## _cr14294 ## Source details **Canonical URL:** [_cr14294](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14294.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14294.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14294.pdf.json) --- ### Authorities' Response to Past IMF Policy Recommendations — Background and Recent Developments - Seven consecutive years of solid growth driven by agriculture and extractive industries; per capita GDP is the lowest in the English-speaking Caribbean. - Economy concentrated in six commodities—sugar, gold, bauxite, shrimp, timber, and rice—representing nearly 60% of GDP and highly exposed to weather and commodity price swings. - Historical public debt trajectory: - Total public debt of 186 percent of GDP at HIPC completion point at end-2003. - IDB canceled nearly US$470 million (21 percent of GDP) in March 2007. - Debt-to-GDP ratio brought down to 65 percent by 2009. - Since PRGF completion in 2006, authorities’ policies broadly in line with Fund advice; Fund TA on VAT, public financial management and statistics considered useful. - Macro developments (2012–2013): - Real GDP projected to grow by around 4.8 percent in 2013 (same as 2012). - Inflation projected to remain low at around 3.5 percent by year-end 2013. - Current account deficit: widened to 9.3 percent of GDP in H1 2013 vs. 8.4 percent a year earlier; expected to widen to 16.8 percent of GDP in 2013 from 13.3 percent in 2012. - Overall balance projected to be a deficit of 3 percent of GDP. - Gross international reserves projected at 3.6 months of imports in 2013 compared to 4.2 months in 2012. - FY2012 overall fiscal deficit: 4.5 percent of GDP. - Public enterprises returned a surplus of 1.3 percent of GDP in FY2012 compared to a deficit of 0.6 percent a year earlier. - Financial soundness indicators (2009–2013Q2 series): - Capital to risk-adjusted assets: 18.3, 18.9, 19.1, 19.3, 20.8, 20.1 - NPLs to total loans: 8.3, 6.5, 5.4, 8.4, 5.7, 5.4 - Provision for loan loss to NPLs: 53.8, 63.2, 79.5, 51.8, 79.3, 79.1 - Return on assets: 2.7, 2.5, 2.6, 2.4, 2.4, 2.7 - Return on equity: 26.6, 24.0, 24.8, 23.1, 22.5, 24.4 - Liquid assets to total assets: 30.9, 30.0, 31.1, 31.5, 28.4, 32.4 - Related party loans to total loans: 4.5, 4.0, 2.9, 3.7, 3.9, 3.7 - Top 20 borrowers to total loans: 35.5, 23.1, 16.9, 17.1, 17.2, 17.4 - Monetary and exchange rate: - Twelve-month broad money growth: about 13 percent in 2012, moderated to about 9 percent as of May 2013. - Private credit growth: 15.3 percent (annual) in May 2013. - Benchmark 91-day T-bill rate: 1.2 percent as of July 2013 (negative in real terms for some years). - REER appreciated about 20 percent since 2008 despite nominal depreciation vs. US dollar. ### Outlook, Risks, and Policy Objectives - Outlook: - Medium-term growth expected to average around 4.4 percent over next five years, supported by AFHP construction and private mining investments. - Large external current account deficit expected to be mostly financed by mining-related FDI inflows. - Upside risks: - Sales of climate services, LCDS projects including hydropower, large private sector oil and mining projects. - Downside risks: - Deteriorating terms of trade (particularly gold), slowing global economy, financing constraints, sharp increase in oil prices, and rapid credit growth with rising house prices. - Policy objective: balance fiscal prudence to maintain debt sustainability with expanded public investment to remove infrastructure bottlenecks and reduce poverty. ### Policy discussions and Fund staff advice - Pursue fiscal consolidation to ensure debt sustainability and rebuild buffers. - Mitigate risks to price and financial stability. - Enhance medium-term sustainable growth while preserving poverty reduction and labor market gains. - Build fiscal and external reserve buffers against shocks identified in the Risk Assessment Matrix. ### Authorities’ fiscal stance and targets - Authorities’ medium-term objective: - Gradually reduce the NFPS deficit to 3.5 percent of GDP by 2018. - Bring public debt to about 60 percent of GDP by 2018. - Planned measures: reduce expenditures on wages, goods and services, and transfers as a share of GDP. - Authorities cautious: concerned that faster consolidation could jeopardize developmental achievements; intend to keep current energy pricing policy unchanged and move to cost recovery once AFHP is in operation. --- ### Policy Framework to Contain Fiscal Risks and Protect Debt Sustainability - Rationale: strong medium-term policy framework needed to safeguard debt sustainability and enhance fiscal and external buffers. - Parliamentary actions on AFHP: - Parliament imposed expenditure cuts on 2013 budget of about 4 percent of GDP due to insufficient information to assess AFHP viability. - Parliament delayed approval of increase in ceiling on government guarantees and amendments to hydro-electric power bill; Sithe Global withdrew from AFHP. - Given previous court ruling overturning expenditure cuts in 2012, fiscal outlays for 2013 expected to be in line with that ruling. - Staff revised 2013 budget estimates: - NFPS deficit: 5.2 percent of GDP. - Primary deficit: 3.9 percent of GDP. - Revised budget incorporates increase in central government non-grant revenue of 0.9 percent of GDP vs. the 2012 outturn (largely higher VAT and excise receipts). - Transfers cut by 0.7 percent of GDP; central government capital expenditure projected to rise by 0.4 percent of GDP. - Public enterprises projected to return a deficit of 0.4 percent of GDP in 2013 compared to a surplus of 1.3 percent in prior year. - NFPS fiscal deficit expected to improve to 3.5 percent of GDP by 2018. - Fiscal consolidation recommended: - Staff view: gradual but slightly more front-loaded effort to lower overall fiscal deficit to about 2.0–3.0 percent of GDP over the medium term, consistent with a primary deficit of about 1.0–2.0 percent of GDP. - Achieving primary deficit target would place debt-to-GDP on a declining path reaching 55 percent by 2018. - Maintain current tax revenues at around 21 percent of GDP while reducing transfers and containing wage and other current spending to provide fiscal space of about 1.2 percent of GDP annually on average in 2014–2018. - Sustain capital expenditure at 10.7 percent of GDP on average over 2014–2018. --- ### SOEs, Electricity Sector, and Subsidy Reform - Staff recommendations: - Ensure financial viability of public enterprises; strengthen GPL’s operational and administrative capacity and distribution network. - Reform electricity tariffs to streamline subsidies and transfers to public enterprises and replace them with a more targeted social safety net. - Key figures: - Current average cost of electricity generation: about 19 U.S. cents/kWh. - Projected average cost with AFHP in first year: 11 U.S. cents. - Projected average cost over 20 year PPA term: 9 U.S. cents. - Expected generation cost once company transferred to GPL after 20 years: less than 2 U.S. cents/kWh. - Fiscal cost reduction on completion of AFHP through elimination of subsidies to GPL: US$30 million in 2012 (accounts for about 25 percent of end user tariffs). - Fuel excise taxes have varied between 7–60 percent for gasoline and 0–40 percent for diesel; no VAT on petroleum products; kerosene is not taxed. --- ### National Insurance Scheme (NIS) Reforms - 2012 actuarial review recommended urgent parametric reforms; NIS ran its first deficit in 2011. - Funded position: fund expected to be exhausted in less than 10 years if measures not taken immediately (within 1–2 years) and sustained. - Recommended measures: increase contribution rate and pension age; raise insurable earnings ceiling; freeze pension increases; revise pension accrual rates; update prudential investment framework. - Actions: NIS contribution rates increased in 2013; public consultations ongoing; NIS established a debt unit and working with Guyana Revenue Authority to recover unpaid contributions. --- ### AFHP (Amaila Falls Hydropower Project) — Costs, Scenarios, and Contingent Liabilities - Projected cost and illustrative financing: - Estimated cost: US$858 million (about 30 percent of 2012 GDP). - Illustrative financing: Sithe Global US$157 million; China Development Bank (CDB) loan US$500.8 million; IDB loan US$100 million; government equity US$100 million. - Sithe Global’s participation uncertain; might reengage if all political parties in Parliament supported the project. - Staff baseline scenario (Sithe reengages, short delay, full implementation): - During construction, real GDP growth could be higher by projected 1.0–1.5 percent of GDP per year. - External current account deficit over construction projected to be higher on average by about 4.5 percent of GDP, lowering reserve coverage by about 0.2 months of imports on average. - Worst case (project does not go ahead): - Government’s direct liability limited to equity contribution of US$100 million (3.5 percent of 2012 GDP). - Government would continue subsidies (0.1 percent of GDP) to support GPL through 2018. - Draft contract with 20-year PPA guaranteed by government: - Contingent fiscal liabilities of guarantees could amount to US$122 million (3 percent of projected 2018 GDP) annually during first 12 years after construction period (end-2018). - GPL could save in excess of this amount on fuel and other generation costs. - Government committed to invest US$90 million in GPL for capital expenses and US$15.3 million to cover company’s operating costs over 2013–2017. - Staff recommendations on AFHP: - Continue engagement with multilateral partners. - Strengthen GPL finances and operations. - Strengthen project and debt management framework; adopt international best practices in PPP management; use TA to design legal, accounting, and fiscal risk management frameworks. --- ### Debt Sustainability, External Sector, and Reserves - Risk of debt distress: remains moderate; debt service manageable reflecting high concessionality of borrowing. - DSA highlights: - NPV of external debt to GDP stabilizes at 26 percent over the medium term. - Debt service projected to decline to less than 5 percent of revenue. - Stress tests show vulnerability to shocks: primary balance and growth, and contingent liabilities from AFHP. - Current account projections (incl. official transfers) — percent of GDP: - 2009: -9.1; 2010: -9.6; 2011: -13.1; 2012: -13.3; 2013: -16.8; 2014: -15.1; 2015: -16.9; 2016: -21.7; 2017: -20.6; 2018: -15.2 - Gross international reserves (US$ millions) and months of imports: - Reserves (US$ millions): 627.5 (2009), 780.0 (2010), 798.1 (2011), 862.2 (2012), 728.4 (2013), 767.7 (2014) - Months of imports: 5.0 (2009), 5.2 (2010), 4.3 (2011), 4.2 (2012), 3.6 (2013), 3.8 (2014) - Risk-weighted reserve metrics: - First risk-weighted measure: reserves 168 percent in 2012 (above adequacy upper bound 100–150 percent), expected to decline to 128 percent by 2018. - SIDS-adjusted measure: 109 percent in 2012, projected decline to 98 percent by 2018. - IMF 2011 Optimal Reserve Metric for LICs: optimal reserves 4.2 months of imports; projected decline to 3.7 months on average during AFHP construction. - Balance of payments headline (US$ millions): - Current account balance (incl. official transfers): -183.9 (2009), -217.2 (2010), -336.7 (2011), -378.5 (2012), -499.3 (2013), -475.0 (2014) - FDI, net: 164.0 (2009), 198.0 (2010), 246.8 (2011), 293.7 (2012), 285.3 (2013), 320.2 (2014) - Imports (c.i.f.): 1,179.5 (2009), 1,419.1 (2010), 1,770.6 (2011), 1,996.7 (2012), 1,920.6 (2013), 1,886.6 (2014) - Exports (f.o.b.): 768.0 (2009), 885.0 (2010), 1,128.9 (2011), 1,396.4 (2012), 1,283.6 (2013), 1,259.7 (2014) - Oil price assumption (US$/b): 61.8 (2009), 79.0 (2010), 104.0 (2011), 105.0 (2012), 104.5 (2013), 101.3 (2014) --- ### AFHP Scenario Tables — Baseline and Active Scenarios (selected projections in percent of GDP or stated units) - Baseline Scenario highlights (2012–2018 series where shown): - Real GDP growth (percent): 4.8, 4.8, 4.3, 4.2, 4.8, 4.3, 4.2 - Inflation, end of period (percent): 3.4, 3.5, 4.3, 4.3, 4.5, 4.3, 3.8 - Revenue and grants: 25.8, 24.8, 26.5, 27.9, 26.3, 26.3, 24.4 - Expenditure: 30.3, 30.0, 31.7, 32.6, 30.7, 30.2, 27.9 - Primary balance: -3.3, -3.9, -4.0, -3.5, -3.2, -2.9, -2.6 - Overall balance after grants: -4.5, -5.2, -5.2, -4.7, -4.3, -3.9, -3.5 - Total public sector gross debt: 64.3, 63.9, 64.6, 64.7, 64.1, 63.3, 60.1 - Current account balance: -13.3, -16.8, -15.1, -16.9, -21.7, -20.6, -15.2 - Gross official reserves (months of imports): 4.2, 3.6, 3.8, 3.7, 3.5, 3.6, 3.9 - Memorandum: Nominal GDP (US$ million): 2,851, 2,970, 3,142, 3,351, 3,582, 3,822, 4,061 - Active Scenario highlights (2012–2018 series where shown): - Real GDP growth (percent): 4.8, 4.8, 4.0, 3.9, 4.8, 4.7, 4.6 - Inflation, end of period (percent): 3.4, 3.5, 3.7, 4.3, 3.9, 4.1, 3.7 - Primary balance: -3.3, -3.9, -3.3, -2.5, -2.0, -1.4, -1.0 - Overall balance after grants: -4.5, -5.2, -4.5, -3.8, -3.1, -2.5, -2.0 - Total public sector gross debt: 64.3, 63.9, 63.7, 62.1, 59.8, 56.8, 54.8 - Current account balance: -13.3, -16.8, -14.8, -14.8, -19.4, -18.3, -13.2 - Gross official reserves (months of imports): 4.2, 3.6, 3.6, 3.7, 3.6, 3.8, 4.2 - Memorandum: Nominal GDP (US$ million): 2,851, 2,970, 3,142, 3,341, 3,565, 3,811, 4,062 - Active Scenario policy mix: fiscal consolidation and monetary tightening over 2014–2018 targeting a primary deficit of 1–2 percent of GDP and reducing inflation to 3.7 percent by 2018. --- ### Financial Sector Soundness, Supervision, and AML/CFT - Financial structure and concentration: - Three foreign banks and three local banks account for about 65 percent of financial sector assets. - New Building Society (NBS) accounts for about 8 percent of financial sector assets and almost a third of non-bank financial institutions’ assets. - Indicators and risks: - NPLs between 5 and 6 percent over last three years; temporary rise to 8.35 at end-2012 due to loan classification delays. - Banks hold net long FX positions (46 percent of capital and reserves as of June 2013). - Loan concentration and maturity mismatch risks exist; high liquidity mitigates some risks. - Supervisory enhancements: - Insurance companies and NBS brought under central bank supervision since 2006 FSAP. - On-site comprehensive inspections conducted every two years; credit, liquidity and FX stress tests quarterly. - Staff advises more frequent comprehensive on-site inspections for larger institutions and improved coordination of supervision for insurers and banks in same groups. - Authorities intend to bring credit unions under Bank of Guyana supervision. - AML/CFT: - CFATF identified significant strategic AML/CFT deficiencies in 2011 assessment. - Amendment bill introduced but passage delayed; CFATF may call for counter measures if insufficient progress by November 2013. - Some banks reported loss of correspondent accounts and a slowdown in foreign transactions due to delays. --- ### Financial Development, Structural Reforms, and Inclusive Growth - Development and challenges: - Loans-to-deposits ratio remains below peers despite rapid credit growth; savers face very low nominal deposit rates; mutual funds not available. - Judicial process for collateral recovery and land title registration can take up to 8 months; staff recommends speeding up these processes. - Credit bureau expected to be fully operational early next year. - Poverty and labor: - Poverty reduced from 43 percent in 1999 to 35 percent in 2006. - Underemployment and informality prevalent due to skills mismatch; labor force participation low. - Authorities promoting vocational training, skill training, and on-the-job training. - Policy priorities: sustain high growth with less volatility (infrastructure, productivity, resilience), and promote inclusive growth (targeted social safety nets, MDG monitoring). - Sectoral investment focus: increase productivity in agriculture and mining; reorient energy policy and reduce cost of doing business. --- ### Data, Statistical Issues, and Reporting - Data broadly adequate for surveillance but timeliness, reliability, and coverage can be improved. - GDDS subscription since early 2011; authorities committed to reviewing dissemination schedule. - National Accounts: GDP rebased to 2006 prices (increase >60% vs. 1988 base); new HIES and CPI series launched. - Balance of payments: BOG does not report IIP due to capacity constraints. - Reporting to STA: no data reported for GFS Yearbook or IFS as of reporting. - Table of Common Indicators Required for Surveillance: various latest observation dates preserved in source (e.g., Exchange Rates 30/09/13; CPI 08/13; Government finance 2012 Q4). --- ### Multilateral Lending, Portfolio, and CDB Relations - Strategy priorities: sustainable energy, natural resources management, private sector development, public sector management, transport, citizen security, water and sanitation. - One SG PBL loan expected: GY-L1039 — Environment Sector Strengthening-I (US$16.9 million). - TC and grant pipeline: six TCs totaling US$8.93 million; investment grants including GY-G1003 US$5 million and GY-G1004 US$5.5 million. - Active portfolio as of reporting: fourteen loans approved US$272.2 million and one loan guarantee US$2.5 million; undisbursed balance US$135.7 million. - Net flow projections and historical disbursements (US$ million): - Loan Disbursements: 60.2 (2010), 51.6 (2011), 51.4 (2012), 44.9 (2013p), 57.7 (2014p) - Net Loan Flow (a-b): 58.9, 49.6, 48.9, 40.6, 52.4 - Net Cash Flow (c-d-e): 54.4, 44.7, 43.2, 34.4, 45.9 - Guyana’s total outstanding debt to the IDB: US$426.7 million as of 13 September 2013. - CDB relations (as of September 30, 2013): - CDB loans/grants approved to Guyana since inception: $296.6 million. - Of $215.4 million in loans approved since 1970, outstanding balances totalled $139.9 million; undisbursed balances $40.5 million. - In 2012–13 one loan approved: Fourth Road Project — US$34.2 million (approved December 2012). --- ### Staff Appraisal and Executive Board Recommendations (selected) - Macroeconomic outlook positive for 2013 and medium term despite political uncertainty. - Recommended priorities: - Pursue prudent fiscal consolidation anchored in medium-term framework to safeguard debt sustainability and rebuild buffers. - Advance SOE reforms, streamline subsidies, and replace universal subsidies with targeted social assistance. - Ensure AFHP remains financially and economically viable; strengthen PPP and debt management frameworks. - Adopt a modestly tighter monetary stance and maintain exchange rate flexibility. - Maintain financial sector vigilance: more frequent on-site inspections, integrated supervision, and address AML/CFT deficiencies by November 2013. - Continue efforts to lower energy costs, address skills mismatches, and improve business environment. - Improve timeliness and frequency of data dissemination. --- *Source: IMF staff report excerpt — "1. Authorities' Response to Past IMF Policy Recommendations" and related chapters from the provided PDF excerpt.* ### 1. Authorities' Response to Past IMF Policy Recommendations __________________________________ 20 ### 1. Authorities' Response to Past IMF Policy Recommendations ### Background - Guyana experienced seven consecutive years of solid growth driven by agriculture and extractive industries. - Per capita GDP is the lowest in the English-speaking Caribbean; debt burden, though low by Caribbean standards, remains elevated. - Economy depends on six commodities—sugar, gold, bauxite, shrimp, timber, and rice—which represent nearly 60% of GDP and are highly susceptible to weather and commodity price fluctuations. - Historical public debt: - Total public debt of 186 percent of GDP at HIPC completion point at end-2003. - IDB canceled nearly US$470 million (21 percent of GDP) in March 2007. - Debt-to-GDP ratio brought down to 65 percent by 2009. - Since PRGF completion in 2006, authorities’ policies broadly in line with Fund advice; Fund TA projects on VAT implementation, public financial management and statistics were useful. - Fund recommended further fiscal consolidation to reduce debt and rebuild policy buffers; authorities prioritize pace of consolidation consistent with reducing infrastructure deficit and addressing unmet social needs. ### Recent Developments (2012–2013) - Macroeconomic drivers in 2012: high commodity prices, FDI, and domestic credit expansion. - Real sector and prices: - Real GDP projected to grow by around 4.8 percent in 2013 (same as 2012). - Inflation projected to remain low at around 3.5 percent by year-end 2013. - External sector: - Current account deficit widened to 9.3 percent of GDP in H1 2013 compared with 8.4 percent of GDP in same period last year. - Current account deficit expected to widen to 16.8 percent of GDP in 2013 from 13.3 percent in 2012. - Drivers: larger trade deficit from higher fuel imports, lower commodity exports (mainly falling gold prices), and lower remittances. - Financial account surplus projected to increase due to larger disbursements for public investment program and resilient FDI. - Overall balance projected to be a deficit of 3 percent of GDP. - Gross international reserves projected at 3.6 months of imports in 2013 compared to 4.2 months in 2012. - Fiscal sector: - FY2012 overall fiscal deficit: 4.5 percent of GDP (broadly in line with 2011). - Central government revenues net of grants declined by 0.8 percent of GDP in nominal terms despite 7 percent nominal growth. - Non-interest current expenditures rose by 1 percent of GDP due to higher transfers to electricity and sugar companies. - Capital expenditures rose by 0.2 percent of GDP. - Public enterprises returned a surplus of 1.3 percent of GDP in FY2012 compared to a deficit of 0.6 percent a year earlier. - Financial sector: - Banking system appears well-capitalized, profitable and liquid. - Key financial soundness indicators (2009–2013Q2): - Capital to risk-adjusted assets: 18.3, 18.9, 19.1, 19.3, 20.8, 20.1 - NPLs to total loans: 8.3, 6.5, 5.4, 8.4, 5.7, 5.4 - Provision for loan loss to NPLs: 53.8, 63.2, 79.5, 51.8, 79.3, 79.1 - Return on assets: 2.7, 2.5, 2.6, 2.4, 2.4, 2.7 - Return on equity: 26.6, 24.0, 24.8, 23.1, 22.5, 24.4 - Liquid assets to total assets: 30.9, 30.0, 31.1, 31.5, 28.4, 32.4 - Related party loans to total loans: 4.5, 4.0, 2.9, 3.7, 3.9, 3.7 - Top 20 borrowers to total loans: 35.5, 23.1, 16.9, 17.1, 17.2, 17.4 - Monetary policy: - Monetary policy accommodative but tightened somewhat in first 5 months of 2013. - Twelve-month broad money growth: about 13 percent in 2012, moderated to about 9 percent as of May 2013. - Private credit growth: 15.3 percent (annual) in May 2013. - Liquidity ratio (liquid to total assets): 32.4 percent as of June 2013. - Benchmark 91-day T-bill rate declined to 1.2 percent as of July 2013; already negative in real terms for some years. - Banks did not fully pass lower interest rates to lending rates, widening net interest margins. - Exchange rate policy: - Real effective exchange rate appreciated about 20 percent since 2008. - Appreciation occurred despite depreciation relative to the US dollar; reflects US dollar movements and higher inflation in Guyana relative to major trading partners. - Pace of depreciation relative to the US dollar moderated recently despite balance of payments deficit and loss of reserves. - Bank of Guyana intervened in 2012 to smooth exchange rate and price volatility. - Social sector: - GDP per capita increasing. - Gini (national average) declined from 0.44 to 0.35 between 1992 and 2006. - Steady progress on Millennium Development Goals. ### Outlook and Risks - Outlook: - Macroeconomic outlook generally positive for 2013 and medium term. - Political context: president’s party does not control Parliament, requiring lengthier legislative approval. - Medium-term growth expected to average around 4.4 percent over next five years, supported by AFHP construction and private mining investments, despite political uncertainty. - Large external current account deficit expected to be mostly financed by mining-related FDI inflows. - Upside risks: - Sales of climate services leveraging vast rainforests. - Projects under Low Carbon Development Strategy (LCDS), including hydropower to lower energy costs. - Large private sector projects in oil and mining. - Downside risks: - Deteriorating terms of trade (particularly gold) and slowing global economy could reduce export volumes and remittances, widening current account deficit. - Financing constraints could exacerbate downside risks if investment projects, portfolio inflows and official transfers do not materialize. - Sharp increase in oil prices could widen external current account deficit and cause fiscal slippages, particularly from state-owned electricity company (GPL). - Rapid credit growth and rising house prices warrant vigilance to mitigate potential financial stability risks. ### Policy Discussions - Policy objective: balance fiscal prudence to maintain debt sustainability with need for expanded public investment to remove infrastructure bottlenecks and reduce poverty. - NFPS fiscal deficit remains relatively large despite seven years of solid growth; public debt around 65 percent of GDP since HIPC relief. - Authorities advancing LCDS investments, including AFHP, to reduce exposure to oil price shocks; AFHP implementation as PPP poses potential fiscal risks via sovereign guarantees. - Fund discussions focused on: - Pursuing fiscal consolidation to ensure debt sustainability. - Mitigating risks to price and financial stability. - Enhancing medium-term sustainable growth while preserving gains in poverty reduction and labor market outcomes. - Building fiscal and external reserve buffers against shocks identified in Risk Assessment Matrix. ### A. Policy Framework to Contain Fiscal Risks and Protect Debt Sustainability - Rationale: strong medium-term policy framework needed to safeguard debt sustainability and enhance fiscal and external buffers. - Fiscal policy context: Guyana weathered global financial crisis relatively well; macroeconomic policy buffers broadly maintained. - Parliamentary actions and AFHP: - Parliament imposed expenditure cuts on 2013 budget due to insufficient information to assess AFHP viability; cuts about 4 percent of GDP. - Parliament delayed approval of increase in ceiling on government guarantees and amendments to hydro-electric power bill; Sithe Global withdrew from AFHP. - Given previous court ruling overturning expenditure cuts in 2012, fiscal outlays for 2013 expected to be in line with that ruling. - Revised 2013 budget estimates (staff): - NFPS deficit: 5.2 percent of GDP. - Primary deficit: 3.9 percent of GDP. - Revised budget incorporates increase in central government non-grant revenue of 0.9 percent of GDP vis-à-vis the 2012 outturn (largely higher VAT and excise receipts). - Notable cut in transfers: 0.7 percent of GDP. - Central government capital expenditure projected to rise by 0.4 percent of GDP. - Public wage bill as percent of GDP broadly stable. - Public enterprises projected to return a deficit of 0.4 percent of GDP in 2013 compared to a surplus of 1.3 percent in prior year. - NFPS fiscal deficit expected to improve to 3.5 percent of GDP by 2018. - Risks from AFHP delays: - Delays increase costs and risks, postpone development opportunities. - Failure to complete financing could jeopardize access to GRIF funds envisaged to finance US$80 million of government’s equity share. - Negotiating new funding could result in less favorable terms. - Staff recommended continued engagement with Parliament and stakeholders; staff assumes fiscal effects of AFHP shifted two years into future to 2015–18. - Fiscal consolidation recommendations: - Given reduced fiscal space, medium-term risks, and robust external growth, a more ambitious consolidation warranted. - Staff view: gradual but slightly more front-loaded effort to lower overall fiscal deficit to about 2.0–3.0 percent of GDP over the medium term, consistent with a primary deficit of about 1.0–2.0 percent of GDP. - Achieving primary deficit target would place debt-to-GDP on a firmly declining path reaching 55 percent by 2018 and preserve moderate risk of debt distress. - Emphasis on strengthened medium-term policy framework anchored on public debt ratio to provide cushion against external shocks and for countercyclical policy. - Maintaining current tax revenues (around 21 percent of GDP), while reducing transfers and containing expenditures on central government wages and other goods and services, would provide fiscal space of about 1.2 percent of GDP annually on average in 2014–2018. - This would help sustain capital expenditure at 10.7 percent of GDP on average over 2014–2018 to address infrastructure needs and bolster social safety nets. *Source: IMF staff report excerpt — "1. Authorities' Response to Past IMF Policy Recommendations" (page 20 onward).* ### 11. Advancing far reaching reforms at the SOEs is key to stemming the drag on public ### 11. Advancing far reaching reforms at the SOEs is key to stemming the drag on public finances ### SOE performance, electricity sector, and subsidy reform - Staff recommends: - Ensuring financial viability of public enterprises, including further strengthening of GPL’s operational and administrative capacity and distribution network. - Reforming electricity tariffs to streamline subsidies and transfers to public enterprises and replacing them with a more targeted social safety net to address the needs of the most vulnerable. - Key figures and observations: - Current average cost of electricity generation: about 19 U.S. cents/kWh. - Projected average cost with AFHP in first year of operation: 11 U.S. cents. - Projected average cost over the 20 year PPA term: 9 U.S. cents. - Expected generation cost once company is transferred to GPL after 20 years: less than 2 U.S. cents/kWh. - Fiscal cost reduction on completion of AFHP through elimination of subsidies to GPL: US$30 million in 2012 (currently accounts for about 25 percent of end user tariffs). - Current fuel pricing regime: limited pass-through of international prices via adjustment of ad valorem excise tax rates; excise taxes have varied between 7–60 percent for gasoline and 0–40 percent for diesel. There is no VAT on petroleum products; kerosene is not taxed. ### National Insurance Scheme (NIS) reforms - Situation and risks: - 2012 actuarial review recommended urgent parametric reforms to restore NIS financial viability. - In 2011 the scheme experienced its first deficit. - The fund is expected to be exhausted in less than 10 years if specific measures are not taken immediately (within 1–2 years) and sustained over the medium term. - Recommended urgent measures from the actuarial review include: - Increasing the contribution rate and pension age. - Raising the insurable earnings ceiling. - Freezing pension increases. - Revising pension accrual rates. - Updating the prudential investment framework. - Actions taken and planned: - NIS contribution rates were increased in 2013. - Public consultations are ongoing for implementation of other measures. - Authorities have raised vigilance on review of benefit expenditures and implemented measures to reduce fraud. - NIS has established a debt unit and is working with the Guyana Revenue Authority to recover unpaid contributions. ### Authorities’ fiscal stance and targets - Authorities’ medium-term objective: - Gradually reduce the NFPS deficit to 3.5 percent of GDP by 2018. - Bring public debt to about 60 percent of GDP over the same period. - Planned measures to achieve targets: - Reducing expenditures on wages, goods and services, and transfers as a share of GDP. - Authorities’ view: - Determined to preserve fiscal sustainability but concerned that faster fiscal consolidation could jeopardize developmental achievements. - Intend to keep current energy pricing policy unchanged and move to cost recovery once AFHP is in operation. ### Fiscal risks, debt, and AFHP project scenarios - AFHP (Amaila Falls Hydropower Project) overview: - Projected to reduce GPL subsidies and generation costs substantially when operational. - Implementation as a PPP intended to limit public sector borrowing and encourage private investment. - Project cost and financing (as presented): - Estimated cost: US$858 million (about 30 percent of 2012 GDP). - Expected financing (illustrative): Sithe Global US$157 million; China Development Bank (CDB) loan US$500.8 million; IDB loan US$100 million; government equity US$100 million. - Sithe Global’s participation uncertain; Sithe Global has indicated it would reengage if all political parties in Parliament supported the project. - Scenarios and contingent liabilities: - Staff baseline: Sithe Global could reengage and AFHP would experience a short delay but is fully implemented. - During construction phase, real GDP growth could be higher by projected 1.0–1.5 percent of GDP per year. - External current account deficit over construction period projected to be higher on average by about 4.5 percent of GDP, resulting in lower reserve coverage by about 0.2 months of imports on average. - Worst case (project does not go ahead): - Government’s direct liability limited to its contribution to the project in the form of equity amounting to US$100 million (3.5 percent of 2012 GDP). - Government would continue spending on subsidies (0.1 percent of GDP) to support GPL’s operations through 2018. - Under the draft contract with a 20-year PPA guaranteed by the government: - Contingent fiscal liabilities of the guarantees for the PPA could amount to US$122 million (3 percent of projected 2018 GDP) annually during the first 12 years after the construction period (end-2018). - GPL could save in excess of this amount on fuel and other power generation costs. - Project-related public financing for GPL: - Government committed to invest US$90 million in GPL for capital expenses and US$15.3 million to cover company’s operating costs over 2013–2017. ### Staff recommendations on AFHP and PPP risk management - Continue engagement with multilateral partners to ensure a viable and successful AFHP. - Strengthen finances and operations of GPL to enable it to handle responsibilities under the project. - Strengthen project and debt management framework given PPP risks and sovereign guarantees. - Adopt international best practices in PPP management and utilize technical assistance to design legal, accounting, and fiscal risk management frameworks. ### Debt sustainability and fiscal risk assessment - Key debt indicators and stress-test findings: - Guyana’s indicators of the risk of debt distress remain comfortably under the relevant thresholds. - DSA suggests NPV of external debt to GDP stabilizes at 26 percent of GDP over the medium term. - Debt service projected to decline to less than 5 percent of revenue. - Stress tests highlight vulnerability of public debt to standard shocks, including primary balance and growth, and contingent liabilities from AFHP. - Goods-for-debt exchange: - Staff and authorities agreed that the goods-for-debt exchange has had a beneficial impact on the debt while stimulating agricultural production. ### Monetary policy, exchange rate flexibility, and reserve management - Current monetary framework: - Bank of Guyana targets monetary aggregates consistent with output and inflation objectives. - Principal tool: treasury bill auctions determined weekly by the Open Market Operation Committee (OMOC). - Other instruments: reserve requirements, rediscount rate, and moral suasion. - Staff view on monetary stance: - Monetary policy should be tightened to safeguard financial stability and stem appreciation of the REER. - Reasons to tighten: negative real T-bill rates, high liquidity, continued high credit growth, closure of the output gap. - Abundant liquidity has impaired monetary policy effectiveness and encouraged potentially risky bank investments in CARICOM sovereign instruments (within prudential exposure limits). - Exchange rate policy: - Staff stressed need for greater exchange rate flexibility to absorb permanent shocks from volatile commodity prices, while smoothing temporary volatility due to high pass-through to domestic prices. - Policy mix recommended: fiscal consolidation, moderate monetary tightening, structural reforms (enhance supply of skilled labor, improve business climate) to curb inflationary pressures, boost competitiveness, contain external current account deficit, and reduce real effective exchange rate appreciation. - Reserve policy: - In view of projected widening current account deficits and uncertainty about external financing, authorities need to implement a policy mix that safeguards international reserves and contains inflationary pressures. ### Financial sector soundness and supervision - Financial sector structure and concentration: - Three foreign banks and three local banks account for about 65 percent of financial sector assets. - New Building Society (NBS) accounts for about 8 percent of financial sector assets and almost a third of non-bank financial institutions’ assets. - Other non-bank institutions include two trust companies, six finance companies (including two micro-credit lenders), two asset management companies, a moderately sized insurance sector, and many small credit unions. - Central bank supervises commercial banks and majority of non-bank financial institutions; credit unions supervised by Ministry of Labor (data on credit unions not currently available). - Indicators of financial stability and risks: - Overall banking system appears well-capitalized, profitable and liquid. - NPLs have remained between 5 and 6 percent over the last three years. - Temporary increase in NPLs at end-2012 to 8.35 from 5.40 a year earlier (related to delays in loan classification at one bank; Bank of Guyana investigating). - Provisioning for bad loans at comfortable levels. - Loan concentration remains high due to limited number of large borrowers. - Maturity mismatch risk from short-term deposit funding mitigated by high liquidity but warrants monitoring. - Foreign exchange exposure: banks in aggregate carry net long positions in foreign exchange (46 percent of capital and reserves as of June 2013), so plausible negative exchange rate shocks may improve banks’ aggregate position. - Interest rate risks mitigated by banks’ ability to adjust rates on existing loans. - Supervisory enhancements and recommendations: - Progress welcomed: insurance companies and NBS brought under central bank supervision since 2006 FSAP. - On-site comprehensive inspections conducted every two years; credit, liquidity and foreign exchange stress tests conducted quarterly. - Financial soundness data and individual institution indicators made available on Bank of Guyana’s website. - Staff advises more frequent comprehensive on-site inspections for larger institutions. - Improved coordination of supervision for insurers and banks in same business groups recommended. - Staff welcomed authorities’ intention to bring credit unions under the supervisory authority of the Bank of Guyana. *IMF staff summary based on the content of chapter 11 of the provided document.* ### 31. Enhancing financial development while safeguarding financial stability remains a ### Enhancing financial development while safeguarding financial stability remains a challenge ### Financial sector development and stability - Banks maintain high levels of liquidity; the ratio of loans to deposits remains below the level in comparable countries despite rapid credit growth in recent years. - Savers face very low nominal interest rates on deposits; other savings products, such as mutual funds, are not available. - Staff recommendations and developments: - Speed up the judicial process of collateral recovery and title registration at the land registry, which can take up to 8 months, according to the financial sector. - Establishment of a credit bureau welcomed; expected to be fully operational early next year. - Historical data point: - In 2004, aggregate credit union assets were 0.8 percent of GDP. ### AML/CFT deficiencies and risks to financial intermediation - The Caribbean Financial Action Task Force (CFATF) identified significant strategic AML/CFT deficiencies in Guyana in its 2011 assessment report. - Government action and delays: - An amendment bill was introduced in Parliament to tackle legislative deficiencies; passage delayed at the request of the opposition for further deliberations. - CFATF timeline and consequences: - In case of insufficient progress by November 2013, CFATF will call upon its members to consider implementing counter measures and will consider referring Guyana to the Financial Action Task Force International Cooperation Review Group (FATF ICRG). - Staff urged authorities and Parliament to press ahead with addressing AML/CFT deficiencies by November 2013. - Reported impacts: - Some banks already reported losing correspondent accounts at major foreign institutions and a slowdown in foreign transactions due to delay in enacting the AML/CFT amendment bill. ### Authorities’ actions and supervisory developments - Post-2006 FSAP measures: - Insurance companies and the NBS brought under the central bank’s supervision. - Expanded staff in the supervision department; introduced a risk-based supervisory framework. - Conducted stress tests of commercial banks on a quarterly basis. - A credit bureau is a key recommendation expected to be fully operational early next year. - On AML/CFT, authorities stated necessary reforms are in place and the outstanding issue is passage of the amendment bill in Parliament. ### Agenda for supporting sustainable growth and poverty reduction - Authorities’ two policy priorities: - (a) Sustain high growth rates with less volatility by tackling infrastructure gaps, raising productivity, and increasing resilience to external shocks. - (b) Promote more inclusive growth, better monitoring of MDGs, and targeting of social safety nets. - Progress and challenges: - Poverty rate reduced from 43 percent in 1999 to 35 percent in 2006 (latest available data from UNDP). - Growth uneven geographically; need to diversify economy to spread benefits to underprivileged areas, such as the hinterland. - Labor market and skills: - Strong positive link between unemployment and poverty; underemployment and informal employment prevalent due to skills mismatch. - Labor force participation remains low; Guyana ranks 47 out of 144 countries in the World Economic Forum’s wage flexibility index, the best performer in the Caribbean. - Authorities’ initiatives: vocational training in secondary schools, skill training programs, on-the-job training, and social programs encouraging labor force participation. - Sectoral investment and fiscal headroom: - Staff support for investments to increase productivity in agriculture and mining. - Transfers to public enterprises averaged 5.6 percent of GDP in 2008–12; advancing reforms and reducing these transfers would create fiscal headroom for targeted social safety nets and SME support. - Recent announcements of large investments in extractive industries suggest major potential to diversify the economy and create jobs; authorities intend to develop an appropriate framework to manage associated sovereign wealth should reserves be proven. ### Structural reforms and business environment - To boost job creation, authorities should: - Improve the business climate and reduce the cost of doing business, especially energy. - Improve labor productivity via investment in human capital, healthcare, and technical and vocational education and training. - Address regulatory shortcomings to enhance flexibility and strengthen the legal framework for reforms. - Authorities project growth in agriculture via expansion in rice production and stabilization of sugar production; improvements in the Skeldon sugar factory expected to boost exports and domestic sales. ### Data dissemination and statistics - While data is broadly adequate for surveillance, improvements needed in periodicity and timeliness of key macroeconomic variables. - Authorities subscribed to the IMF’s GDDS in early 2011 but acknowledged long lags in dissemination and committed to reviewing the data dissemination schedule to increase frequency and timeliness and reduce lags. ### Staff appraisal: macro outlook and policy recommendations - Macroeconomic outlook: - Guyana’s outlook remains positive for 2013 and the medium term despite political uncertainty. - Over the medium term, FDI-financed projects in mining and infrastructure investments, including construction of the AFHP, should sustain growth above trend. - Fiscal policy and debt sustainability: - Continued fiscal consolidation within a strengthened medium-term policy framework required to safeguard debt sustainability and bolster fiscal and external reserve buffers. - Specific medium-term targets and impacts: - Gradually lowering the overall fiscal deficit to about 2.0–3.0 percent of GDP over the medium term would help bolster buffers and provide fiscal space for capital expenditure. - This would help reduce the debt-to-GDP ratio to around 55 percent by 2018 and preserve Guyana’s ranking of moderate risk of debt distress. - To contain the NFPS deficit, advance far reaching reforms of SOEs, streamline subsidies and transfers to public enterprises, and replace them with a more targeted social safety net. - AFHP and contingent liabilities: - Staff urged use of implementation delay to ensure AFHP remains financially and economically viable to avoid exposing the budget to undue risks and future debt distress. - Recommended strengthening project and debt management framework and adopting international best practices in PPP management to manage contingent fiscal liability risks. - Monetary and exchange rate policy: - Flexible exchange rate regime remains appropriate. - Continue a policy mix to safeguard international reserves and contain inflationary pressures: fiscal consolidation, moderate monetary tightening, structural reforms, and nominal exchange rate flexibility. - Financial sector vigilance: - Risks contained but warrant vigilance given several years of rapid credit growth. - Recommendations: - More frequent comprehensive on-site inspections for larger institutions. - Improve coordination of supervision of insurers and banks that are part of the same business group. - Press ahead with addressing AML/CFT deficiencies by November 2013 to avoid potential impairment of the financial system. - Poverty reduction and inclusiveness: - Sustaining poverty reduction and inclusive growth remains a high priority. - Suggested measures include lowering the cost of energy, reorienting training to match needed skills, and structural measures to lower the cost of doing business and improve the business environment. - Data dissemination: - Build on GDDS subscription through more timely dissemination of economic information; staff welcomed authorities’ commitment to review the data dissemination schedule. - Other specific recommendations and procedural notes: - Staff recommends that the next Article IV consultation with Guyana be held on the standard 12-month cycle. ### Boxed external stability assessment highlights - Real effective exchange rate (REER) developments: - REER appreciated about 20 percent since 2008, notwithstanding nominal depreciation relative to the US dollar. - CGER-type analysis suggests the Guyanese REER is close to its equilibrium level, but some depreciation is necessary to contain projected widening current account deficit and build buffers. - External sustainability (ES) approach: REER is 7.4 percent above the level that would stabilize the net foreign asset (NFA) position at its 2012 level (-107 percent of GDP). *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 12.5 percent of GDP over the medium-term is lower than its norm level of 10.8 percent of GDP, ### _cr14294 - 12.5 percent of GDP over the medium-term is lower than its norm level of 10.8 percent of GDP, ### Current account norm, drivers, and real exchange rate assessment - Current account norm estimated using a set of indicators via the generalized method of moments (GMM). - Main determinants of Guyana’s current account norm: the oil balance, the NFA position, the fiscal balance, and the terms-of-trade. - Projection: the current account deficit will gradually decrease over time—initially widening due to the AFHP project and higher imports of intermediate goods, accompanied by an increase in FDI inflows, before declining once the investment projects are completed. - Policy actions to contain widening current account deficit: some depreciation in the real effective exchange rate, coupled with fiscal consolidation and monetary tightening, to help stem import growth and boost export competitiveness. - CGER table entries (In percent of GDP, unless otherwise indicated): - Equilibrium external current account (CA) 1/: -10.8 -9.4 - Underlying CA balance 2/: -12.5 -12.5 - CA elasticity to REER 3/: -0.4 -0.4 - Implied REER adjustment (in percent, "+" appreciation) 4.1 7.4 - Notes from table: - 1/ Equilibrium external current account corresponds to a CA level that is consistent with a specific set of economic fundamentals. - 2/ External current account in 2018, excluding AFHP-related imports. - 3/ Elasticity computed using long-run REER elasticities for imports (0.92) and exports (-0.71) and Guyana’s exports and imports (percent of GDP). ### Reserves adequacy and risk-weighted metrics - Traditional reserves metrics indicate reserves remain above comfortable adequacy threshold in the medium term. - Current coverage (based on traditional metrics): above adequacy benchmark using three months of imports, 20 percent of broad money, and full cover of short-term debt for a year. - New risk-weighted measures (for small countries) point to a projected shortfall of reserves over the medium-term: - First risk-weighted measure: reserves stood at 168 percent in 2012 (above adequacy upper bound of 100–150 percent), expected to decline to 128 percent by 2018. - Second (SIDS-adjusted) measure: current ratio 109 percent in 2012 (above upper benchmark), projected decline to 98 percent by 2018 (slightly below the upper bound). - IMF 2011 Optimal Reserve Metric for Low Income Countries: optimal level of reserves is 4.2 months of imports (adequate coverage in 2012); projected decline to 3.7 months of imports on average during AFHP construction, temporarily below adequate coverage. - Risk implication: projected widening of the current account deficit and vulnerability of external financing sources mean declining international reserves could pose a risk to Guyana’s external stability. ### External debt sustainability and vulnerability - External DSA indicates risks to external stability remain moderate and debt service manageable. - Debt indicators remain well below respective thresholds over projection period in baseline scenario. - PV of external debt-to-GDP ratio: increases moderately over next 3 years due to large external borrowing in medium term, before declining and leveling off at around 27 percent. - Sensitivity analysis and bound tests: high vulnerability of debt to shocks in case of new loans on less favorable terms and one-time 30 percent depreciation. - Debt service projections: remain manageable reflecting high concessionality of public borrowing, remaining at 6 percent and 9 percent of exports and government revenue, respectively. ### Medium-term external sector projections and key figures - Current account (incl. official transfers), in percent of GDP (memorandum items / Table 7 projections): - 2009: -9.1 - 2010: -9.6 - 2011: -13.1 - 2012: -13.3 - 2013: -16.8 - 2014: -15.1 - 2015: -16.9 - 2016: -21.7 - 2017: -20.6 - 2018: -15.2 - Gross international reserves (US$ millions) and months of imports (Table 2 / Table 7): - Gross international reserves (US$ millions): 627.5 (2009), 780.0 (2010), 798.1 (2011), 862.2 (2012), 728.4 (2013), 767.7 (2014) - Gross official reserves in months of imports: 5.0 (2009), 5.2 (2010), 4.3 (2011), 4.2 (2012), 3.6 (2013), 3.8 (2014) - Excluding AFHP, months of imports: 5.2, 4.3, 4.2, 3.6, 3.8, 3.7 (period alignment per table) - Balance of payments headline (Table 2 projections, US$ millions): - Current account balance (incl. official transfers): -183.9 (2009), -217.2 (2010), -336.7 (2011), -378.5 (2012), -499.3 (2013), -475.0 (2014) - Current account (excl. official transfers): -230.9 (2009), -247.4 (2010), -372.5 (2011), -415.0 (2012), -539.8 (2013), -535.0 (2014) - FDI, net (US$ millions): 164.0 (2009), 198.0 (2010), 246.8 (2011), 293.7 (2012), 285.3 (2013), 320.2 (2014) - Imports (c.i.f.) (US$ millions): 1,179.5 (2009), 1,419.1 (2010), 1,770.6 (2011), 1,996.7 (2012), 1,920.6 (2013), 1,886.6 (2014) - Exports (f.o.b.) (US$ millions): 768.0 (2009), 885.0 (2010), 1,128.9 (2011), 1,396.4 (2012), 1,283.6 (2013), 1,259.7 (2014) - Oil price assumption (US$/b): 61.8 (2009), 79.0 (2010), 104.0 (2011), 105.0 (2012), 104.5 (2013), 101.3 (2014) ### Fiscal implications and recommended policy stance - Fiscal consolidation and monetary tightening are recommended to: - Help contain the pace of import growth. - Boost export competitiveness. - Contain a widening current account deficit associated with AFHP-related imports and large investment projects. - Fiscal outlook and risks (selected figures from Nonfinancial Public Sector tables): - Overall balance after grants (percent of GDP): -3.4 (2009), -3.5 (2010), -4.4 (2011), -4.5 (2012), -5.2 (2013), -5.2 (2014) - Total public sector gross debt (end of period, percent of GDP): 64.8 (2009), 65.2 (2010), 65.1 (2011), 64.3 (2012), 63.9 (2013), 64.6 (2014) - A more ambitious fiscal consolidation strategy is warranted to create fiscal space and put public debt on a declining trajectory. - Identified downside fiscal risks: shortfalls in sugar production and weakening performance of sugar, electricity sectors and national insurance scheme that could increase public sector debt. *Source: IMF staff estimates and projections as presented in the cited report.* ### 1. Delay or ### 1. Delay or termination of the Amaila Falls Hydroelectric Project ### Risk description - Medium: The ongoing uncertainty with concluding financial arrangements for the Amaila Falls Hydro-Project could delay the start or cause termination of the project before it comes into operation, and failure to adequately improve the administrative and technical readiness of GPL for increased power load. - High (impact potential in scenario analysis): Delay in the start of the AFHP would entail lower growth, tax receipts, and investment, and likely external instability due to lower capital inflows. ### Fiscal and contingent liability implications - Contingent fiscal liabilities associated with the power purchase agreement: 3 percent of GDP annually during the first 12 years after the construction period. - If AFHP is terminated during construction phase, government’s direct liability would be limited to its contribution into equity: 3.5 percent of GDP. - Offsetting factors noted: contingent liabilities could be offset by fuel imports and other power generating costs. ### Policy recommendations - Strengthen the finances and operations of GPL to enable the company to adequately handle its responsibilities under the AFHP. - Ensure the project is economically and financially viable before proceeding. - Strengthen the project and debt management framework to handle potential risks of contingent fiscal liabilities. - Build fiscal buffers. ### Key related macro-framework projections (In percent of GDP, unless otherwise indicated) Baseline Scenario (2012 2013 2014 2015 2016 2017 2018) - Real GDP growth (percent): 4.8 4.8 4.3 4.2 4.8 4.3 4.2 - Inflation, end of period (percent): 3.4 3.5 4.3 4.3 4.5 4.3 3.8 - Revenue and grants: 25.8 24.8 26.5 27.9 26.3 26.3 24.4 - Expenditure: 30.3 30.0 31.7 32.6 30.7 30.2 27.9 - Primary balance: -3.3 -3.9 -4.0 -3.5 -3.2 -2.9 -2.6 - Overall balance after grants: -4.5 -5.2 -5.2 -4.7 -4.3 -3.9 -3.5 - Of which: AFHP: -0.7 0.0 0.0 -4.1 -1.4 -1.4 0.0 - Overall balance after grants (excl. AFHP): -3.8 -5.2 -5.2 -0.6 -2.9 -2.6 -3.5 - Total public sector gross debt: 64.3 63.9 64.6 64.7 64.1 63.3 60.1 - Credit to the private sector (percent change): 20.1 13.8 13.6 16.3 19.8 18.6 15.9 - Current account balance 1/: -13.3 -16.8 -15.1 -16.9 -21.7 -20.6 -15.2 - Of which: AFHP: 0.0 0.0 0.0 -5.2 -6.5 -5.3 -1.2 - Current account balance (excl. AFHP) 1/: -13.3 -16.8 -15.1 -11.7 -15.2 -15.3 -14.0 - Gross official reserves (months of imports): 4.2 3.6 3.8 3.7 3.5 3.6 3.9 - Gross official reserves (months of imports) (excl. AFHP): 4.2 3.6 3.8 3.7 3.8 3.8 4.0 - Memorandum item: Nominal GDP at market prices (US$ million): 2,851 2,970 3,142 3,351 3,582 3,822 4,061 Active Scenario (2012 2013 2014 2015 2016 2017 2018) - Real GDP growth (percent): 4.8 4.8 4.0 3.9 4.8 4.7 4.6 - Inflation, end of period (percent): 3.4 3.5 3.7 4.3 3.9 4.1 3.7 - Revenue and grants: 25.8 24.8 26.5 27.9 26.4 26.3 24.4 - Expenditure: 30.3 30.0 31.0 31.7 29.4 28.8 26.3 - Primary balance: -3.3 -3.9 -3.3 -2.5 -2.0 -1.4 -1.0 - Overall balance after grants: -4.5 -5.2 -4.5 -3.8 -3.1 -2.5 -2.0 - Of which: AFHP: -0.7 0.0 0.0 -4.1 -1.4 -1.4 0.0 - Overall balance after grants (excl. AFHP): -3.8 -5.2 -4.5 0.3 -1.6 -1.1 -2.0 - Total public sector gross debt: 64.3 63.9 63.7 62.1 59.8 56.8 54.8 - Credit to the private sector (percent change): 20.1 13.8 10.9 12.7 20.4 20.2 20.1 - Current account balance 1/: -13.3 -16.8 -14.8 -14.8 -19.4 -18.3 -13.2 - Of which: AFHP: 0.0 0.0 0.0 -5.2 -6.5 -5.3 -1.2 - Current account balance (excl. AFHP) 1/: -13.3 -16.8 -14.8 -9.7 -13.0 -13.1 -12.0 - Gross official reserves (months of imports): 4.2 3.6 3.6 3.7 3.6 3.8 4.2 - Gross official reserves (months of imports) (excl. AFHP): 4.2 3.6 3.6 3.7 3.9 4.1 4.4 - Memorandum item: Nominal GDP at market prices (US$ million): 2,851 2,970 3,142 3,341 3,565 3,811 4,062 1/ Including official transfers. ### Scenario implications and implementation note - The Active Scenario assumes fiscal consolidation and tightening of monetary stance over 2014–2018, targeting a primary deficit of 1–2 percent of GDP by reducing current expenditure, and monetary tightening to reduce credit growth and inflation to 3.7 percent by 2018. This policy mix is intended to reduce imports, improve export competitiveness, reduce the current account deficit, and allow accumulation of international reserves. GDP growth is expected to decline marginally as large infrastructure investments and increased exports partly offset fiscal and monetary tightening. *Source: IMF staff report content provided in the source content unit.* ### 2016. The Strategy supports the priority areas of: sustainable energy, natural resources ### _cr14294 - 2016. The Strategy supports the priority areas of: sustainable energy, natural resources ### Strategy priorities and planned operations - The Strategy supports the priority areas of: sustainable energy, natural resources management, private sector development and public sector management as well as the strategic dialogue areas of transport, citizen security and water and sanitation. - One SG PBL loan is expected to be approved: GY-L1039 - Environment Sector Strengthening-I (US$16.9 million) in the natural resources management sector of the CS. ### Lending program (2013) — loans and amounts - GY-L1039: Environment Sector Strengthening - I — 16.9 (US$ million) - Total 2013 — 16.9 (US$ million) ### Technical Cooperation (TC) and Investment Grants aligned with CS - Six TCs expected to be approved for a total of US$8.93 million. - Public Sector Management: - GY-T1101: Support for Management for Development Results — US$1.1 million - Natural Resources Management: - GY-T1097: Forest Carbon Partnership Facility (FCPF) in Guyana — US$3.8 million - GY-T1106: Supporting Technical Training in Extractive Industries — US$0.43 million - Strategic Dialogue areas: - Transport: GY-T1098: Guyana-Brazil Land Transport Link and Deep Water Port — US$1.5 million - Water and Sanitation: GY-T1090: Support for Preparation of Water Supply and Sanitation Infrastructure — US$0.5 million - Citizen Security: GY-T1107: Support to the Preparation of the Security Strategy — US$1.6 million - Investment Grant program: - GY-G1003: Micro and Small Enterprise development — US$5 million (GRIF funded, approved 27 February 2013) - GY-G1004: Sustainable Energy Program for Guyana — US$5.5 million (GEF funded, approved 12 July 2013) ### Portfolio in execution (summary as of reporting) - Active portfolio: fourteen loans for an approved amount of US$272.2 million and one loan guarantee for US$2.5 million, with a total undisbursed balance of US$135.7 million. - By the end of 2013, three loans are expected to exit: - GY-L1019: Justice Sector Program — US$10 million - GY-0071: Citizen Security Program — US$19.8 million - GY-L1008: Transport Infrastructure — US$24.3 million ### Portfolio indicators (as of 13 September 2013) - Loans in Execution — Number: 14 - Undisbursed balance (US$ million): 133.2 - % Undisbursed balance of total loan portfolio: 51.0 - Median age of portfolio (years): 4.2 - Performance Index (No. of loans- 14): - Problem (0-0.4): 1 - Alert(0.4-.0.8): 3 - Satisfactory(>0.8): 6 - Outliers: N/A - MIF in Execution — Number: 3 - MIF in Execution — Undisbursed balance (US$ million): 1.24 - TC and Investment Grants in Execution — Guyana TCs — Number: 12 - TC and Investment Grants in Execution — Undisbursed balance (US$ million): 5.19 - Investment Grants (Number): 3 - Investment Grants Undisbursed balance (US$ million): 13.1 ### Net flows and projections (Net Flow Convertible Currencies as at 13 September 2013, US$ Million) - 2010, 2011, 2012, 2013p, 2014p columns shown in source. Key rows: - a. Loan Disbursements: 60.2, 51.6, 51.4, 44.9, 57.7 - PBL Disbursements: 10, 13, 9.9, 16.9, 0 - b. Repayments (principal): 1.3, 2, 2.5, 4.3, 5.3 - c. Net Loan Flow (a-b): 58.9, 49.6, 48.9, 40.6, 52.4 - d. Subscriptions & Contributions: 0.4, 0.4, 0.5, 0, 0 - e. Interests & Charges: 4, 4.5, 5.2, 6.2, 6.5 - f. Net Cash Flow (c-d-e): 54.4, 44.7, 43.2, 34.4, 45.9 - Notes in text: - Net loan flows are projected to continue to be positive in 2013, accounted for by the high level of disbursement (absorptive capacity of GoG). - In 2012, actual disbursements were US$51.4 million, while US$44.9 million is projected to be disbursed in 2013. - Net cash flow, while remaining positive is expected to fall quickly over the medium term. - As of 13 September 2013, Guyana’s total outstanding debt to the IDB is US$426.7 million. ### Projects in execution (selected entries as of Sept 13, 2013; US$ million) - Summary totals: - Total Loans 14 — Current Approved: 272.2; Disbursed: 139.0; % Disbursed: 51%; Undisbursed: 133.2 - Guarantee Solid Waste Management — 2.5 (undisbursed 2.5) - Total Loans plus Loan Guarantee 15 — 274.7; Disbursed: 139.0; 51%; Undisbursed: 135.7 - Selected project lines: - GY0055 Georgetown Solid Waste Management — Approval Date: 3-May-06; Current Approved: 18.1; Disbursed: 11.5; % Disbursed: 63.6; Undisbursed: 6.6 - GY-L1009 Justice Administration System — 21-Jun-06; 10; 9.2; 91.5; 0.9 - GY-L1006 Support for Competitiveness — 28-Jun-06; 8.7; 5.3; 61.1; 3.4 - GY-0071 Citizen Security — 28-Jun-06; 19.8; 18.1; 91.2; 1.7 - GY-L1008 Transport Infrastructure Rehabilitation Program — 21-Nov-06; 24.3; 21.5; 88.3; 2.9 - GY-L1007 Agricultural Export Diversification Program — 5-Dec-07; 20.9; 14.7; 70.2; 6.2 - GY-L1019 Second Low Income Settlement Program — 17-Dec-08; 27.9; 22.6; 80.8; 5.4 - GY-L1027 Road Improvement and Rehabilitation — 28-Oct-09; 24.8; 11.8; 47.7; 13.0 - GY-L1028 Expansion of Basic Nutrition Program — 11-Dec-09; 5; 1.9; 37.1; 3.1 - GY-L1025 Georgetown Sanitation Improvement Program — 27-Oct-10; 9.5; 5.8; 60.6; 3.8 - GY-L1030 EBD 4 Lane Extension Providence-Diamond — 17-Nov-10; 20; 8.6; 43; 11.4 - GY-L1036 Linden Water Supply Rehab. Program — 15-Jun-11; 12; 6.5; 53.8; 5.6 - GY-L1037 Sustainable Oper. Of the Electricity Sector & Improved Quality of Service — 7-Sep-11; 5; 1.8; 36.4; 3.2 - GY-L1031 Road Network Upgrade & Expansion Program — 21-Jun-12; 66.2; 0.0; 0; 66.2 ### Relations with the Caribbean Development Bank (CDB) (As of September 30, 2013) - CDB accounts for over 20% of Guyana’s multilateral debt stock. - Total loans and grants approved for Guyana from CDB’s inception (January 26, 1970) to September 30, 2013 amounted to $296.6 million, representing 7.6 percent of CDB’s total approvals for its 18 borrowing members, making Guyana CDB’s fifth largest borrower. - Allocation of the $296.6 million approved: - $158.7 million (53.5%) toward economic and social infrastructure projects - $82.8 million (27.9%) for productive sector projects - $55.1 million (18.6%) for multi-sector projects - Subsector breakdown examples: - Transportation and communication subsector accounted for $101.4 million of lending for economic and social infrastructure - Agriculture/rural and manufacturing projects accounted for $64.3 million of productive sector lending - Of $215.4 million in loans approved for Guyana since 1970, outstanding balances totalled $139.9 million as of September 30, 2013; undisbursed balances remained $40.5 million as of that date. - Summary Statement of Loan Approvals and Undisbursed Balances, September 30, 2013 (In US$ million): - May 12, 2003 Third Road Project — Approved: 19.10; Undisbursed: 0.72 - July 17, 2003 Skeldon Sugar Modernisation — Approved: 28.36; Undisbursed: 0.95 - December 10, 2008 Enhancement of TVET — Approved: 7.50; Undisbursed: 0.55 - July 22, 2010 Community Roads Improvement Programme — Approved: 16.29; Undisbursed: 4.07 - December 12, 2012 Fourth Road Project — Approved: 34.20; Undisbursed: 34.18 - Total — Approved: 105.45; Undisbursed: 40.47 - In 2012–13 only one loan was approved for Guyana: West Coast Demerara Road Improvement (Fourth Road Project) — US$34.2 million (approved December 2012), with additional $0.2 million grant; other grant funding in 2012–13 totaled around $6.4 million for BNTF 7 and a small CTCS workshop. - Approval activity is anticipated to pick up from the end of 2013 given the pipeline of projects in the 2013–17 CSP with Guyana. ### Statistical issues (As of October 31, 2013) - General: Data provided to the Fund is broadly adequate for surveillance purposes, although timeliness, reliability, and coverage of selected data can be improved. Selected data are only available during missions and by telephone/email contacts by the staff. - National Accounts: - GDP rebased with 2006 prices, reflecting more than sixty percent increase compared to the old GDP based on 1988 prices. - BOS adopted a new household income and expenditure survey (HIES) since January 2010 and launched a new CPI series; CPI reflects movements in prices in the Georgetown area. - Government finance statistics: - Progress implementing GFS mission recommendations (May 2005), including compilation of quarterly data for the National Insurance Scheme (NIS) and five non-financial public enterprises; progress toward GFSM 2001 methodology continuing. - Monetary statistics: - Monetary statistics include the BOG, other depositary corporations, and other financial corporations; BOG publishes financial prudential indicators in its quarterly report and on its website. - Balance of payments: - Weaknesses noted in 2003 (CARTAC) including recording of external debt arrears and identification of financial account transactions; BOG does not report the international investment position (IIP) due to capacity constraints. - Data Standards and Quality: - Participant in the General Data Dissemination System (GDDS) since 2011. - Reporting to STA: - No data are being reported for publication in the Government Finance Statistics Yearbook or in the IFS. - Table of Common Indicators Required for Surveillance (As of October 31, 2013) — sample entries preserve dates and frequencies exactly as reported in source: - Exchange Rates — Date of Latest Observation: 30/09/13; Date Received: 31/10/13; Frequency: D; Frequency of Reporting: D; Frequency of Publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of Latest Observation: 12/12; Date Received: 04/13; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M - Reserve/Base Money — 04/13; 09/13; M; M; M - Broad Money — 04/13; 09/13; M; M; M - Consumer Price Index — 08/13; 09/13; M; Half yearly; Half yearly - Revenue, Expenditure, Balance and Composition of Financing – General Government — 2012 Q4; 09/13; Q; Half yearly; Half yearly - GDP/GNP — 2012; 09/13; A; A; A - International Investment Position — N/A; N/A; N/A; N/A; N/A ### Debt Sustainability Analysis (DSA) and background - Updated DSA yields results broadly in line with those reported in the 2012 Article IV. Guyana’s risk of debt distress remains moderate and debt service manageable, but further fiscal consolidation is needed to reduce the vulnerability of debt sustainability to shocks. - Debt indicators remain well below their respective thresholds over the projection period in the baseline scenario. - The PV of external debt-to-GDP ratio increases moderately over the next 3 years, before declining and leveling off at around 27 percent. - Sensitivity analysis and bound tests show high vulnerability of Guyana’s debt to shocks in the case of new loans on less favorable terms and/or a one-time 30 percent depreciation. - Risks noted: - Large PPP project: Amaila Falls Hydroelectric Project (AFHP) - Possibility that Venezuela may renegotiate the terms of its Petrocaribe loans to finance Guyana’s oil imports on less concessional terms - Policy advice from DSA: - Authorities should advance their fiscal consolidation efforts - Continue investing in infrastructure and education to address the economy’s bottlenecks and boost growth and productivity Background fiscal and debt context (selected figures) - Total public sector debt declined from 93.1 percent of GDP in 2006 to 64.3 percent in 2012. - Under MDRI, the Fund, the World Bank, and the IDB provided debt relief amounting to US$611 million in 2006–07. - Debt in question with other non-Paris Club creditors amounts to around 15 percent of total debt or 7 percent of GDP. - NFPS deficit declined from 8.6 percent of GDP in 2005 to 4.4 percent of GDP in 2011. - Total gross public debt increased slightly over last four years: debt-to-GDP ratio increased from 61.6 percent of GDP in 2008 to 64.3 percent in 2012. - External debt increased from 43.7 percent of GDP in 2008 to 47.7 percent of GDP in 2012; domestic debt declined from 17.9 percent of GDP in 2008 to 16.6 percent of GDP in 2012. - Multilateral institutions (IDB, CDB, IDA) account for 50 percent of total debt; bilateral creditors account for 49 percent, with China and Venezuela as main creditors. - The loan portfolio has a long maturity profile and low average interest rates. *Prepared by the staff of the International Monetary Fund in consultation with the World Bank staff. November 21, 2013* ### 3. Over the years, Venezuela has become an important donor through Petrocaribe’s ### _cr14294 - 3. Over the years, Venezuela has become an important donor through Petrocaribe’s ### Petrocaribe and external financing - Venezuela has provided concessional loans through Petrocaribe to finance Guyana’s oil imports. - Large disbursements under Petrocaribe are deposited in an account at the Central Bank of Guyana as a ‘sinking fund’, which on a net debt basis: - Has a smaller impact on debt vulnerabilities. - Increases gross reserves available to service external debt. - Guyana has initiated repayment of its Petrocaribe debt using rice exports and accumulated savings under the financing arrangement. ### External debt thresholds and policy rating - Guyana’s three-year average CPIA = 3.4, corresponding to a medium policy performance rating. - Associated external debt thresholds for a medium policy performance rating: - PV of debt-to-GDP ratio = 40 percent - PV of debt-to-exports ratio = 150 percent - PV of debt-to-revenue ratio = 250 percent - Debt service-to-exports ratio = 20 percent - Debt service-to-revenue ratio = 20 percent ### Macroeconomic background and projections - Real GDP growth: - 2012: 4.8 percent - Projected 2013: 4.8 percent - Medium-term average (2013–2018): 4.4 percent - Long-term (2019–2033) convergence to about 3 percent - Inflation: - Projected medium-term average: 4.0 percent - Projected long-term average: 3.6 percent - External current account deficit: - Medium term (2013–2018) average: about 18 percent of GDP - Long term (2019–2033) average: 9.9 percent of GDP - Gross foreign reserves: projected to decline to just below 3.5 months of imports by 2027. - Fiscal deficits: - 2013 fiscal deficit: will remain over 5 percent of GDP - Projected to decline to 3.5 percent of GDP in 2018 - Long term average fiscal deficit: 1 percent of GDP - Public debt: - Public debt expected to remain about the same level as in 2012 despite large disbursements in 2013 (reflecting a rice-for-debt agreement with Venezuela). - Gross public debt projected to remain above 64 percent of GDP over the medium term, declining to 48 percent of GDP in the long term. - External debt share increases while domestic debt declines from around 17 percent of GDP in 2012 to around 9 percent of GDP in the long term. - AFHP (Amaila Falls Hydropower Project) effects: - Construction estimated to add between 1 and 1.5 percentage points per year to growth during construction. - Construction assumed to start in the second half of 2015 and last until the second half of 2018. - AFHP-related imports drive medium-term current account widening. ### Baseline scenario assumptions on financing and flows - External financing and flows: - FDI inflows peak at around 17 percent of GDP in 2016, declining to around 6 percent of GDP in the long term. - Net official transfers: around 2 percent of GDP in the medium term, about 1 percent in the long term. - Net official borrowing: 5.5 percent of GDP over the next 4 years, declining to around 1 percent of GDP over the medium and long term. - PetroCaribe savings appear in financing tables (e.g., PetroCaribe savings row shows values such as -2.5, -0.6, -0.9, -0.9, -0.9, 1.2, -0.7, 0.0, -0.2 across years). ### Assessment of baseline: gross external debt - Under the baseline, Guyana’s external debt is sustainable with moderate risk of debt distress; all sustainability indicators remain below thresholds. - PV of gross external debt-to-GDP ratio: - Peaks at 33 percent in 2015 - Levels off at around 27 percent in the long term - Debt service ratios: - Debt service-to-exports and debt service-to-revenue remain well below thresholds due to high concessionality. - Repayment initiatives: - Authorities repaying Petrocaribe debt via rice exports; continuation could reduce foreign debt levels. - Sensitivity and stress tests: - PV of debt-to-GDP breaches threshold only in the most extreme combination of shocks. - A one-time 30 percent depreciation (low probability) leads to breach (Table 2, B6). - PV of debt-to-exports and PV of debt-to-revenue do not breach thresholds even under extreme shocks. - Discount rate change affecting PV calculation: - Discount rate used = 5 percent (previously 3 percent). ### Assessment of baseline: gross public debt - Nominal public sector debt projected to decline from 64 percent of GDP in 2013 to 48 percent of GDP in 2033. - PV of public sector debt-to-GDP ratio projected to decline from 46 percent of GDP in 2013 to 36 percent in 2033. - Fiscal consolidation: - Further fiscal consolidation is desirable to reduce debt ratios faster. - Closer monitoring of Public Sector Investment Program (PSIP) projects is important to ensure financial viability and productivity gains. ### Vulnerabilities and stress scenarios for public debt - Public debt is vulnerable to standard shocks; the PV of debt-to-GDP ratio is most sensitive to a growth shock (real GDP growth at -0.1 percent, historical average minus one standard deviation in 2013–2014). - In that growth-shock scenario, PV of debt-to-GDP ratio would increase to 51 percent during the medium term and 63 percent in 2033 (28 percentage points higher than baseline). - Debt service: - Generally remains manageable due to concessionality, but in some scenarios could increase to as much as a third of revenues, constraining public investment and social spending. - AFHP guarantee (PPA) risk: - Illustrative worst-case scenario assumes government must cover full PPA payment of US$120 million a year over the 20-year contract if Guyana Power and Light (GPL) cannot pay. - Assumption: higher fiscal deficit financed entirely by domestic debt; other baseline assumptions held constant. - Impact of this scenario: - Public debt-to-GDP ratio rises to 76 percent by 2033 versus 35 percent in the baseline. - Debt service could increase up to 14 percent of revenues compared to 8 percent in the baseline, significantly reducing resources for public investment and social spending. - Note: US$120 million PPA payment is provisional; actual number can be higher or lower depending on financial closure terms. ### Key numeric datapoints (selected from projections and tables) - CPIA three-year average = 3.4 - Real GDP growth: - 2012: 4.8 percent - Projected 2013: 4.8 percent - 2013–18 average: 4.4 percent - 2019–33 average: 3.0 percent - Inflation (consumer prices end of period): - 2013: 3.5 percent - Medium-term average: 4.0 percent - Long-term average: 3.6 percent - Current account balance (incl. official transfers): - 2013: -16.8 percent of GDP - Medium-term average (2013–18): -17.7 percent of GDP - Long-term average (2019–33): -9.9 percent of GDP - Investment: - 2013: 18.7 percent of GDP - 2013–18 average: 24.7 percent of GDP - 2019–33 average: 18.2 percent of GDP - FDI (net): - 2013: 9.6 percent of GDP - Peak around 2016: 15.9 percent of GDP - 2019–33 average: 5.7 percent of GDP - Gross official reserves (months of imports): - 2013: 3.6 - Long-term: just over 3 months of imports - Fiscal balances: - Overall balance (after grants) 2013: -5.2 percent of GDP - Overall balance 2018: -3.5 percent of GDP - Financing (net external financing) 2013: 8.0 percent of GDP - PetroCaribe savings (selected yearly entries): -2.5, -0.6, -0.9, -0.9, -0.9, 1.2, -0.7, 0.0, -0.2 - Public debt projections: - Gross public debt 2013: 64 percent of GDP - Gross public debt long-term (2033): 48 percent of GDP - PV public sector debt-to-GDP 2013: 46 percent - PV public sector debt-to-GDP 2033: 36 percent - PPA provisional payment: US$120 million a year *International Monetary Fund staff and Guyanese authorities (extracted from the provided content unit).* ### 16. Guyana’s risk of debt distress remains moderate and debt service manageable, but ### 16. Guyana’s risk of debt distress remains moderate and debt service manageable, but further fiscal consolidation is needed to reduce the vulnerability of debt sustainability to shocks ### Summary of fiscal and debt outlook - Debt indicators remain well below their respective thresholds over the projection period in the baseline scenario. - The PV of external debt-to-GDP ratio: - Increases moderately over the next 3 years due to large external borrowing in the medium term, before declining and leveling off at around 27 percent. - Table 1 PV of external debt (selected years): 28.3, 30.7, 31.9, 32.7, 32.3, 32.0, 30.7, 28.6, 26.6 (series shown in table). - Debt service remains manageable reflecting the high concessionality of public borrowing. - Debt service-to-exports ratio (series shown): 2.5, 2.8, 2.6, 5.6, 6.0, 6.4, 6.8, 7.1, 7.4, 5.2, 5.7. - PPG debt service-to-revenue ratio (series shown): 5.3, 6.9, 6.3, 12.9, 12.3, 11.9, 13.2, 13.3, 14.1, 9.8, 8.8. - Gross financing need (Billions of U.S. dollars) (series shown): 0.0, 0.1, 0.1, 0.3, 0.2, 0.3, 0.3, 0.3, 0.2, 0.2, 0.5. - Nominal GDP (Billions of US dollars) (selected series): 2.3, 2.6, 2.9, 3.0, 3.1, 3.3, 3.6, 3.8, 4.0, 5.1, 8.2. ### Vulnerabilities and stress tests - Sensitivity analysis and bound tests show high vulnerability of Guyana’s debt to shocks, in particular: - New loans on less favorable terms. - One-time 30 percent depreciation. - Table 2 key stress-test outcomes (selected highlights): - PV of debt-to-GDP ratio, baseline and shocks (2013–2033): baseline path shows values e.g., 31, 32, 33, 32, 32, 30, 28, 27 (table series); A2 (new loans on less favorable terms) reaches higher values including 43 in 2033 in the A2 scenario. - One-time 30 percent nominal depreciation relative to the baseline in 2014 (B6) produces large increases in ratios (e.g., PV-debt-to-GDP and PV-debt-to-exports show strongly elevated values in 2014–2018). - Debt service and PV debt-to-revenue ratios also rise substantially under several bound tests and alternative scenarios (tables and figures document the numerical series). - Specific bound-test results (selected numbers from Table 2): - PV of debt-to-GDP ratio under B6 (one-time 30 percent depreciation) in 2014–2018: 31, 46, 47, 46, 46, 44, 41, 38 (series shown). - PV of debt-to-exports ratio under B6 in 2014–2018: baseline 59, 66, 69, 70, 71, 82; B6 yields values up to 83 in projections (table series). - PV of debt-to-revenue ratio under B6 in 2014–2018: baseline 135,190,183,192,190,189,188,183 (table series). ### Public sector debt dynamics and fiscal metrics - Public sector debt (percent of GDP) (selected series from Table 3): - 2010: 65.2; 2011: 65.1; 2012: 64.3; 2013–2018 average: 63.9; 2019–33 average: 54.5; projection to 2033: 48.4. - Of public sector debt, foreign-currency denominated (percent of GDP) (selected series): 46.0, 46.7, 47.7, 48.7, 50.6, 52.9, 53.1, 53.2, 51.1, 45.3, 39.2. - Identified debt-creating flows and drivers: - Primary deficit (percent of GDP) series includes: 2.2, 3.1, 3.6, 3.4, 1.7, 4.1, 4.1, 3.6, 3.3, 2.9, 2.5, 3.4 (table series). - Revenue and grants (percent of GDP) series shown: 26.3, 25.0, 25.8, 24.8, 26.5, 27.9, 26.3, 26.3, 24.4, 22.6, 21.8. - Primary (noninterest) expenditure (percent of GDP) series shown: 28.4, 28.1, 29.4, 28.9, 30.6, 31.5, 29.6, 29.2, 26.9, 22.2, 19.3. - Automatic debt dynamics (contribution to debt ratio) series: -5.2, -6.8, -5.3, -2.2, -2.7, -3.0, -3.2, -3.0, -2.7, -1.7, -1.7. - PV of public sector debt (percent of GDP) (selected series): 44.9, 46.0, 45.9, 44.6, 43.6, 42.5, 40.2, 37.7, 35.7 (table series). - Gross financing need (percent of GDP) series: 21.3, 22.2, 22.0, 23.1, 21.7, 20.0, 17.8, 16.9, 15.9, 10.6, 7.9. ### Key macroeconomic assumptions used in projections - Real GDP growth (in percent) series: 4.4, 5.4, 4.8, 3.1, 2.8, 4.8, 4.3, 4.2, 4.8, 4.3, 4.2, 4.4, with long-run assumptions 3.0, 3.0, 3.0 (table series). - GDP deflator in US dollar terms (change in percent) series: 6.9, 8.2, 5.6, 6.2, 2.8, -0.6, 1.5, 2.2, 1.8, 2.1, 1.7, 1.4, 1.8, 1.8, 1.8. - Effective interest rate (percent) series: 1.3, 1.3, 1.1, 1.1, 0.2, 1.2, 1.3, 1.4, 1.4, 1.4, 1.4, 1.4, 1.6, 1.9, 1.7. - Grant element of new public sector borrowing (in percent) (selected series): 41.6, 37.5, 44.9, 44.7, 43.8, 34.4, 41.1, 34.4, 34.4, 34.4 (table series). - Grant-equivalent financing (in percent of GDP) series (selected): 5.8, 5.0, 5.8, 5.0, 4.9, 2.5, 1.9, 1.8, 1.9. - Grant-equivalent financing (in percent of external financing) series (selected): 52.4, 53.4, 57.7, 60.0, 59.5, 51.8, 53.1, 52.4, 53.2. ### Policy implications and recommendations from the staff assessment - Advance fiscal consolidation efforts to reduce vulnerability of debt sustainability to shocks. - Continue to seize the opportunity of the debt-for-rice program with Venezuela to keep the debt ratio at a lower level. - Monitor risks from specific developments: - Additional risks stemming from the AFHP project. - The possibility that Petrocaribe may renegotiate the terms of its loans to finance Guyana’s oil imports on less concessional terms. - Recognize that under some scenarios and bound tests debt service could increase significantly, reducing the room to allocate resources for public investment and social spending. ### Historical context and macroeconomic background (press release highlights) - Over the last decade to 2012: - Seven years of uninterrupted growth averaging about 4 percent annually. - Real economic activity expanded by 4.8 percent in 2012. - Twelve-month inflation was 3.4 percent in 2012. - FY2012 overall fiscal deficit was 4.5 percent of GDP. - Central government revenues net of grants declined by 0.8 percent of GDP in FY2012. - External reserves: gross international reserves stood at 4.2 months of imports at end-2012. - Banking indicators: NPLs between 5 and 6 percent over the last three years. *Source: IMF staff estimates, projections, and the IMF press release summarizing the 2013 Article IV consultation with Guyana as presented in the supplied content.* ### 0.4 percent of GDP compared to a surplus of 1.3 percent in 2012. Higher VAT receipts are ### _cr14294 - 0.4 percent of GDP compared to a surplus of 1.3 percent in 2012. Higher VAT receipts are ### Fiscal outlook and public finances - Central government non-grant revenue is projected to rise by 0.9 percent of GDP due to higher VAT receipts. - Central government capital expenditure is projected to rise by 0.4 percent of GDP. - The public wage bill as a percent of GDP will remain broadly stable. - Transfers are projected to decline by 0.7 percent of GDP. - Nonfinancial public sector: - Revenue and grants: 26.3 (2010), 25.0 (2011), 25.8 (2012), 24.8 (2013), 26.5 (2014) (In percent of GDP) - Expenditure: 29.8 (2010), 29.4 (2011), 30.3 (2012), 30.0 (2013), 31.7 (2014) (In percent of GDP) - Current expenditure: 18.8 (2010), 19.1 (2011), 19.7 (2012), 19.4 (2013), 19.3 (2014) (In percent of GDP) - Capital expenditure: 11.0 (2010), 10.2 (2011), 10.5 (2012), 10.6 (2013), 12.4 (2014) (In percent of GDP) - Overall balance (after grants) 1/: -3.5 (2010), -4.4 (2011), -4.5 (2012), -5.2 (2013), -5.2 (2014) (In percent of GDP) - Total public sector gross debt (end of period): 65.2 (2010), 65.1 (2011), 64.3 (2012), 63.9 (2013), 64.6 (2014) (In percent of GDP) - External debt: 46.0 (2010), 46.7 (2011), 47.7 (2012), 48.7 (2013), 50.6 (2014) (In percent of GDP) - Domestic debt: 19.2 (2010), 18.3 (2011), 16.6 (2012), 15.2 (2013), 13.9 (2014) (In percent of GDP) ### External sector and reserves - The current account deficit is expected to widen to 16.8 percent of GDP in 2013, driven by higher fuel imports, lower commodity prices, and lower remittances. - Remittances are projected to fall with slowing activity in major host countries. - With larger disbursements for public investment and resilient FDI, gross international reserves are projected to remain adequate at 3.6 months of imports. - External sector indicators (in millions of U.S. dollars, end of period): - Current account balance 1/: -217.2 (2010), -336.7 (2011), -378.5 (2012), -499.3 (2013), -475.0 (2014) - Gross official reserves 2/: 780.0 (2010), 798.1 (2011), 862.2 (2012), 728.4 (2013), 767.7 (2014) - Months of imports of goods and services: 5.2 (2010), 4.3 (2011), 4.2 (2012), 3.6 (2013), 3.8 (2014) ### Growth, prices, and investment - Real GDP growth (annual percent change): 4.4 (2010), 5.4 (2011), 4.8 (2012), 4.8 (2013), 4.3 (2014) - Real GDP per capita (annual percent change): 3.3 (2010), 3.9 (2011), 3.9 (2012), 4.8 (2013), 4.3 (2014) - Consumer prices (average): 3.7 (2010), 5.0 (2011), 2.4 (2012), 3.5 (2013), 3.9 (2014) - Consumer prices (end of period): 4.5 (2010), 3.3 (2011), 3.4 (2012), 3.5 (2013), 4.3 (2014) - Terms of trade: 6.5 (2010), -3.4 (2011), 5.7 (2012), -7.6 (2013), 0.4 (2014) - Investment (In percent of GDP): 16.7 (2010), 19.7 (2011), 19.1 (2012), 18.7 (2013), 19.8 (2014) - Private sector investment: 5.7 (2010), 9.5 (2011), 8.5 (2012), 8.0 (2013), 7.4 (2014) - Public sector investment: 11.0 (2010), 10.2 (2011), 10.5 (2012), 10.6 (2013), 12.4 (2014) - National saving (In percent of GDP): 7.1 (2010), 6.6 (2011), 5.8 (2012), 1.8 (2013), 4.7 (2014) - Private sector saving: 0.8 (2010), 1.9 (2011), 0.8 (2012), -2.8 (2013), -2.0 (2014) - Public sector saving: 6.3 (2010), 4.7 (2011), 5.0 (2012), 4.6 (2013), 6.7 (2014) ### Financial sector and monetary conditions - Broad money (annual percent change, end of period): 15.5 (2011), 16.0 (2012), 11.5 (2013), 8.4 (2014), 8.3 (projection) - Domestic credit of the banking system (annual percent change, end of period): 16.3 (2010), 52.9 (2011), 7.5 (2012), 17.8 (2013), 17.3 (2014) - Public sector (net): -24.1 (2010), 37.0 (2011), -72.7 (2012), -3.4 (2013), -2.6 (2014) - Private sector credit: 19.0 (2010), 19.9 (2011), 20.1 (2012), 13.8 (2013), 13.6 (2014) ### Executive Board assessment and policy recommendations - Directors welcomed Guyana’s strong growth underpinned by favorable commodity prices and robust FDI. - Recommended policy priorities: - Persevere with sound policies and reforms to strengthen policy buffers, promote more inclusive growth, and further reduce poverty. - Pursue prudent fiscal consolidation anchored in a medium-term policy framework to safeguard debt sustainability, bolster fiscal and external buffers, and address unmet development needs. - Implement reforms to boost the efficiency of public enterprises and replace universal subsidies with better-targeted social assistance. - Ensure that the large hydroelectric project under consideration remains financially and economically viable to curb fiscal risks; strengthen project and debt management framework; pursue international best practices for public-private partnerships. - Adopt a modestly tighter stance of monetary policy and maintain exchange rate flexibility to safeguard international reserves, contain inflationary pressures, and reduce the current account deficit. - Maintain vigilance over the financial sector: frequent on-site inspections for larger banks; better integrated supervision of financial business groups. - Urgently address remaining gaps in the regime to combat money laundering and the financing of terrorism. - Continue efforts to lower the cost of energy, address skill mismatches, and improve the business environment to foster more inclusive growth. - Increase productivity in traditional sectors, such as agriculture and mining. - Encourage further improvements in data provision and dissemination. ### Memoranda and other headline statistics - Nominal GDP (G$ billion): 460.1 (2010), 525.7 (2011), 582.7 (2012), 621.1 (2013), 670.2 (2014) - Per capita GDP, US$: 2,904 (2010), 3,263 (2011), 3,581 (2012), 3,729 (2013), 3,945 (2014) - Guyana dollar/U.S. dollar (period average): 203.6 (2010), 204.0 (2011), 204.4 (2012) - PetroCaribe loans savings (stock, in % of GDP): 4.0 (2010), 1.8 (2011), 6.7 (2012), 8.9 (2013), 9.0 (2014) *Source: IMF staff report content provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14294.pdf_