IMF Executive Board Concludes 2008 Article IV Consultation with GuyanaPublic Information Notice (PIN) No. 09/61
May 19, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On February 27, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guyana.1
Despite external shocks and social pressures, macroeconomic stability was preserved in 2008. Growth decelerated to about 3 percent owing to a sharp shortfall in sugar production, but end-2008 inflation declined to 6.4 percent (6.8 percent target). The fiscal deficit widened to 7.9 percent of GDP (6 percent target) due to measures adopted in early 2008 to reduce the impact of high fuel prices, most of which have since been eliminated. So far, the financial system has been relatively unaffected by the global turmoil.
Higher growth is projected for 2009, with a recovery in sugar output expected to offset a slowdown in the other sectors of the economy. Lower oil import prices would compensate a decline in commodity export prices in 2009. Still, Guyana faces other significant challenges, including lower worker remittances in 2009 and preferential sugar export prices in the years ahead. Downside risks include a lower-than-projected increase in sugar production and a more protracted than currently envisaged global slowdown.
In 2008, the external current account widened by almost 3 percent of GDP, to close to 21 percent of GDP, but was fully financed by concessional loans, grants, and FDI. The wider deficit was mainly explained by lower sugar exports together with higher fuel prices and imports of capital goods. The underlying current account deficit of about 10½ percent of GDP is consistent with the estimated medium-term equilibrium position. Guyana’s real effective exchange rate is broadly in equilibrium. Following debt relief, the external debt-to-GDP ratio declined from over 100 percent in 2006 to about
70 percent by end-2008.
Significant progress has been made in the area of fiscal reforms and the VAT is now well established. The Guyana Revenue Authority introduced a Total Revenue Integrated Processing System allowing for better monitoring of taxes and risk profiling. Financial sector reforms include measures to improve compliance with Basle Core Principles and the preparation of legislation facilitating the creation of a credit bureau, on money transfer agencies, and on anti-money laundering and combating the financing of terrorism. The recently completed Berbice Bridge—a major public-private project—bodes well for increased private sector participation in the economy.
Executive Board Assessment
Executive Directors noted that, by implementing prudent fiscal and monetary policies, the Guyanese authorities had maintained macroeconomic stability in 2008 despite external shocks and social pressures. Sustaining these policies will be critical to reduce vulnerabilities associated with commodity price volatility and possible spillovers from the global crisis. Directors commended the authorities’ commitment to further entrench macroeconomic stability, strengthen the financial system, and implement structural reforms.
Directors observed that direct spillovers from the global financial crisis on the banking system have so far been limited. The banks remain well capitalized and profitable, and the financial system is sound. Directors supported heightened financial supervision to limit potential contagion, and continued monitoring of the still high level of non-performing loans. The progress being made on financial sector reforms and on legislation to prevent money laundering and the financing of terrorism is welcome.
Directors noted that the authorities had reduced petroleum product excise taxes temporarily in 2008 in order to limit the pass-through of higher international fuel prices to consumers, effectively diffusing social pressures while helping to contain inflation. They commended the authorities for reinstating the excise taxes in recent months as international oil prices have abated, to protect the fiscal position. Going forward, the authorities were encouraged to focus on targeted support to the most vulnerable.
Directors welcomed the authorities’ commitment to sustain the fiscal consolidation effort. They agreed that a more gradual deficit reduction than previously envisaged is justified in the context of the global slowdown. While the authorities’ plan to return to the target laid out in the medium-term fiscal framework by 2012 was welcomed, a few Directors considered that a faster move toward convergence would reduce risks to fiscal sustainability. The identification of contingency measures in case of a shortfall in revenue or more difficult access to financing would help protect priority spending and avoid reductions in growth-enhancing capital expenditures.
Directors welcomed the progress made in the area of fiscal reforms, including the successful implementation of the VAT. They cautioned against a further expansion of the list of zero-rated VAT items, and a weakening of the rules-based system for granting tax exemptions.
Directors commended the authorities for the reduction in the rate of inflation. They supported continued vigilance and readiness to adjust monetary policy to keep inflation low, as needed. Directors noted that the exchange rate appears broadly aligned with fundamentals, and that the current exchange rate policy has served Guyana well. In this context, a number of Directors stressed that a stable exchange rate is critical to the authorities’ goal of maintaining macroeconomic stability.
Directors welcomed the plans to reduce the external current account deficit gradually over the medium term, through growth in nontraditional exports and the development of petroleum and hydropower resources. They noted that external financing and inflows of foreign direct investment related to development projects could be vulnerable to the global financial turmoil, at least in the short term.
Directors encouraged further structural reforms to sustain growth and make progress on poverty alleviation over the medium term. Achieving the authorities’ output target in the key sugar sector will require steadfast implementation of the sector’s modernization plan. Directors also encouraged efforts to address the high cost of energy, to enhance private sector participation in the economy, and to prepare an appropriate legal and fiscal framework for future oil revenues drawing on international experience.
Directors welcomed the upcoming finalization of the Poverty Reduction Strategy Paper to underpin the government’s medium-term plans for poverty alleviation and achieving the Millennium Development Goals. They noted the importance of ensuring consistency between the medium-term macroeconomic framework and the PRSP and of establishing an effective system to monitor PRSP implementation.