Public Information Notice No. 05/32

Public Information Notice: IMF Executive Board Concludes 2004 Article IV Consultation with Guyana

March 11, 2005

On January 24, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guyana.¹

Background

Since the last Article IV consultation in 2002, growth continued to fall significantly short of expectation. Economic growth fell by 0.6 percent in 2003 reflecting a decline in sugar output after the 2002 bumper crop and lower gold production. A moderate recovery of about 1½ percent is expected in 2004, reflecting in part, the adverse effect of the higher fuel prices.

The overall external position has narrowed sizably since 2002. The current account deficit declined to 11-12 percent of GDP in 2003 and 2004 from 15 percent of GDP in 2002 due to solid export performance, which offset higher imports reflecting largely higher oil prices. The smaller current account deficit, coupled with inflows of FDI and concessional external resources, allowed official international reserves to remain at comfortable levels in 2003. However, a decline in net capital inflows and pre-financing for sugar sector restructuring led to a significant drop in the level of reserves in 2004, although reserve cover remains adequate.

The fiscal outturns have generally exceeded budget targets reflecting in part higher public savings but also delayed capital spending related to the state sugar company, GUYSUCO. Public saving increased from about -1½ percent of GDP in 2002 to above 4 percent of GDP in 2004, reflecting tax reform, wage moderation, and the closure of loss-making public entities. However, capital outlays increased from about 12½ percent of GDP in 2002 to 19 percent of GDP in 2004, notwithstanding delays in sugar sector restructuring. As a result, the nonfinancial public sector deficit significantly widened from 5.8 percent of GDP in 2002 to 8.3 percent of GDP in 2004. Social spending remained at around 18 percent of GDP. Wage policy supported the fiscal effort, as public sector wage increases were kept in line with inflation and attrition in the government and public enterprises continued, making room for new teachers and nurses.

Monetary policy has been geared toward keeping inflation low and maintaining financial stability. Inflation remained low, although the higher oil prices, together with a spike in food prices in the first half of 2004, have led to an increase in the inflation forecast to 6 percent in 2004 compared to 5 percent in 2003, but underlying inflation remains moderate. Broad money growth has been increasing in the past years consistent with the moderate trend decline in velocity. While credit to private sector remains weak, nonperforming loans (NPLs) declined sharply from 37 percent of total loans in 2002 to 23 percent in 2003 after the privatization of a major commercial bank (GNCB) and further to 18 percent in September 2004, largely as a result of write-offs. The Guyana dollar has remained broadly stable relative to the U.S. dollar (in real terms), but has depreciated by about 13 percent since 2002 in real effective terms, and the Bank of Guyana has refrained from intervening in the market.

Structural reforms are broadly on track. After some initial delays, progress was made in tax reform, public enterprise restructuring, improving public sector governance, strengthening the financial system, and improving the private investment framework. Tax reform measures such as eliminating discretionary power of the Minister of Finance in granting exemptions and annual publication of exemptions improved the efficiency, equity, and transparency of the tax system. Improvement in operations of GUYSUCO, the state electricity company (GPL), and the bauxite company (AROAIMA), together with the closure and privatization of two other bauxite companies, has contributed to strengthening public finances. A new procurement law and organic budget law were enacted and became operational to strengthen fiscal management and accountability. The loss-making state-owned commercial bank GNCB was privatized and the Financial Institutions Act and Bank of Guyana Act were amended to bring them further in line with best intentional practices.

Weak growth has limited progress in poverty reduction. Although reliable data is still lacking, the July 2004 Poverty Reduction Strategy Paper Progress Report indicated that for 2003 only 11 of the 24 goals were attained or exceeded, with shortfalls in HIV/AIDS, access to treated water, and secondary school enrollment. Nevertheless, reflecting continued emigration and low population growth, per capita GDP in U.S. dollars has increased, while still lagging well behind other Caribbean countries.

Executive Board Assessment

Executive Directors commended the authorities' determined implementation of their medium-term economic program in the face of a difficult domestic and external environment. Important progress has been made in implementing structural reforms and transforming the economy to a fully functioning market economy. Macroeconomic stability has been achieved, evidenced by low inflation and a relatively stable exchange rate. The external debt burden has declined following the Heavily Indebted Poor Countries (HIPC) Initiative completion point, although it remains high.

At the same time, Directors observed that considerable challenges remain ahead. In particular, economic growth needs to be boosted to levels that will make a significant dent on poverty while safeguarding medium-term external debt sustainability. This will require a stepped up effort to remove structural impediments to growth, especially those relating to the investment climate, infrastructure, and financial sector. Directors were encouraged by the authorities' commitment to achieving their economic objectives, and stressed the importance of closer cooperation with the Fund to this end.

Although economic growth is expected to strengthen in the medium term, Directors cautioned that the economic outlook is subject to considerable risk associated with high world oil prices, the envisaged liberalization in EU sugar prices, the forthcoming presidential elections, and the potential budgetary impact of the hosting of the 2007 Cricket World Cup. Managing these risks will require steadfast implementation of the authorities' fiscal and structural reform program, as well as continued support from the donor community. Directors warned that additional adjustment may be required, especially if the external environment deteriorates further.

Directors underscored the importance of placing the public finances on a sustainable path. While they were concerned about the significant widening of the fiscal balance in 2005, they noted that this primarily reflects the capital spending related to the restructuring of the sugar sector. Furthermore, they welcomed the authorities' intention not to relax further the fiscal stance in the face of higher-than-envisaged world oil prices. However, some Directors stressed that stronger efforts are needed to bring the overall budget deficit down. Directors stressed the importance of efforts to strengthen tax collections, limit tax exemptions, and improve the efficiency of the tax system. They commended the rapid adjustment of ad valorem tax rates in response to the recent easing in world oil prices, and called for continued monitoring of revenue trends and adjustment of fuel taxes as needed to meet the 2005 revenue target. Implementation of the value added tax by July 2006 as planned will be critical for improving the efficiency of the tax system. In addition, a few Directors stressed that the forthcoming study to be supported by the Caribbean Regional Technical Assistance Center should provide a basis for reducing the fiscal and other costs of customs exemptions.

Directors emphasized that containing public expenditure—in particular, through strict limits on the wage bill and careful selection of public investment projects—remains a pre-requisite for achieving a sustainable fiscal position. In this context, they urged the authorities to carefully prioritize public sector investment projects to maximize returns and to ensure their financial viability and consistency with the debt strategy. Directors expressed concerns about the reemergence of debt sustainability problems following the HIPC completion point, and stressed the critical importance of monitoring new borrowing, notwithstanding that all its borrowing is on concessionary terms. In this regard, they welcomed the steps taken to offset the budgetary impact of building the cricket stadium, and most Directors advised that further commitments of public funds or investment guarantees related to the 2007 Cricket World Cup be avoided. Directors also advised against the use of the Infrastructure Development Fund as a vehicle for extra-budgetary transactions, since this would appear to be inconsistent with the government's commitment to improving fiscal transparency and accountability. They urged its consolidation within the budget. They also stressed that the Berbice bridge project will need careful examination to ensure that it does not jeopardize the government's fiscal and debt objectives or undermine the financial position of the National Insurance Scheme.

Directors noted that progress in reducing poverty has been mixed despite the high level of social spending in Guyana, and stressed the need to improve the monitoring, quality, and efficiency of such spending in order to achieve the Millennium Development Goals. They looked forward to the review of spending priorities in the social area and the assessment of the effectiveness of current spending in the upcoming PRSP progress report.

Directors commended the progress that has been achieved in restructuring the public enterprises to ensure their cash neutrality to the budget. They noted, in particular, the privatization of one bauxite company (LINMINE), the signing of a foreign management contract for another bauxite company (AROAIMA), and the commencement in the near future of the long-delayed construction of the sugar company's Skeldon project. Directors stressed that it is essential to closely monitor the construction of the Skeldon project to avoid further cost increases, and to undertake the additional reforms needed to ensure the viability of the sugar sector as EU prices are liberalized. They welcomed the approval of new procurement regulations.

Directors noted that monetary and financial sector policies are key to supporting macroeconomic stability and growth. They agreed that monetary policy should continue to aim at achieving the inflation and official reserve targets, while allowing the exchange rate to float freely. Directors emphasized that reducing financial intermediation costs and strengthening financial sector stability are critical to increasing private sector investment. In this regard, they welcomed the authorities' intention to request an FSAP, and the recent amendment of the Financial Institutions Act and the Bank of Guyana Act to bring them in line with best international practice.

Directors emphasized that improvement of the investment climate and development of a dynamic private sector will be crucial for diversifying the economy and achieving the authorities' growth and poverty reduction objectives. They noted that the weak growth of recent years reflected a range of factors, some of which were outside the authorities' control, including adverse external developments, political tensions, a deterioration in the domestic security situation, fundamental structural weaknesses, and a concomitant decline in investor confidence. Elimination of these impediments will require the steadfast implementation of fiscal reform, improved governance, reduced financial intermediation costs, and measures to improve the investment climate. Directors urged the authorities to streamline regulations for business registration, licensing, custom clearance, and land title issuance, and to proceed rapidly with the establishment of commercial courts.