Introduction
A report compiled last November by the staff of the IMF in which two officials of the World Bank participated predicts a brighter future for Guyana despite the challenges, risks and threats to the economy. The exercise is done annually under Article IV of the IMF’s Articles of Agreement which requires it to hold bilateral discussions with members, usually every year.
The report was based on information available at the time of these discussions and completed on January 5, 2011 some days before the 2011 National Budget. Surprisingly it took close to six months for the report to wend its way through the IMF bureaucracy – and perhaps discussions with the Guyana Government – before it was published last month.
What is even more surprising is that despite the hands through which the report would have passed and the time it took before release, the report contains some remarkably elementary mistakes.
These reflect poorly on the team and the IMF despite its usual disclaimer about the views expressed being those of the staff team and not necessarily those of the Executive Board of the IMF.
The report included extensive coverage on the Amaila Falls Hydro Electricity Project and the National Insurance Scheme, but in critical areas it seems to have suffered from the absence of proper and independent research and critical analysis.
The shortcomings in those areas make the report less than helpful to someone seeking an objective evaluation of the state of and prospects for the economy. Its attention to oil and its impact on the economy was helpful but its reference to private estimates of Guyana’s potential reserves (15.2 billion barrels of oil) that places it among the top twenty countries seem far too optimistic.
In its introduction the report indicated that the team met with President Jagdeo, Prime Minister Hinds, Minister of Finance Dr Ashni Singh, Central Bank Governor Lawrence Williams, representatives of the private sector, labour, and the donor community, and members of the political opposition.
Yet the report reflects – if only coincidentally – the official line while none of the more frequently expressed concerns about the economy such as the illegal economy, the impact of the drug trade, corruption and governance gets any mention.
Business Page today presents a summary of the main findings and conclusions and offers its own comments where necessary.
Overall assessment
The report reflects a generally positive macroeconomic outlook in the medium-to-long term. It exults that Guyana is on the “cusp of major changes,” led by the government’s Low Carbon Development Strategy (LCDS) and private sector investments in gold, oil, and gas sectors and supports the large PPP (private-public sector partnership) associated with the construction of hydroelectric plant at Amaila.
It notes that the operating surplus of public enterprises is projected to rise from 0.6 per cent of GDP in 2010 to 1.9 per cent in 2011, supported by an expected surge in sugar production. It goes on to quote the authorities’ estimate that GuySuCo’s production in 2011 will rise by about one third to 300,000 tons. The results of the first crop suggest that this is most unlikely and that even the official target of 280,000 tons may not be achieved. While the report avoided any direct indication of the fiscal cost of keeping the sugar company intact or the high cost of production it did include the company as posing a risk.
Under risks, the report identified global uncertainty, volatile commodity prices, delays in grant disbursements, a widening external current account deficit and potential trouble with the NIS. In this connection, it suggested that the authorities would need to pay careful attention to balancing infrastructural needs with fiscal and debt sustainability. In the IMF song book, governance, crime and corruption do not seem to exist.
Amaila
The report notes that the Amaila Falls Hydroelectricity Project will have the capacity to generate electricity – which it states at approximately 154 megawatts – an output far in excess of present demand.
Ignoring the cost of mothballing and the need for redundancy, it predicts that Amaila should enable “a significant reduction” in the electrical tariff rates charged by GPL and lead to a sharp rise in electricity sales as self-generators would be attracted to the lower rates charged by GPL.
The authors note that based on current information, AFHP would eventually result in a 20-40 per cent reduction in the cost of generation as the switch from oil to hydro takes hold, but places the caveat that the precise extent of the pass-through of these savings to the end-user would depend on the PPA and its impact on GPL’s operations.
The report also states that GPL will have an equity interest in the hydroelectricity company, something that Guyanese are hearing for the first time. This would be an act of incurable insanity and would place GPL in a conflict situation and consumers at a real disadvantage.
While the report calls for the impact of the Amaila Falls project to be carefully monitored, both during construction (end 2011-14) as well as at the operational stages (2015 onward), its failure to do any independent examination of key elements of the arrangement leads it into unfortunate and misleading generalizations. The report does not seem to have any familiarity with the statutory procedures for the grant of a final licence and the obligation of the licensee to have power purchase agreements in place before the construction begins.
Incredibly, the report, “welcomed the high level of transparency and public disclosure of the project to date”! Without being ungracious to the team, one has to ask whether they read the independent press or used Fip Motilall as their source.
Oil
Noting that the Guyanese economy relies exclusively on imports for its oil consumption, the report observes that in 2010, oil-related imports represented some 16 per cent of GDP and were a main driver in the widening of the external current account deficit. It calculates that this makes the country vulnerable to oil price shocks and reckons that a 10 per cent increase in oil prices widens the current account deficit by 1¼ percentage points of GDP.
Changes in oil prices also have a significant impact on the fiscal accounts. Under the assumption that changes in the excise tax absorb half of any given increase, a 10 per cent rise in world oil prices boosts tax revenue by 0.6 percentage points of GDP.
Other issues
Poverty reduction
Out of the blue and from the IMF, Guyanese learn that their government in late 2010-early 2011 was currently preparing an outline of the Poverty Reduction Strategy Paper (PRSP) for discussion with the Cabinet Committee on Finance by July 2011. It notes that the architects of the outline are assessing the costs of achieving the Millennium Development Goals with technical donor support. Yet, this important step did not even warrant a mention in the Budget speech of the Minister of Finance presented to the National Assembly only a few days/weeks later.
NIS
Missing the correct date of the establishment of the NIS by nine years, the report dealt extensively with the risks posed to the sustainability of the Scheme with projections showing that after 2011, NIS will shift from small surpluses to growing deficits, largely as a result of rising benefit payments. It identifies as causes, what it calls a mismatch between pension benefits and contributions; contribution arrears and evasion by both workers and employers; and the additional challenge of the large investment of 18.6 per cent of total assets, or 1.3 per cent of GDP that the NIS has in the Clico conglomerate. Whether the team was told this by the government is a matter of conjecture, but that the government has guaranteed the indebtedness is false, wrong, misleading and dangerous.
What is more absurd is the comment that the Clico investment is “due to mature in a few years.” Professionals must do a fact-check of vital information, not repeat nonsense. Clearly they did not inform themselves about the nature of the investment or are aware that once liquidation was ordered by the court, the investments became immediately payable subject to the rules of priority of debts.
Unwilling to attribute direct responsibility for the challenges facing the Scheme to the failure of successive administrations to act promptly on the recommendations of the actuary, the report recommends “more actions” to restore its medium-term financial viability. They apparently did not ask Dr Roger Luncheon, the Chairman of the NIS Board and more importantly Cabinet Secretary to explain the failures of both Cabinet and the Board to address the problems.
The future
According to the report, the country’s future looks brighter, despite identified challenges. It predicts that with a fifth consecutive year of economic growth, Guyana is beginning to lock in gains from recent years of fiscal consolidation. It notes that prudent and sustained macroeconomic policies have developed resilience in the face of external and domestic shocks and notes that there are growing indications that the private sector is building up major plans for the exploitation of Guyana’s sizeable natural resources. One wonders whether they read Appendix G to the National Estimates which tells a different story.
The report predicts that over the medium term, the LCDS should help Guyana compete better on the global stage and unleash opportunities for lowering poverty. The report did not state what competitive advantages would accrue from the LCDS, but one can put that down to the government and the team themselves not being too clear about this.
As far as the team and the IMF are concerned, they have complied with Article IV and have said little that would ruffle the sensitive and preened feathers of the administration and have not given anything to the political opposition.