IMF Executive Board Concludes 2006 Article IV Consultation with Guyana

Public Information Notice (PIN) No. 07/53
May 11, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Background

Growth in 2006 rose to nearly 5 percent after a decline of 2 percent in 2005, reflecting strong aggregate demand driven by a recovery in private sector credit, strong private remittances,

and foreign direct investment. Inflation fell to below 4 percent, following a decline in international fuel prices and a stable exchange rate. The overall external position has widened to 28 percent of GDP in 2006 from 9 percent in 2004 as a result of rapid growth in both consumer and capital imports. This was in large part due to the increase in fuel prices since 2004 and the ambitious public investment program, including the modernization of the sugar plant at Skeldon which amounted to about 6 percent of GDP. Notwithstanding, foreign international reserves increased to US$278 million (3 months of imports of goods and services) by end-December 2006, as the widening of the current account deficit was more than covered by official disbursements, foreign direct investment, and debt relief in the context of the Multilateral Debt Relief Initiative. The latter, together with the improved growth performance, led to a significant improvement in the public debt sustainability outlook.

Despite the continuation of a very ambitious public expenditure program, the public sector deficit declined from 13.6 percent of GDP in 2005 to 11.2 percent in 2006, primarily as a result of the improved performance of the public enterprises and an increase in grants. Excluding the government's investment in the modernization of the sugar plant, the deficit is estimated at 5 percent of GDP. As a result of the government's continued emphasis on infrastructure, total public capital expenditures were estimated at about 25½ percent of GDP in 2006. Total government social spending also remained high at about 23 percent of GDP. Wage policy supported the fiscal effort as public sector wage increases were kept in line with inflation.

The recovery of private sector credit that began in 2005, has picked up along with the continued strengthening of financial sector indicators. The credit expansion reflects partly rapid growth in mortgage lending as a result of increased government land sales and leases and preparation for the Cricket World Cup. The Guyana dollar has remained broadly stable since mid-2004 at about G$200 per U.S. dollar, reflecting a balanced foreign exchange market. The real effective appreciation of the Guyana dollar in 2005 has been partially reversed by the recent depreciation of the U.S. dollar relative to the euro and by the widening inflation differentials with some trading partners.

There was significant progress with structural reforms, the most notable being the implementation of the value-added tax (VAT) on January 1, 2007 as envisaged under the recently expired program supported by the Poverty Reduction and Growth Facility (PRGF). Despite some delays, there was also progress with strengthening public sector expenditure management, improving governance, and the construction of a modern sugar factory. The Bank of Guyana has already begun to implement many of the recommendations made by the Financial Sector Assessment Program conducted in 2005.

Guyana has also made progress with the Millennium Development Goals (MDGs) with the attainment of two indicators (eradicate extreme hunger and achieve universal primary education). It is likely to achieve another two by 2015 (reduce child mortality rate and provide access to safe drinking water to more than half of the population) but significant additional financing will be needed to meet the targets for the other four. The preparation of the Household Income and Expenditure Survey (HIES)—which would allow a comprehensive measure of poverty—is nearly completed and will inform the government's next Poverty Reduction Strategy Paper (PRSP).

Executive Board Assessment

Executive Directors commended the authorities for implementing sound macroeconomic policies, resulting in a better growth and inflation performance and an improved debt sustainability outlook. However, they noted that domestic and external imbalances remain large, and that the economy continues to be vulnerable to shocks.

Directors welcomed the introduction of the VAT, a cornerstone of the authorities' fiscal reform program, as planned. They commended the authorities for reversing some of the recent large increases in government spending, noting that adherence to the commitments in the 2007 budget would provide a sound basis for the achievement of fiscal sustainability. It will be critical for the government to address quickly revenue shortfalls that may arise in the implementation of the VAT, and to resist calls to expand exemptions to it. Directors supported the authorities' request for technical assistance in the taxation area. They welcomed the government's intention to appoint members to the National Insurance Reform Council, and urged them to develop a reform program for the National Insurance Scheme. They called for steps to better prioritize the public investment program.

Directors commended the authorities for pursuing a prudent monetary policy. The authorities should remain focused on maintaining low inflation and guarding against potential pressures from the rapid increase in private sector credit. Directors welcomed the efforts to further strengthen the financial system—which remains fundamentally sound—by enhancing the supervisory framework and modernizing the reporting system. They noted that the central bank's oversight of private lending may need to be strengthened to contain any possible weakening of bank assets accompanying rapid credit expansion.

Directors considered that the exchange rate system has served Guyana well, and that the current level of the exchange rate is broadly appropriate. A number of Directors called for measures to strengthen liquidity management and develop the foreign exchange market.

Directors agreed that the authorities' reform agenda focuses appropriately on improving competitiveness to strengthen growth prospects, speeding up progress in poverty alleviation, and reducing vulnerability to shocks. Directors encouraged the authorities to proceed quickly with the planned reform of the sugar sector to achieve lasting improvements in its competitiveness, and to explore the scope for greater private sector involvement in the sector to minimize the public sector's risk. They welcomed plans to address the high cost of electricity through a public-private partnership to construct a hydroelectric power plant. A sound legal framework for the partnership should be developed quickly to help manage fiscal risks and public sector costs. Directors considered that timely implementation of the National Competitiveness Strategy will be important to foster an investor-friendly climate and stimulate private investment.

Directors welcomed the improvement in Guyana's debt outlook as a result of debt relief under the MDRI. They noted that the risk of debt distress is judged to be moderate. They looked forward to faster progress by Guyana's non-Paris Club and commercial creditors in extending debt relief on terms at least as favorable as those extended by the Paris Club.

Directors encouraged the authorities to persevere with their efforts to improve statistics and strengthen the institutional capacity of the Bureau of Statistics, in order to support economic policy formulation and development objectives. They emphasized that adequate data on poverty indicators will be essential in the preparation of a new Poverty Reduction Strategy Paper, and called on the authorities to finalize quickly their work to improve the statistical database in this area.

Directors looked forward to continued close cooperation between the authorities and the staff to sustain Guyana's growth and structural reform agenda, possibly in the context of program support.


Guyana: Selected Economic Indicators

 

2003 2004 2005 2006 2007

 

 

 

  Prog. Est. Proj.

  (Annual percentage change, unless otherwise indicated)

National income and prices

           

GDP at constant prices

-0.7 1.6 -1.9 3.5 4.8 5.2

GDP deflator

5.4 4.3 7.5 4.3 4.0 4.2

Consumer prices (end of period)

5.0 5.5 8.3 5.7 3.6 5.0

Exchange rate (eop, depreciation -)

           

Guyana dollar per U.S. dollar

1.3 2.8 0.3 .... 0.2 ...

Real effective rate

-5.6 -4.3 8.9 .... ... ...
  (Annual percentage change relative to broad money, unless otherwise indicated)

Money and credit

           

Net domestic assets

-2.5 12.4 1.5 -2.8 1.9 4.3

Combined public sector credit

7.8 12.6 -2.1 -6.2 -5.7 0.0

Private sector credit

-10.3 -0.2 3.5 3.4 7.5 4.3

Broad money

8.3 7.8 8.3 6.0 15.9 10.7

Lending rate (in percent)

15.7 14.3 13.5 .... ... ...

Deposit rate (in percent)

3.4 3.0 3.1 .... ... ...
  (In percent of GDP)

Combined public sector

           

Noninterest revenue and grants

39.6 44.0 44.1 51.3 48.7 45.2

Noninterest expenditure

42.0 43.2 49.0 51.9 49.6 46.6

Primary balance

-2.4 0.9 -4.9 -0.5 -0.9 -1.4

Interest payments

5.8 5.0 4.4 4.2 4.1 3.7
             

Savings

5.8 10.1 6.7 11.4 10.2 9.2

Capital expenditure

14.4 16.3 23.4 28.7 25.4 22.8
             

Overall balance

-8.7 -4.5 -13.6 -13.2 -11.2 -9.7

External financing

6.2 -0.1 9.7 13.0 10.3 10.4

Domestic financing

1.4 3.3 3.6 0.2 0.9 -0.8
             

National Accounts

           

Investment

21.0 22.1 31.1 37.8 35.5 34.3

National savings

12.2 17.5 15.6 15.8 11.2 14.0
  (In millions of U. S. dollars, unless otherwise indicated)

Balance of payments

           

Gross international reserves

271 225 251 261 278 308

(in months of imports)

4.4 3.2 3.1 3.1 3.0 3.3

Change in net international reserves (increase -) 1/

-8 27 -17 -86 -52 -30

External current account balance (percent of GDP)

-8.9 -4.1 -14.9 -25.7 -24.4 -20.3

(excluding official transfers)

-11.9 -8.9 -19.1 -28.8 -28.0 -23.0

Exports of goods, f.o.b. (annual percentage change)

3.5 14.8 -6.5 10.0 7.5 5.6

Imports of goods, f.o.b. (annual percentage change)

1.5 13.2 21.6 8.4 18.9 4.2

Public sector debt (in percent of GDP) 2/

173 170 164 139 135 132

Public sector external debt (in percent of GDP) 2/

145 136 133 113 105 105

Public sector external debt service (in percent of exports of goods and services)

7.4 6.0 4.3 3.2 5.6 4.0

Sources: Guyana authorities; and IMF staff estimates.

1/ Includes adjustments made for NIR and NDA due to Fund MDRI debt relief granted in January 2006.

2/ After stock write-off of original and enhanced HIPC, and implementation of the MDRI from the Fund and IDA


1 Under 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.



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