IMF Executive Board Concludes 2007 Article IV Consultation with GuyanaPublic Information Notice (PIN) No. 08/45
April 3, 2008
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.
On February 20, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guyana.1
In 2007, economic performance was strong for a second consecutive year although inflation increased. Real GDP growth is estimated to have been about 5½ percent—a record for the last decade—and is projected to remain robust at 4½ percent this year. The drivers of the recovery have been investment and consumption—supported by external financing and grants, FDI, remittances, and domestic credit. Inflation is estimated to have risen to about 14 percent at end-2007 (compared to 4¼ percent at end-2006) mainly reflecting high food and fuel prices as well as initial adjustments following VAT implementation, and is projected to decline to about 6¾ percent in 2008.
The fiscal deficit declined to an estimated 9 percent of GDP in 2007 from 11¾ percent of GDP in 2006, mainly due to a stronger revenue performance backed by the successful VAT implementation and expenditure restraint. The fiscal position is projected to further improve this year. While the finances of the central government strengthened, those of state enterprises deteriorated because of a shortfall in sugar production and higher costs of electricity generation. Debt indicators further improved reflecting debt relief and a stronger fiscal situation.
Supported by robust exports, the external current account deficit narrowed to about 18¼ percent of GDP (19½ percent in 2006), despite higher imports associated with temporary spending. The underlying current account deficit of about 9½ percent of GDP is consistent with the estimated medium-term equilibrium position. Guyana's real effective exchange rate is broadly in equilibrium.
Expansion in private sector credit, in line with economic activity, is financing real estate and consumption. Although the banking system remains stable and profitable, an insufficient competitive behavior persists.
Structural reforms moved forward with a concession to finance a commercially strategic bridge, the issuance of regulations on insurance company disclosures, the preparation of a report on the pension reform, and the completion of a household income and expenditure survey to provide inputs for the next PRSP expected to be published soon.
Executive Board Assessment
Directors commended the Guyanese authorities for a second consecutive year of strong real GDP growth. They welcomed the authorities' commitment to sound macroeconomic and structural policies, as evidenced by the perseverance with adjustment and reform and the cautious use of external financing. They considered this commitment crucial to diversify the economy, reduce its vulnerability to commodity price and other external shocks, and achieve the Millennium Development Goals. Directors stressed the importance of further fiscal consolidation, prudent monetary policy, and additional structural reforms to strengthen the financial system, the business environment, and Guyana's external competitiveness.
Directors agreed that the real effective exchange rate is broadly in equilibrium and that the authorities' macroeconomic policies are consistent with external stability. While acknowledging that the current exchange rate regime has served Guyana well, a few Directors felt that a gradual move to a more flexible exchange rate, and in the context of a fully operational inter-bank foreign exchange market, could help buffer the economy from external shocks.
Directors observed that fiscal consolidation should remain the anchor of macroeconomic stability, and welcomed the progress achieved in strengthening the public finances. They commended the successful VAT implementation and the authorities' resolve to preserve spending discipline. They supported the objective of reducing the fiscal deficit in the medium term consistent with long-term debt sustainability, while noting that this will require further improvements in tax administration, control of non-priority spending, and a strengthening of the financial condition of public enterprises. Directors concurred with the authorities' decision to smooth aid-related spending. Directors also encouraged the authorities to continue their efforts to reach agreement with creditors that have yet to provide debt relief under the Heavily Indebted Poor Countries Initiative.
Directors observed that adherence to the fiscal strategy will require a reduction in administrative and operating costs of the state-owned electricity and sugar companies and the national pension scheme. Directors welcomed efforts to further improve tax policy efficiency and tax administration, enhance the quality and efficiency of public expenditure, strengthen governance, and upgrade the government's debt management capability.
Directors considered that the projected decline in inflation in 2008 is consistent with the unwinding of some of the 2007 temporary shocks. They welcomed the authorities' readiness to tighten monetary policy as needed. To improve the efficiency and transparency of monetary policy, Directors advised upgrading the Bank of Guyana's monetary policy framework by improving liquidity management, making treasury bills negotiable, and promoting the development of the inter-bank market in line with the recent FSAP recommendations. Directors welcomed indications that the banking sector is financially sound, but called for continuous financial sector oversight and strengthened prudential regulations to maintain financial stability, particularly in light of the growing concentration of new loans in real estate and consumption.
Directors emphasized that progress in key structural reforms and infrastructure upgrading is crucial to enhance external competitiveness, improve the business climate, and attract private investment. They stressed the importance of rehabilitating the electricity infrastructure, and welcomed the increase in electricity tariffs as well as measures to mitigate the impact on the poor. Directors encouraged the authorities to supplement the ongoing sugar industry modernization program with administrative reforms, and welcomed the authorities' efforts to diversify the sugar product and its export markets. They also supported the authorities' efforts to deepen customs reform, strengthen the rule of law and the judiciary, and further reduce the perception of corruption.
Directors welcomed the forthcoming Poverty Reduction Strategy Paper, which will guide the government's medium-term expenditure plans. They noted that macroeconomic stability and growth are key to ameliorating poverty, and called for well-targeted assistance to the poor to achieve faster progress toward the Millennium Development Goals. They encouraged the authorities to strengthen the existing poverty expenditure tracking mechanism.
Directors welcomed the steps being taken to improve the quality of economic statistics, which include rebasing the national accounts to obtain more accurate GDP data.