expenditure at public enterprises, while the increase in spending on other goods and services could be viewed as a one-off change. As for the latter, they pointed out that wage growth will moderate in the future.
The authorities also noted that they remain committed to restructuring public enterprises to reduce their reliance on government support. With regard to the public utility company here, the Guyana Power and Light, a recent network modernization project has reduced some transmission losses. Further progress is expected under a new IDB project. Lower oil prices have reduced electricity generation cost and tariffs ensure cost recovery.
Furthermore, the Government has indicated that they would continue to refrain from non-concessional external borrowing, and expressed interest in developing domestic debt instruments. The authorities agreed that major public investment projects should continue to be donor financed on concessional terms.
They also intend to mobilize private sector funding, including through well designed private public partnerships.
The administration expressed interest in developing long term domestic debt instruments with a view to developing financial markets and mobilizing domestic savings. In this regard, technical advice from the IMF on debt market development has been sought. The authorities took note of staff’s view that domestic borrowing should be pursued with caution as it could raise the interest burden and crowd out private investment. They also reiterated that they are not factoring in possible future oil income in their medium-term plans.
Additionally, Guyana’s financial sector is dominated by commercial banks. There are three foreign banks and three local banks, whose combined assets correspond to about 70 percent of financial sector assets, and are equivalent to 68 percent of GDP. The largest bank is Trinidad-based, followed by a domestic bank, accounting for 40 and 22 percent of commercial bank assets, respectively. That domestic bank plays a relatively large role in lending to businesses.
Among non-bank financial institutions, the New Building Society (NBS), a deposit taking institution that focuses primarily on mortgage loans, is the largest entity accounting for about 7 percent of financial sector assets and over a quarter of non-bank financial institution assets.
In addition to this, vulnerabilities to foreign exchange and interest rate risks appear limited. A depreciation of the exchange rate would improve the financial position of the overall banking system since banks in aggregate carry net long positions in foreign exchange (84 percent of capital and reserves as of December 2015). Interest rate risks are mitigated by banks’ ability to adjust interest rates on existing loans, although a higher interest rate burden on debtors can increase credit risk. However, banks are exposed to credit risk in their CARICOM securities. Stress tests conducted by the authorities also suggest that the weaker banks are also vulnerable to downgrades on their investment portfolio.
In light of the aforementioned, the IMF has encouraged the authorities to continue to strengthen financial sector supervision. The international body also argued for improved coordination of supervision of insurers and banks within the same business group. Risks from global banks’ de-risking activity should continue to be monitored. A Financial Sector Assessment Program (FSAP) mission visited Guyana in May, and provided a more granular analysis of financial sector challenges and assisted the authorities with strengthening the prudential toolkit.
The mission encouraged the authorities to further strengthen the business climate in priority areas. The World Bank’s 2015 Doing Business Report ranked Guyana 137th out of 189 countries in terms of ease of doing business. Staff noted several areas in which Guyana lags regional peers, notably access to electricity and credit, and resolving insolvencies. The 2015–16 World Economic Forum’s Global Competitiveness Report ranked Guyana 121st out of 140 countries in terms of competitiveness, noting weaknesses in transport infrastructure, electricity and telecommunications, institutional quality, ICT, and innovation. The mission said that the public investment program can help relieve structural bottlenecks such as transportation and electricity that have long been identified as impediments to growth and economic diversification.
