Public Information Notices
Guyana and the IMF
IMF Concludes Article IV Consultation with Guyana
On November 13, 2000, the Executive Board concluded the Article IV consultation with Guyana1 and at the same time approved the second annual arrangement under the Poverty Reduction and Growth Facility (PRGF) along with a disbursement of SDR 6.96 million (about US$9 million) of the SDR53.76 million originally committed under the (former Enhanced Structural Adjustment Facility) program in 1997. On that occasion, the Executive Board of the IMF jointly with the World Bank decided that Guyana was eligible for additional debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative (see Press Release No. 00/61). As a result, the amount of assistance to Guyana from its external creditors provided under the HIPC Initiative in net present value terms will be US$585 million (including US$256 million under the original HIPC Initiative and US$329 million additional assistance under the enhanced Initiative). The IMF will contribute about US$74 million (US$34.5 million under the original Initiative and US$39.5 million under the enhanced Initiative).
Economic performance improved substantially during 1991-97, as the country reduced its financial imbalances and implemented wide-ranging structural reforms to increase efficiency. However, since late 1997, the country has encountered a series of shocks (including weather, the terms of trade, and public sector wage increases). After a decline in 1998, real GDP grew by 3 percent in 1999, while 12-month inflation rose from 4½ percent at end-1998 to 8½ percent at end-1999. Following a two-month strike by civil servants in May-June 1999 a binding arbitration tribunal granted large civil service wage increases for 1999 and 2000 that put pressure on prices. Despite these events, the overall public sector deficit (after grants) fell from about 5 percent of GDP in 1998 to 1 percent of GDP in 1999, reflecting mainly lower nonwage and capital expenditures. Nevertheless, in 1999 HIPC-related social expenditure at 11½ percent of GDP was about ½ percentage point higher than the target set at the completion point in May 1999. In addition, progress was made on structural reforms, including privatization of the airline and electricity companies, trade liberalization, and strengthening of the financial sector.
The authorities have formulated an Interim Poverty Reduction Strategy, which focuses on economic growth and targeted poverty projects within a stable macroeconomic environment. Over the medium term, the program is based on an average annual real GDP growth of 4½ percent and aims at bringing inflation down to 3 percent. The program also contains important additional structural reforms, including the restructuring of the state-owned bank and sugar company, civil service reform, and actions to improve the business environment (including new investment, procurement and securities legislation).
More spending on poverty reduction projects would contribute to increases in the overall public sector deficit (after grants) in 2001_02 that would shift to a small surplus by 2005. Fiscal policy is based on a two-pronged strategy that: the public sector will not engage in domestic borrowing and its saving performance will improve over the medium term, following the unavoidable decline in 2000. Public saving would improve through efforts to keep government current expenditures (including the wage bill) generally in line with projected inflation. The deficits would be more than covered by concessional external financing, thereby allowing a reduction in public sector domestic indebtedness.Monetary policy would be conducted to achieve the inflation and balance of payments objectives of the program. Interest and exchange rates will continue to be determined by market forces. The program also calls for a strengthening of banking supervision with a view to begin reducing nonperforming loans in the banking system.
The enhanced HIPC Initiative provides additional debt relief which should be directed towards poverty reduction. Relevant social indicators are being developed and the collection of information improved to strengthen the tracking of social sector spending on education, health, housing, water, and direct poverty alleviation capital projects under the program.
While the program is appropriate to achieve the objectives specified, there are risks. Macroeconomic pressures and a slowdown in the pace of implementation of structural reforms could occur. Further, civil service unions may demand additional real wage increases, notwithstanding the sizable increases in 1998-2000. Consultations with stakeholders, including unions, to create consensus on the public sector wage bill policy will be essential to increase the chances of its full implementation.
Executive Board Assessment
Executive Directors observed that since 1998, real GDP growth has recovered; but inflationary pressures have increased, reflecting currency depreciation, increases in utility rates and fuel prices, and the large wage increases to civil servants. Directors expressed concern about these wage increases, but commended the authorities for their efforts to reduce the overall public sector deficit while protecting spending on social services. Directors welcomed the progress made in structural reforms, particularly the recent privatizations of large public enterprises.
Directors considered that the authorities' economic program has set realistic objectives to achieve higher real GDP growth, reduce inflation gradually, and maintain a reasonable cushion of international reserves against shocks. They noted that the pursuit of a prudent fiscal policy is crucial for achieving these goals. Directors noted that public expenditures, excluding wages, were curtailed to a minimum level in 1999 and that a temporary recovery in these expenditures was needed particularly to accelerate the implementation of poverty reduction programs. They encouraged the authorities to expedite improvements in the new Revenue Authority. At the same time, they recognized that room to increase taxes was constrained by the already high tax effort in Guyana. Directors encouraged the authorities to remain steadfast in their two-pronged fiscal strategy of refraining from domestic borrowing and improving public saving performance over the medium term. In this context, Directors urged the authorities to monitor fiscal developments closely, particularly the wage bill and nonpriority spending, and to stand ready to take corrective fiscal actions if slippages emerged.
Directors commended the authorities for their success in privatizing public enterprises, including the state airline company, the electricity company, and a retail outlet. Directors encouraged the authorities to persevere with efforts to restructure the remaining public enterprises, especially the modernization of the sugar company (GUYSUCO), and welcomed their intention to privatize the bauxite companies. Directors noted that these efforts are necessary for increasing public saving to support poverty reduction programs. The authorities should also strengthen their project implementation capacity, particularly the procurement system, to achieve the projected level of public investment needed to reduce poverty and generate growth.
Directors welcomed the authorities' prudent monetary policies, aimed at achieving the inflation and balance of payments objectives. They also welcomed the authorities' efforts to strengthen the supervision of financial institutions and encouraged the authorities to implement the new Securities Law. They urged the authorities to increase their efforts to reduce the high level of nonperforming loans, to continue to enforce adequate provisioning, and to bring the Guyana National Cooperative Bank to the point of sale soon. The current exchange rate regime has served Guyana well, and Directors noted that interest and exchange rates should continue to be allowed to reflect market conditions.
Directors welcomed the authorities' efforts to improve their debt management capabilities. They noted that while Guyana provides the core minimum data needed for surveillance and program monitoring, there are significant deficiencies with respect to the quality, timeliness, and coverage of economic statistics that hamper a more comprehensive assessment of economic developments. Directors strongly urged the authorities to enhance their efforts to improve data collection and dissemination for program monitoring and promoting transparency; in particular, there was an urgent need to improve fiscal data collection.
|Guyana: Selected Economic Indicators|
(Annual percent change; unless otherwise noted)
|Consumer price index (end-of-period)||4.5||4.2||4.7||8.7||8.0|
|Gross national saving 1/||22.3||16.2||15.0||13.4||10.0|
|Public sector 1/|
|Overall balance (before grants)||-3.2||-8.7||-6.4||-5.4||-13.8|
|Overall balance (after grants)||1.2||-3.0||-4.8||-1.0||-6.3|
|Money and interest rates|
|Domestic credit of the banking system 2/||14.0||18.3||15.6||-3.7||3.1|
|Public sector (net) 2/||-16.8||3.4||4.8||-9.5||-1.7|
|Private sector 2/||30.8||14.9||10.8||5.8||4.9|
|Treasury bills (91 days)||9.9||8.2||8.8||11.1||...|
|Current account balance 1/||-7.7||-14.2||-13.7||-11.0||-18.6|
|Overall balance of payments 3/||60.0||4.3||-17.4||-2.2||7.1|
|Gross official reserves 4/||5.2||4.7||4.3||4.4||3.9|
|To exports of goods and|
|To central government revenue||42.7||58.5||50.3||34.0||31.8|
|Real effective exchange rate|
Source: Guyanese authorities.
|1/ In percent of GDP.|
|2/ In percent of broad money at the beginning of the period.|
|3/ In millions of U.S. dollars.|
|4/ After original HIPC Initiative assistance; in 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 Executive 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