## wpiea2024151-print-pdf

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---

### Executive summary — macro context and main policy challenges
- International oil companies announced in 2015 that they discovered commercially recoverable petroleum reserves of around 11 billion barrels.
- By 2030, the oil sector in Guyana is projected to account for over 80 percent of GDP, more than 40 percent of central government revenues and over 90 percent of merchandise exports.
- Present value calculations of Guyana’s oil reserves use the assumption of oil price increasing at 0.7 percent per year and a discount rate of 3 percent.
- Key near- and medium-term fiscal policy concerns:
  - Possible overheating and inflationary pressures.
  - Loss of competitiveness through real exchange rate appreciation and Dutch disease dynamics.
  - Absorptive and institutional capacity constraints.
  - Long-term fiscal and debt sustainability are not pressing under reasonable baseline scenarios, but remain important because oil is exhaustible.

### Executive summary — fiscal objectives and institutional needs
- Fiscal policy must balance:
  - Promoting and maintaining macroeconomic stability.
  - Safeguarding the sustainability of public finances.
  - Ensuring an equitable intertemporal distribution of oil wealth across generations.
  - Meeting physical infrastructure and human capital needs while respecting absorptive and institutional capacity constraints.
- Recommended institutional elements:
  - A medium-term fiscal framework (MTFF) anchored by a medium-term fiscal anchor.
  - Updated public investment management (PIM) and public financial management (PFM) frameworks to support the MTFF.
  - Strengthening PFM to enhance operational efficiency of public service delivery and improve the effectiveness of a rules-based MTFF.
  - Bolstering PIM capacity to ensure scaling up public spending yields expected growth benefits.

### Recommended fiscal path and buffers (summary)
- Staff assessment favors a more gradual decline in capital spending, moving steadily towards a zero overall fiscal balance by 2028 (instead of overall fiscal surpluses over the next few years, as implied by the PIH rule).
- Establish a precautionary stabilization buffer to mitigate large oil price shocks because:
  - Transfers from the Natural Resources Fund (NRF) to the budget cannot be drawn upon readily when shocks materialize, except in the case of a major natural disaster.
  - A precautionary buffer would help avoid procyclical fiscal responses or borrowing at highly unfavorable terms and provide time to assess permanence of shocks.

---

### Section II — Fiscal framework options: objectives and anchors
- Key policy objectives for fiscal frameworks in resource-rich countries (RRCs):
  - Ensure macro-fiscal stability and fiscal / debt sustainability.
  - Manage government revenue volatility and avoid fiscal procyclicality.
  - Scale up growth-enhancing public expenditures while accounting for absorption and institutional capacity constraints.
  - Adequate accumulation of precautionary savings as a buffer against shocks.
  - Guyana’s reserve horizon is over 41 years, informing the priority given to long-term sustainability.

- Permanent Income Hypothesis (PIH) anchor — concept and limitations:
  - PIH sets a fiscal anchor via a target for the non-resource primary balance (NRPB): sustain a constant consumption flow equivalent to the implicit return on the present value of future natural resource revenues.
  - Advantages:
    - Benchmark for an indefinitely financeable NRPB and a ‘sustainable’ level of government expenditure.
    - Helps insulate government spending from volatility when using NRPB rather than overall primary balance as anchor.
  - Criticisms / practical limitations:
    - May be too tight for low-income, capital-scarce, credit-constrained economies where current generations are poorer than future ones.
    - Calibration challenges from uncertainty about commercially viable reserves and volatile prices.
    - Price forecast dependence on current observed prices can produce sizeable revisions and lead to volatility in spending.

- Alternative anchors and Bird-in-Hand (BIH):
  - Alternatives: resource price–based rules (smooth resource revenues); expenditure growth rules (limits on nominal or real growth; limits as percent of GDP / non-resource GDP); public debt anchors (ceilings as percent of GDP or non-resource GDP); a floor on net financial assets.
  - BIH approach:
    - Invest all resource revenues in financial assets; consumption equals interest on accumulated financial wealth.
    - Advantages: highly prudent; avoids relying on uncertain future revenues.
    - Drawbacks: benefits future generations more than current; disallows borrowing to finance productive investment; may be too restrictive given development needs.

### Model simulations — data inputs and scenarios
- Data inputs:
  - Oil production projections from Liza-1 (started production in December 2019), Liza-2 (February 2022), Payara (2024), Yellowtail (2026) and Uaru (2027).
  - They do not include additional offshore fields in the Stabroek Block announced by the Exxon Group after July 2022.
  - Oil price projections and macroeconomic projections for Guyana taken from the August 2023 vintage of the IMF’s WEO.
- Five alternative scenarios simulated:
  - BIH (Bird-in-Hand).
  - Constant share of non-resource GDP (resource consumption constant share of non-resource GDP).
  - Real annuity (resource consumption constant in real terms; PIH).
  - Real annuity per capita (resource consumption constant in real per capita terms).
  - Baseline scenario (staff baseline projections until 2028, then assumes a constant NRPB in percent of non-oil GDP).
- Calibration uses an FAD template (IMF, 2021) to generate fiscal policy dynamics and trade-offs; NRPB path from “Real annuity” used to calibrate public capital expenditures and derive overall fiscal balance and public debt projections.

### Simulation results — key fiscal trajectories (PIH / “Real annuity”)
- Overall fiscal balance (after grants): deficit of 4.9% of GDP in 2023 improving to a surplus of 3.0% of GDP in 2030.
- Public capital expenditures: fall from 11.4% of GDP in 2023 to 3.4% of GDP in 2030.
- Total public debt: decline from 29% of GDP in 2023 to 15% of GDP in 2030.
- NRF accumulation: grows from close to 13.0% of GDP (almost 30.0% of non-oil GDP) to 103.0% of GDP.
- Additional PIH calibration note: PIH approach requires a steeper decline in public capital spending as a share of GDP, from 13.8 percent in 2023 to around 2.0 percent by 2030.
- Comparison across scenarios:
  - “Real annuity” and “Real annuity per capita” produce very similar results over the medium term (due to Guyana’s low population growth).
  - PIH-based approaches require significantly less fiscal consolidation than BIH and Constant share approaches.
  - Simulations show projected NRF accumulation to 103 percent of GDP by 2028 under IMF staff projections and the operational rules for the NRF approved in 2021.

### Section II — Recommendations (framework design and operational steps)
- Guiding principle:
  - Consider long-term fiscal and debt sustainability but not make it the major constraint on fiscal policy, given Guyana’s small population and moderate and falling public debt ratio (as of end-2023, at around 30 percent of GDP).
  - Under reasonable baseline scenarios, public indebtedness and fiscal or debt sustainability are not likely to be major concerns absent large and persistent shocks.
  - Short- and medium-term priorities: address overheating, absorptive and institutional capacity constraints, and ‘Dutch disease’ concerns.
- Policy architecture:
  - An expenditure growth rule limiting government spending growth in real terms or as percent of GDP—combined with a suitable fiscal anchor—could work well.
  - Expenditure growth rules alone do not ensure intergenerational equity or long-term fiscal sustainability; they need to be accompanied by an anchor.
  - Given calibration challenges for NRPB under PIH, an alternative or modified anchor is likely more appropriate.
- Operational recommendations:
  - Conduct in-depth analysis of development needs, absorptive and institutional capacity constraints, and proposed solutions to inform an expenditure rule, including:
    - Thorough assessment of infrastructure gaps and likely returns versus investing in financial assets.
    - Assessment of impact on fiscal sustainability and intergenerational distribution of oil and gas wealth.
    - In-depth study of public investment management processes (project appraisal, selection, monitoring, evaluation).
    - Analysis of absorptive capacity including cost and price dynamics in labor and product markets.
  - Adjustments to expenditure growth limits should be informed by regular analysis of absorption and institutional capacity constraints.
  - Consider a ceiling on the ratio of current to total primary spending to ensure an adequate share of additional spending goes to public investments, but only if accompanied by efforts to strengthen PIM.

---

### Section III — Role of supportive fiscal systems: findings and policy recommendations
- Major findings:
  - Supportive fiscal systems (MTFFs, PFM, FRLs and/or independent fiscal councils, SWFs) can effectively supplement a rules-based fiscal framework to ensure macroeconomic stability and long-term growth.
  - A sound PFM system, possibly combined with a FRL and/or an independent fiscal council, could enhance credibility of the fiscal rule and strengthen transparency and accountability.
  - Building political support for the MTFF and a clear communications strategy would help limit large and destabilizing changes in expenditure policies over time.
  - For Guyana specifically:
    - Strengthening PFM would enhance the growth impact of higher public spending.
    - Authorities have started to strengthen PFM with development partner support, but additional elements need strengthening.
    - Bolstering PIM capacity is critical to ensure scaling up public spending yields expected growth benefits.
    - Public procurement reforms and standardization of project preparation, selection, monitoring and implementation are key to efficiency and timeliness.

- Policy recommendations:
  - Adopt a rolling MTFF consistent with an expenditure rule to:
    - Facilitate assessment of meeting a floor on the overall fiscal balance under prudent macroeconomic assumptions.
    - Guide spending decisions and integrate transfers (including from oil revenues) with budgetary financing needs in the context of an appropriate fiscal anchor.
  - Strengthen public procurement and PIM to improve value-for-money and timeliness of public investment projects.
  - Develop a clear communications strategy to explain fiscal strategy and build political support for the MTFF.

---

### Section IV — Role of a Sovereign Wealth Fund (SWF) and Guyana’s NRF
- SWF objectives (typical macro-fiscal):
  - (i) stabilization–insulate budget and economy from volatile commodity prices;
  - (ii) savings–transfer wealth across generations or time (e.g. pension funds);
  - (iii) development–allocate resources to priority socioeconomic projects, based on appropriate MTFF and budgetary rules.
- The budget remains the main fiscal policy instrument; spending decisions of oil resources should be made within the budget framework and guided by macroeconomic and allocation mechanisms.

- Guyana’s Natural Resource Fund (NRF):
  - Established in 2019; Natural Resource Fund Act passed on January 3, 2019.
  - Act introduced a rule for withdrawing funds to facilitate gradual scaling up of oil revenue-financed public spending and transition to a sustainable spending profile.
  - Amendments in December 2021 set clear ceilings on withdrawals; schedule of transfers amended again in January 2024 to allow more rapid transfer to the budget.
  - The paper describes the 2021 rules and uses model simulation and analysis done for the 2023 Article IV consultation.

- 2021 NRF withdrawal rule (as described)
  - More specifically, the 2021 NRF rules implied that in any given year, US$500 million can be withdrawn and then a declining percentage of what remains:
    - US$500 million can be withdrawn (initial tranche)
    - 75 percent from the second five hundred million
    - 50 percent from the third five hundred million
    - 25 percent from the fourth five hundred million
    - 5 percent from the fifth five hundred million
    - 3 percent from any amounts in excess of US$2.5 billion

  - Table lines (previous year's oil revenue deposits into the Natural Resource Fund, xAmount transferred to the Budget) are preserved exactly:
    - < US$500 mnx mn
    - US$500 mn < x < US$1000 mn500 + 0.75*(x-500) mn
    - US$1000 mn < x < US$1500 mn875 + 0.5*(x-1000) mn
    - US$1500 mn < x < US$2000 mn1125 + 0.25*(x-1500) mn
    - US$2000 mn < x < US$2500 mn1250 + 0.05*(x -2000) mn
    - US$2500 mn < x 1275 + 0.03*(x-2500) mn

- Assessment of NRF vis-à-vis MTFF:
  - The NRF Act does not represent a MTFF; a MTFF is still needed.
  - A laudable feature of the 2021 (or 2024) NRF Act is that transfers to the budget are based on a clear and transparent formula easily understandable by the general public.
  - However, the Act alone is not sufficient to substitute for a MTFF, since transfers are not yet closely integrated with budgetary financing needs in the context of an appropriate medium-term fiscal anchor.

---

### Section V — Conclusions, risks, and staff recommendations
- Key conclusions:
  - Guyana’s oil production presents a momentous opportunity to boost inclusive growth and address human development and infrastructure gaps, but presents important policy challenges.
  - High volatility of oil prices makes maintaining macroeconomic stability especially challenging.
  - Fiscal policy must:
    - (i) promote and maintain macroeconomic stability;
    - (ii) safeguard the sustainability of public finances;
    - (iii) ensure an equitable intertemporal distribution of oil wealth across generations;
    - (iv) meet infrastructure and human capital needs while accounting for absorption and institutional capacity constraints.
- Risks and near-term challenges:
  - Stress tests (LIC-DSF, 2023) suggest long-term fiscal and debt sustainability do not come under risk under plausible baseline assumptions, but could be affected by large and persistent adverse shocks to real GDP growth, exports, and/or commodity prices.
  - Short- and medium-term challenges: overheating, absorptive and institutional capacity constraints, and ‘Dutch disease’ concerns (inflationary and real exchange rate pressures).
- Staff recommendations and simulation insights:
  - Adopt a comprehensive fiscal policy framework: MTFF anchored by a suitable fiscal anchor, and updated PIM and PFM frameworks.
  - Expenditure growth rules can help contain overheating and capacity constraints but must be accompanied by an appropriate fiscal anchor to ensure intergenerational equity and sustainability.
  - A modified PIH approach could be consistent with ambitious public investment plans if capital spending declines steadily as a share of non-oil GDP to avoid overheating.
  - Projected large NRF savings under PIH suggest a somewhat looser fiscal stance than strict PIH could be fiscally sustainable.
  - Staff recommends a more gradual decline in capital spending than strict modified PIH, moving steadily towards a zero overall fiscal balance by 2028.
- Further institutional reforms:
  - Introduce and anchor a Medium-Term Fiscal Framework (MTFF).
  - Strengthen Public Financial Management (PFM) and Public Investment Management (PIM) systems.
  - Consider establishing a precautionary stabilization buffer over the medium- to long-term to mitigate large oil price shocks.

*Source: wpiea2024151-print-pdf — Sections I–V (Executive Summary; Section II: Fiscal Policy Frameworks Options for Guyana; Section III: Role of Supportive Fiscal Systems; Section IV: Role of a Sovereign Wealth Fund; Section V: Concluding Remarks).*

### EXECUTIVE SUMMARY _____________________________________________________ 3

### EXECUTIVE SUMMARY

### Macro context and main policy challenges
- Guyana is growing rapidly following the start of oil production; international oil companies announced in 2015 that they discovered commercially recoverable petroleum reserves of around 11 billion barrels.
- By 2030, the oil sector in Guyana is projected to account for over 80 percent of GDP, more than 40 percent of central government revenues and over 90 percent of merchandise exports.
- Present value calculations of Guyana’s oil reserves use the assumption of oil price increasing at 0.7 percent per year and a discount rate of 3 percent (similar to the expected long-run returns to Guyana’s NRF, as per the NRF Act).
- Key near- and medium-term fiscal policy concerns:
  - Possible overheating and inflationary pressures.
  - Loss of competitiveness through real exchange rate appreciation and Dutch disease dynamics.
  - Absorptive and institutional capacity constraints.
  - Long-term fiscal and debt sustainability are not pressing under reasonable baseline scenarios, but remain important because oil is exhaustible.

### Fiscal objectives and the need for a comprehensive framework
- Fiscal policy must balance multiple objectives:
  - Promoting and maintaining macroeconomic stability.
  - Safeguarding the sustainability of public finances.
  - Ensuring an equitable intertemporal distribution of oil wealth across generations.
  - Meeting physical infrastructure and human capital needs while respecting absorptive and institutional capacity constraints.
- Recommended institutional elements:
  - A medium-term fiscal framework (MTFF) anchored by a medium-term fiscal anchor.
  - Updated public investment management (PIM) and public financial management (PFM) frameworks to support the MTFF.
  - Strengthening PFM to enhance operational efficiency of public service delivery and improve the effectiveness of a rules-based MTFF.
  - Bolstering public investment management capacity to ensure scaling up public spending yields expected growth benefits.

### Fiscal anchor options and calibration challenges
- Many resource-rich developing countries adopt a target for their non-resource primary balance (NRPB) calibrated via a modified Permanent Income Hypothesis (PIH) model.
  - The NRPB approach is useful for countries with relatively short resource reserve horizons (typically 30 years or less) and where fiscal and debt sustainability are pressing concerns.
- Practical challenges for Guyana:
  - High volatility of oil prices.
  - Considerable uncertainty about the level of commercially viable oil and gas reserves as new fields are still being discovered and explored.
  - Uncertain future global demand for oil and gas due to evolving climate policies.
- Simulations indicate:
  - A modified PIH approach can be consistent with meeting the authorities’ ambitious public investment plans over the medium term, incorporating the government’s 2023 budget and using oil price assumptions and real GDP growth projections from the August 2023 World Economic Outlook vintage.
  - Projected savings accumulation in the NRF under the 2021 NRF rules, 2023 WEO economic assumptions and a non-modified PIH imply that a somewhat looser fiscal stance than the PIH-implied path would also be fiscally sustainable.

### Recommended fiscal path and buffers
- Staff assessment favors a more gradual decline in capital spending, moving steadily towards a zero overall fiscal balance by 2028 (instead of having overall fiscal surpluses over the next few years, as implied by the PIH rule).
  - This path aims to meet urgent public spending needs while also accumulating financial and resource wealth and achieving a steady decline in the public debt-to-GDP ratio.
- Establishment of a precautionary stabilization buffer is recommended to mitigate large oil price shocks:
  - Transfers from the Natural Resources Fund (NRF) to the budget cannot be drawn upon readily when shocks materialize, except in the case of a major natural disaster.
  - A precautionary stabilization buffer would help avoid procyclical fiscal responses or borrowing at highly unfavorable terms and would provide time to assess whether shocks are permanent.

### Role of the Natural Resources Fund (NRF) and stress-testing
- Oil revenues were first transferred to the budget in 2022.
- Guyana currently has one of the lowest public debt ratios in the world.
- Stress tests using the low-income country debt sustainability framework (LIC-DSF) suggest long-term fiscal and debt sustainability could be at risk only under adverse shocks to real GDP growth, exports, and/or commodity prices.
- Projected accumulation in the NRF could provide a substantial buffer against such shocks, supporting intergenerational equity and fiscal insurance.

### Rules on expenditure growth and supportive institutions
- Expenditure growth rules can help contain overheating pressures and manage absorptive capacity constraints, particularly when scaling up public expenditures amid volatile resource revenues.
  - Expenditure growth rules alone cannot ensure fiscal sustainability or inter-generational equity; they need to be accompanied by a suitable fiscal policy anchor.
- The fiscal anchor should be designed to ensure macroeconomic stability, fiscal sustainability, inter-generational equity, and insurance against large and persistent shocks.
- Enhanced supportive PFM and PIM systems are critical to realizing the benefits of a rules-based MTFF and of scaled-up public investment.

*IMF WORKING PAPERS — A Suggested Medium-Term Fiscal Framework for Guyana, INTERNATIONAL MONETARY FUND.*

### Section II: Fiscal Policy Frameworks Options for

### Section II: Fiscal Policy Frameworks Options for Guyana

### Key policy objectives for fiscal frameworks in RRCs
- Ensure macro-fiscal stability and fiscal / debt sustainability.
- Manage government revenue volatility and avoid fiscal procyclicality.
- Scale up growth-enhancing public expenditures to address physical infrastructure and human capital needs, while taking account of absorption and institutional capacity constraints.
- Adequate accumulation of precautionary savings as a buffer against shocks.
- The reserve horizon of natural resource endowments informs the priority given to long-term fiscal sustainability; Guyana’s reserve horizon is over 41 years.

### Permanent Income Hypothesis (PIH) anchor: concept and limitations
- PIH sets a fiscal anchor via a target for the non-resource primary balance (NRPB): sustain a constant consumption flow equivalent to the implicit return on the present value of future natural resource revenues (resource wealth = present value of all future resource revenues).
- Advantages:
  - Provides a benchmark for an indefinitely financeable NRPB and a ‘sustainable’ level of government expenditure.
  - Helps insulate government spending from volatility of resource revenues when using NRPB rather than overall primary balance as an anchor.
- Criticisms and practical limitations:
  - May be too tight for low-income, capital-scarce, credit-constrained economies where current generations are poorer than future ones (justifying frontloaded public spending).
  - Calibration challenges when uncertainty about commercially viable reserves and volatile prices exist.
  - Price forecast dependence on current observed prices can produce sizeable revisions and difficulties separating temporary from permanent shocks, risking excessive spending volatility or insufficient savings.
  - PIH often leads to large revisions of expenditure paths in response to unexpected commodity price shocks.

### Alternative fiscal anchors and the Bird-in-Hand (BIH) approach
- Alternatives discussed: resource price–based rules (smooth resource revenues), expenditure growth rules (limits on nominal or real growth; limits as percent of GDP / non-resource GDP), public debt anchors (ceilings as percent of GDP or non-resource GDP), and a floor on net financial assets of the government.
- Bird-in-Hand (BIH) approach:
  - Very conservative: invest all resource revenues in financial assets; consumption from resource wealth equals interest earned on accumulated financial wealth.
  - Advantages: prudent, does not bring forward uncertain future revenues.
  - Drawbacks: benefits future generations more than current generation; disallows borrowing to finance productive investment opportunities; may be too restrictive given absorption and development needs.

### Model simulations: scenarios and data inputs
- Data inputs include oil production projections from Liza-1 (started production in December 2019), Liza-2 (February 2022), Payara (2024), Yellowtail (2026) and Uaru (2027). They do not include additional offshore fields in the Stabroek Block announced by the Exxon Group after July 2022.
- Oil price projections and macroeconomic projections for Guyana are taken from the August 2023 vintage of the IMF’s WEO.
- Five alternative scenarios simulated:
  - BIH (Bird-in-Hand).
  - Constant share of non-resource GDP (resource consumption constant share of non-resource GDP).
  - Real annuity (resource consumption constant in real terms; PIH).
  - Real annuity per capita (resource consumption constant in real per capita terms).
  - Baseline scenario (staff baseline projections until 2028, then assumes a constant NRPB in percent of non-oil GDP).
- Calibration uses an FAD template (IMF, 2021) to generate fiscal policy dynamics and trade-offs. The NRPB path from the “Real annuity” scenario is used to calibrate public capital expenditures and derive projections for overall fiscal balance and public debt.

### Simulation results: fiscal impacts and trajectories
- Under the “Real annuity” scenario (PIH):
  - Overall fiscal balance (after grants) improves from a deficit of 4.9% of GDP in 2023 to a surplus of 3.0% of GDP in 2030.
  - Public capital expenditures fall from 11.4% of GDP to 3.4% of GDP over the same period.
  - Total public debt declines from 29% of GDP in 2023 to 15% of GDP in 2030.
  - Accumulation of savings in the Natural Resource Fund (NRF) grows from close to 13.0% of GDP (almost 30.0% of non-oil GDP) to 103.0% of GDP.
- Comparison across scenarios:
  - Over the medium-term the “Real annuity” scenario produces very similar results to the “Real annuity per capita” scenario (due to Guyana’s low rate of population growth).
  - The PIH-based approaches require significantly less fiscal consolidation than the BIH and Constant share of non-resource GDP approaches.
- Additional PIH calibration noted:
  - PIH approach requires a steeper decline in public capital spending as a share of GDP, from 13.8 percent in 2023 to around 2.0 percent by 2030.
  - Simulations show projected NRF accumulation to 103 percent of GDP by 2028 under IMF staff projections and the operational rules for the NRF approved in 2021.

### Recommendations for a medium-term fiscal framework for Guyana
- Guiding principle:
  - Consider long-term fiscal and debt sustainability, but not make it the major constraint on fiscal policy, given Guyana’s small population and moderate and falling public debt ratio (as of end-2023, at around 30 percent of GDP).
  - Under reasonable baseline scenarios, public indebtedness and fiscal or debt sustainability are not likely to be major concerns absent large and persistent shocks to oil prices or oil production.
  - Short- and medium-term policy priorities: address overheating, absorptive and institutional capacity constraints, and ‘Dutch disease’ concerns (inflationary and real exchange rate pressures).
  - Stress tests (LIC-DSF framework) suggest long-term fiscal and debt sustainability could be at risk with adverse shocks to real GDP growth, exports, and/or commodity prices; but NRF accumulation is projected to be more than adequate as a buffer.
- Policy architecture:
  - An expenditure growth rule limiting government spending growth in real terms or as percent of GDP—combined with a suitable fiscal anchor—could work well for Guyana.
  - Expenditure growth rules alone do not ensure intergenerational equity or long-term fiscal sustainability; they should be accompanied by an anchor.
  - Given calibration challenges for NRPB under PIH (price volatility, reserve uncertainties, climate policy impacts on demand), an alternative or modified anchor is likely more appropriate.
- Operational recommendations:
  - Conduct an in-depth analysis of development needs, absorptive and institutional capacity constraints, and proposed solutions to inform an appropriate expenditure rule. This should include:
    - Thorough assessment of infrastructure gaps and likely returns versus investing in financial assets.
    - Assessment of the impact on fiscal sustainability and intergenerational distribution of oil and gas wealth.
    - In-depth study of public investment management processes (project appraisal, selection, monitoring, evaluation).
    - Analysis of absorptive capacity including cost and price dynamics in labor and product markets.
  - Adjustments to expenditure growth limits should be informed by regular analysis of absorption and institutional capacity constraints.
  - Consider a ceiling on the ratio of current to total primary spending to ensure an adequate share of additional spending goes to public investments, but only if accompanied by deliberate efforts to address weaknesses in public investment management.
- Recommended fiscal stance based on simulations:
  - A modified PIH approach could be consistent with meeting ambitious public investment plans over the medium term, provided capital spending declines steadily as a share of non-oil GDP to avoid overheating.
  - Projected large NRF savings under PIH suggest a somewhat looser fiscal stance than strict PIH could be fiscally sustainable.
  - Staff’s recommended path: allow high but steadily declining public capital spending and move steadily towards a zero overall fiscal balance by 2028 (instead of overall fiscal surpluses implied by strict PIH), assuming no overheating and no absorptive capacity constraints.

*Source: IMF staff calculations and analysis, Section II: Fiscal Policy Frameworks Options for Guyana.*

### Section III: Role of Supportive Fiscal Systems

### Section III: Role of Supportive Fiscal Systems

### Major findings
- Supportive fiscal systems can effectively supplement a rules-based fiscal framework to ensure macroeconomic stability and long-term economic growth.
- Key supportive institutions and systems include Medium-Term Fiscal Frameworks (MTFFs), Public Financial Management (PFM) systems, Fiscal Responsibility Laws (FRLs) and/or independent Fiscal Councils, and Sovereign Wealth Funds (SWFs).
- A sound PFM system, possibly combined with a FRL and/or an independent fiscal council, could enhance the credibility of the fiscal rule while strengthening transparency and accountability of fiscal decisions.
- Building up strong political support for the MTFF and a clear communications strategy would help to limit large and potentially destabilizing changes in expenditure policies over time.
- For Guyana specifically:
  - Strengthening PFM would enhance the growth impact of higher public spending.
  - Authorities have recently started to strengthen the PFM system, with support from development partners (e.g. the World Bank), but additional elements of PFM need strengthening.
  - Bolstering public investment management (PIM) capacity is critical to ensure that scaling up of public spending will yield expected growth benefits.
  - Public procurement plays a critical role in executing public investment projects and in determining the price, quality, and timeliness of public services.
  - Standardizing systems for preparation, selection, monitoring and implementation of public investment projects would help increase efficiency and scale up public investment effectively.

### Policy recommendations
- Adopt a rolling MTFF consistent with an expenditure rule to:
  - Facilitate assessment of the likelihood of meeting a floor on the overall fiscal balance under prudent and relevant macroeconomic, external, and policy assumptions.
  - Guide spending decisions and integrate transfers (including from oil revenues) with budgetary financing needs in the context of an appropriate and effective medium-term fiscal anchor.
- Strengthen public procurement and PIM to improve value-for-money and timeliness of public investment projects.
- Develop a clear communications strategy to explain fiscal strategy to the public and build political support for the MTFF.

---

### Section IV: Role of a Sovereign Wealth Fund

### Major findings on SWFs and objectives
- Sovereign Wealth Funds (SWFs) are widely used by resource-rich countries and should be seen as complementary policy tools, not the main fiscal policy instrument.
- Typical macro-fiscal objectives for SWFs include:
  - (i) stabilization–to insulate the budget and the economy from volatile commodity prices;
  - (ii) savings–to transfer wealth across generations or across time (e.g. pension funds);
  - (iii) development–to allocate resources to priority socioeconomic projects, based on appropriate medium-term fiscal framework and budgetary rules.
- The budget remains the main fiscal policy instrument; spending decisions of oil resources should be made within the budget framework and be guided by macroeconomic considerations and sound mechanisms to set expenditure priorities and allocate public resources.

### Guyana’s Natural Resource Fund (NRF)
- Guyana established its SWF in 2019, before oil production started.
- Guyana passed the Natural Resource Fund Act on January 3, 2019 to establish a Natural Resource Fund (NRF).
- The Act contains features required for accountability and transparency and introduced a rule for withdrawing funds to facilitate gradual scaling up of oil revenue-financed public spending, with a transition over the medium- to long-run towards a sustainable spending profile.
- Annual transfers to the budget are specified to finance capital spending, support development needs, and savings for future generations.
- Amendments to the 2019 Natural Resources Fund Act were introduced in December 2021; these amendments set clear ceilings on withdrawals of oil revenues from the NRF for budgetary spending, with a progressively smaller proportion of the previous year’s oil revenue deposits into the NRF being allowed to be transferred to the budget for public spending.
- The schedule of transfers was amended again in January 2024 to allow for a more rapid transfer of funds to the budget. In the first few years, given the oil production profile, the 2021 and 2024 rules have similar results in terms of revenue implications for the budget.
- The paper describes the 2021 rules and uses model simulation and analysis done for the 2023 Article IV consultation.

### 2021 NRF withdrawal rule (as described)
- More specifically, the 2021 NRF rules implied that in any given year, US$500 million can be withdrawn and then a declining percentage of what remains:
  - US$500 million can be withdrawn (initial tranche)
  - 75 percent from the second five hundred million
  - 50 percent from the third five hundred million
  - 25 percent from the fourth five hundred million
  - 5 percent from the fifth five hundred million
  - 3 percent from any amounts in excess of US$2.5 billion

- Table lines (previous year's oil revenue deposits into the Natural Resource Fund, xAmount transferred to the Budget) are preserved exactly:
  - < US$500 mnx mn
  - US$500 mn < x < US$1000 mn500 + 0.75*(x-500) mn
  - US$1000 mn < x < US$1500 mn875 + 0.5*(x-1000) mn
  - US$1500 mn < x < US$2000 mn1125 + 0.25*(x-1500) mn
  - US$2000 mn < x < US$2500 mn1250 + 0.05*(x -2000) mn
  - US$2500 mn < x 1275 + 0.03*(x-2500) mn

### Assessment of NRF vis-à-vis MTFF
- The NRF Act does not represent a medium-term fiscal framework, which is still needed.
- A laudable feature of the 2021 (or 2024) NRF Act is that transfers to the budget are based on a clear and transparent formula easily understandable by the general public.
- However, the Act alone is not sufficient to substitute for a MTFF, since transfers of oil revenues to the budget are not yet closely integrated with budgetary financing needs in the context of an appropriate and effective medium-term fiscal anchor.

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### Section V: Concluding Remarks

### Key conclusions
- Guyana’s oil production presents a momentous opportunity to boost inclusive growth and diversify the economy by addressing human development needs and infrastructure gaps, but also presents important policy challenges.
- High volatility of oil prices makes maintaining macroeconomic stability especially challenging in the face of external and terms-of-trade shocks.
- Fiscal policy has a crucial role to:
  - (i) promote and maintain macroeconomic stability;
  - (ii) safeguard the sustainability of public finances;
  - (iii) ensure an equitable intertemporal distribution of oil wealth across generations;
  - (iv) meet the economy’s infrastructure and human capital needs while taking into account absorption and institutional capacity constraints.

### Risks and near-term challenges
- Stress tests using the low-income country debt sustainability framework (LIC-DSF) in 2023 suggest long-term fiscal and debt sustainability do not come under risk under plausible macroeconomic assumptions in the baseline scenario, but:
  - Long-term sustainability could be affected by large and persistent adverse shocks to real GDP growth, exports, and/or commodity prices.
- Short- and medium-term policy challenges likely to be more pressing:
  - Overheating
  - Absorptive and institutional capacity constraints
  - ‘Dutch disease’ concerns through inflationary pressures and real exchange rate misalignment

### Staff recommendations and simulation results
- IMF staff recommended during the 2023 Article IV consultation the adoption of a comprehensive fiscal policy framework to guide spending decisions, based on a MTFF and updated PIM and PFM frameworks.
- Expenditure growth rules can help contain overheating pressures and capacity constraints, but:
  - Expenditure growth rules by themselves do not ensure intergenerational equity or long-term fiscal sustainability and should be accompanied by a suitable fiscal anchor.
- Staff simulations show:
  - A modified PIH approach could be consistent with meeting the authorities’ ambitious public investment plans over the medium term, provided there is a steady and significant decline in capital spending as a share of non-oil GDP over time.
  - Calibrating a path for the NRPB for Guyana consistent with a PIH approach that is relatively stable over time faces considerable practical and operational challenges because:
    - Oil prices are highly volatile.
    - There is considerable uncertainty about the level of Guyana’s commercially viable oil and gas reserves.
    - Future global demand for oil and gas is uncertain due to evolving climate-change policies.
  - Projected large savings accumulation in the NRF suggest a somewhat looser fiscal policy stance than that implied by a modified PIH approach would also be fiscally sustainable.
- Staff recommends a more gradual decline in capital spending than implied by a strict modified PIH approach, consistent with moving steadily towards a zero overall fiscal balance by 2028 (instead of overall fiscal surpluses over the next few years, as implied by the PIH rule).

### Further institutional reforms
- Introduce and anchor a Medium-Term Fiscal Framework (MTFF).
- Strengthen Public Financial Management (PFM) and Public Investment Management (PIM) systems.
- Consider establishing a precautionary stabilization buffer over the medium- to long-term to mitigate large oil price shocks.

*Source: wpiea2024151-print-pdf - Section III: Role of Supportive Fiscal Systems*

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024151-print-pdf.pdf_