Public Information Notices
Guyana and the IMF
On May 12, 1999, the IMF Executive Board concluded the Article IV consultation with Guyana1 and at the same time completed the midterm review under the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), and approved a new disbursement of SDR 8.96 million (US$12.1 million) of the SDR 53.76 million originally committed. On that occasion, the Executive Board of the IMF jointly with the World Bank decided that the conditions for reaching the completion point under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) had been satisfied (see Press Release No. 99/17). The amount of assistance to Guyana from its external creditors provided under the HIPC Initiative is estimated at about US$410 million in nominal terms. In terms of net present value, assistance under the Initiative will be about US$256 million, of which the IMF will contribute about US$34.5 million.
After two decades of declining economic activity and financial imbalances, Guyana’s economy improved substantially in the period 1991-97. However, beginning in late 1997, Guyana’s economic performance was adversely affected by major external shocks and policy slippages. In 1998 real GDP declined by 1½ percent and the rate of inflation increased to 4½ percent. The overall public sector deficit (after grants) increased from 3 percent of GDP in 1997 to 3½ percent of GDP in 1998 (compared with ½ percent of GDP in the program). Guyana did not observe several of the quantitative performance criteria under the program supported by the ESAF for end-December 1998.
The authorities have formulated a program designed to return the economy to a sustainable growth path. The program assumes a real GDP growth of 2 percent in 1999, rising to 4 percent by 2003, and aims at containing inflation and strengthening the balance of payments. The overall public sector deficit (after grants) would decline to 3 percent of GDP in 1999 and to 1½ percent of GDP by 2002. In 1999 the exchange rate used for valuing imports for customs purposes is being brought more in line with the market rate, tax administration is being improved through the establishment of a new Revenue Authority, the national airline has been privatized, several other enterprises have been earmarked for privatization, and the growth of the public sector wage bill is being contained.
Monetary policy has been tightened through the intensified use of open-market operations whose effectiveness has increased following the liberalization of interest rates on government securities. In addition to the envisaged privatization, structural measures in the program include a revision of the civil service remuneration structure to help retain qualified key personnel, other civil service reforms, steps to strengthen the operations of the financial sector (including restructuring the state-owned commercial bank), and a reduction in the maximum external tariff to 20 percent. The Fund also has been requested to provide technical assistance to reform the tax system and improve bank supervision.
As required under the HIPC Initiative, the program provides for increased budgetary resources to be used efficiently for education, health, and poverty alleviation programs.
While the program is appropriate to achieve the objectives specified, there are risks. Despite easing of tensions, Guyana continues to face political challenges (a constitutional reform in 1999 and a general election in 2000). In addition, the government faces a major challenge to implement the agreed wage policy. The program, however, provides for compensating measures to offset any wage overrun.
Executive Board Assessment
Directors observed that, notwithstanding the unfavorable exogenous and political developments that affected the economy in 1998, Guyana had made some progress in reducing fiscal imbalances and in implementing structural reforms. They noted, however, that there had been a number of policy slippages, particularly the unprogrammed increase in civil service salaries, which had contributed to the deviations from the program path.
Directors emphasized the importance of fiscal adjustment to help stabilize the economy and set the stage for medium-term fiscal sustainability. They noted that the adjustment envisaged in the 1999 budget was much less than expected in the original program. Directors welcomed the government’s efforts to bring the program back on track, including by adjusting the customs valuation exchange rate, privatizing the loss-making public airline company, and enhancing the efficiency of the sugar company. They also welcomed the ongoing initiative to further reduce the size of the civil service and to introduce a new remuneration structure for the skilled and professional staff. Directors, however, stressed the paramount importance of avoiding excessive increases in the wage bill in 1999, and took note of the authorities’ commitment totake any necessary additional measures to achieve the program’s fiscal objectives. Several Directors considered that the limited scope for such measures further underlined the need to avoid excessive wage increases. Directors emphasized the importance of early establishment of the Revenue Authority, without further delay, and supported the authorities’ recent request for technical assistance from the Fund to improve the efficiency of the tax system. While noting the recent change in the customs valuation exchange rate, some Directors suggested that valuations should be carried out at current market exchange rates.
Directors welcomed the increase in the 1999 budget allocation for expenditure on the social sectors, which they generally saw as consistent with the objectives of the HIPC Initiative. They urged the authorities to take the necessary measures to ensure the achievement of the spending targets for education, health, and poverty alleviation, and to improve the quality and effectiveness of social sector expenditure. A few Directors emphasized that it was essential to prevent HIPC Initiative resources from being diverted to other purposes.
Directors agreed with authorities’ the restrictive monetary stance to help contain inflation and strengthen the external position. They recognized the positive steps taken to recapitalize, reorganize, and enhance the autonomy of the central bank; and to liberalize interest rates by removal of bid limits in treasury bill auctions. The need to offset the effects of a reduction in reserve requirements by tightening other policies was noted. Directors supported the authorities’ efforts to restructure the operations of the large state-owned Guyana National Cooperative Bank, and emphasized the importance of other actions being taken to improve bank supervision and tighten prudential regulations.
Directors encouraged the authorities to press ahead with their privatization program and, in particular, to redouble their efforts to privatize those enterprises that have been brought to the point of sale. They stressed in particular the need to proceed toward the sale of the electricity company.
Directors observed that the delivery of assistance under the HIPC Initiative would lessen the heavy fiscal burden of Guyana’s external debt and free resources for social purposes, including for improving the provision of services to the poor through civil service reform. However, they also observed that, partly reflecting adverse recent developments, the fiscal sustainability of Guyana’s debt was not yet assured. While HIPC Initiative assistance would lower the NPV of debt-to-exports ratio to within the target range established at the decision point, it would not achieve the fiscal target for the NPV of debt-to-central government revenue of 280 percent. Directors saw this as underscoring the vital need for continued pursuit of prudent debt management policies, strong fiscal adjustment, and structural reforms. Only with such measures would it be possible for Guyana to further improve its debt service profile and achieve external sustainability in the longer run. They commended the authorities on their efforts to develop Guyana’s debt management capacity.
Many Directors considered that, following any agreed revisions to the framework of the HIPC Initiative, Guyana’s eligibility for additional assistance could be considered subject to its meeting the relevant requirements, although some Directors expressed reservationsconcerning such an approach. Some Directors noted that other means could also be used to alleviate Guyana’s heavy debt burden, including augmented access to ESAF resources in support of appropriately strong policies.
Directors looked forward to a review by the staff and the authorities of the macroeconomic framework at the time of the discussion of the program to be supported by the second annual ESAF arrangement.
|Guyana: Selected Economic Indicators|
(Annual percent change unless otherwise noted)
|Consumer price index (average)||13.6||12.2||7.1||3.6||4.6|
|Gross national saving1||8.4||13.9||20.9||16.2||15.1|
|Current account balance||5.9||12.3||15.9||9.4||9.4|
|Overall balance (before grants)||-5.7||-4.0||-3.2||-8.7||-5.1|
|Overall balance (after grants)||-1.1||-2.1||1.2||-3.0||-3.5|
|Money and interest rates|
|Domestic credit of the banking system||-55.3||310.4||68.2||61.7||41.8|
|Public sector (net)||-140.7||3.2||-75.5||10.2||26.4|
|Treasury bills (91 days)||18.6||15.5||9.9||8.2||8.8|
|Current account balance1||-18.9||-17.9||-9.3||-14.2||-13.5|
|Overall balance of payments2||-35.0||-44.0||60.0||4.0||-17.0|
|Gross official reserves3||5.1||4.6||5.2||4.7||4.3|
|Exports of goods and nonfactor services||17.5||17.1||14.6||17.3||18.9|
|Central government revenue||59.1||51.5||42.7||53.6||55.2|
|Real effective exchange rate|
Source: Guyanese authorities.
|1In percent of GDP.|
|2In millions of U.S. dollars.|
|3In months of imports of goods and nonfactor services.|
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT