IMF Executive Board Concludes 2009 Article IV Consultation with GuyanaPublic Information Notice (PIN) No. 10/48
April 13, 2010
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 March 17, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guyana.1
Guyana has weathered the impact of the global crisis well by regional and global standards. Newly released GDP series (re-based to 2006 prices) suggest that economic activity expanded by 3.3 percent in 2009, compared to 2 percent in 2008, largely on the back of a recovery in agriculture in the second half of the year along with continued strong gold production and robust activity in the non-tradable sector. This mitigated the adverse impact of global and weather shocks on output in early 2009. End-year inflation fell to 3.6 percent from 6.4 percent as of end-2008, reflecting the softening in world commodity prices.
In 2009, the external current account deficit narrowed, and the international reserve position strengthened significantly. The current account deficit declined by 5 percent of GDP (to 8.5 percent of GDP), largely led by a reduction in imports, particularly of fuel. This, together with strong official inflows (including concessional loans and grants, and the Fund’s Special Drawing Rights allocation) and steady short-term capital inflows by commercial banks—attracted to higher domestic interest rates—helped offset a decline in Foreign Direct Investment and raised Guyana’s gross international reserves to US$623 million by end-year (over 5 months of imports). The nominal exchange rate remained stable, and the real effective exchange rate is assessed to be broadly in equilibrium. The impact of the crisis on the financial sector has been limited so far, although expansion in private sector credit has moderated to about 6 percent in 2009 (down from nearly 22 percent in 2008), reflecting both a deceleration in private sector credit demand, as well as tighter lending standards by the banking sector.
Macroeconomic policies have remained prudent. Monetary policy tightened somewhat in 2009, supporting the decline in inflation and external stability. The fiscal deficit for the non-financial public sector declined to 3.3 percent of GDP (equivalent to 5.3 percent of old GDP) from 4.7 percent of GDP in 2008, on the back of higher-than expected revenues that supported the full execution of priority spending, including on infrastructure. Guyana’s public debt has fallen from 93.1 percent of GDP as of end-2006 to 56.8 percent of GDP in 2009, assisted by debt relief operations and fiscal consolidation efforts.
Structural reform has continued to focus on further reducing vulnerabilities and entrenching long term growth. On the financial sector, the authorities have consolidated insurance and bank supervision at the central bank, incorporated risk-based supervision, issued new guidelines on risk management and enacted the Anti-Money Laundering/Combating the Financing of Terrorism legislation and the Money Transfer Agencies Act. In the fiscal area, a modern chart of accounts for capital expenditure has been introduced into the integrated financial management system, enhancing the accounting and transparency of public investment. Efforts to further strengthen the Guyana Revenue Authority also continued, including consolidating the new functional organization, completing the rolling out of the integrated tax information system, and improvements in the filing, refund, arrears collection and audit functions. Reforms to support growth centered on modernizing the sugar sector, and on implementing the Low Carbon Development Strategy (LCDS), which could help Guyana benefit from external resources in exchange for the preservation of its rainforests in the world’s carbon credit markets—including through a model agreement signed with Norway, whose resources will allow, among others, the development of non-traditional economic sectors and the conversion of Guyana’s energy sector.
Guyana’s outlook remains positive in the near and medium term, although some important challenges remain. Growth is expected to benefit from the global recovery, the modernization of the sugar sector and the start up of investment projects, which could spur average growth to 4-5 percent in the medium term. The current account would widen somewhat in 2010 with the uptick in domestic demand and the increase in fuel prices, but would narrow gradually over time. Nonetheless, challenges remain, particularly if the upturn in world economic activity were slower than envisaged; or if oil prices were to rise more sharply than projected. Slower progress than expected with the modernization of the sugar sector could also complicate this outlook, particularly in light of the recent phasing out of the preferential sugar prices by the EU, which will increasingly expose Guyana to world-price volatility. Upside potential is related to the full implementation of the LCDS, the eventual exploitation of Guyana’s oil reserves and the sound completion of key large public-private investment projects over the next few years.
Executive Board Assessment
Executive Directors noted that Guyana has weathered the global crisis well, sustaining a solid macroeconomic performance supported by prudent policies. Directors commended the authorities’ commitment to further entrench macroeconomic stability and fiscal sustainability, while promoting long-term growth and development to improve the country’s standard of living and reduce poverty.
Directors observed that the strong fiscal consolidation in 2009 provides space for a more gradual tightening over the near term to support infrastructure investment and growth. A cautious fiscal stance remains nevertheless warranted given remaining vulnerabilities. Directors therefore supported the authorities’ commitment to maintain prudent expenditure policies and to continue implementing structural reforms aimed at safeguarding fiscal sustainability.
Directors commended the authorities’ intention to continue seeking highly concessional terms when contracting debt and to minimize fiscal risks from public investment and public-private-partnerships (PPPs), paying close attention to international best practices. They welcomed the authorities’ efforts to continue to enhance the quality of the assessment and fiscal accounting of public investment. Directors commended the authorities’ commitment to reflect any firm or contingent liabilities related to PPPs in the public debt statistics.
Directors welcomed the authorities’ efforts to achieve sustainable long-term growth, including under the Low Carbon Development Strategy. Continued modernization of the sugar sector and diversification of Guyana’s productive base are key to sustaining growth. In this context, Directors stressed the importance for the public sugar company to implement its recovery measures and ensure that the new plant at Skeldon becomes fully operational in the near term.
Directors commended the authorities’ prudent monetary policy aimed at maintaining low inflation. They noted that the exchange rate appears broadly aligned with fundamentals, and that the current exchange rate policy has served the country well. Looking forward, some Directors supported a gradual approach toward greater exchange rate flexibility, while others considered that a more detailed assessment of the advantages and disadvantages of greater exchange rate flexibility in Guyana is needed.
Directors noted that the financial system has not been directly affected by the global crisis. They welcomed ongoing efforts to further strengthen supervision and enhance the banking system’s resilience. Directors encouraged the authorities to require banks to increase provisioning, monitor asset quality, and further tighten the legislation on the exposure to large borrowers and related-party lending. They commended the recent amendment to bring insurance supervision under the purview of the central bank, and recommended gradually bringing all non-bank financial institutions under a similar regulatory perimeter.
Directors commended the continued upgrading of Guyana’s statistical capacity. They welcomed the completion of the national accounts rebasing exercise, which resulted in a significant upward revision of GDP data. Directors welcomed the authorities’ intention to review the requirements of the General Data Dissemination System (GDDS).
Directors supported the forthcoming publication of the Poverty Reduction Strategy Paper to underpin the authorities’ long-standing commitment to poverty reduction and reaching the Millennium Development Goals.
It is expected that the next Article IV consultation with Guyana will be held on the standard 12-month cycle.