Public Information Notice No. 12/136

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Guyana

November 29, 2012

On November 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guyana.¹

Background

Guyana recorded another year of robust growth in 2011 supported by favorable external conditions, rising foreign direct investment and low inflation. Following general elections in November 2011 the political situation, though largely stable, became more complicated, but investor interest has remained strong and confidence generally positive. In 2011, output expanded by 5.4 percent, buoyed by increased activity in the gold, agriculture and services sectors. Twelve-month inflation was 3.3 percent in 2011, reflecting pressures from higher food prices later in the year. The current account deficit weakened somewhat (from 9.9 percent of GDP in 2010 to 13.6 percent in 2011) due to a surge in oil and capital goods imports as a result of higher international oil prices and stronger investment. Foreign direct investment financed most of the current account deficit with gross reserves remaining comfortable in 2011 (though falling from 5.3 months of imports at end-2010 to 4.3 months of imports at end-2011). Public debt remained stable at 65 percent of Gross Domestic Product (GDP)

In fiscal Year 2011, the overall fiscal deficit widened to 4.4 percent of GDP from 3.6 percent of GDP in 2010, falling short of the target of 3.5 percent of GDP. This slippage was due to the combined effect of an 8 percent wage increase to public sector workers in November 2011; lower excise fuel tax revenues used to cushion the impact of higher international oil prices; losses in public enterprises; and the increase in the tax thresholds for personal income taxes. Meanwhile, prudential indicators through end-March 2012, continue to improve, with rising capital asset ratios and falling non performing loans (NPLs). Banking system liquidity remains ample. Steady progress has been made in meeting the Millennium Development Goals (MDGs).

The macroeconomic outlook for 2012 and the medium term remain generally positive. Real GDP is projected to grow by around 3.7 percent this year, roughly in line with what was envisaged in the 2012 budget (4.1 percent), but lower than the outturn in 2011 (5.4 percent). This expected outturn builds on strength in the gold, agriculture (rice) and services (construction and transportation) sectors, which should offset any expected falloff in sugar production. Inflation is projected to pick up to about 4.6 percent by year-end, from 3.3 percent in 2011, reflecting higher energy and food prices. The external current account deficit is expected to widen to about 14 percent of GDP, due mainly to robust non-oil import growth. The increase in imports would cause gross reserves to fall to just under 4 months of imports.

Executive Board Assessment

Executive Directors commended the authorities’ policies that have supported macroeconomic resilience and sustained growth. Nonetheless, Directors noted that policy challenges remain for the near and the medium term, and encouraged the authorities to persevere with fiscal consolidation and structural reforms to strengthen debt sustainability and make growth more inclusive.

Directors welcomed the authorities’ continued commitment to fiscal prudence. They concurred that sustained budgetary adjustment is needed to avoid policy pro-cyclicality and rebuild buffers. While a number of Directors recommended a more ambitious fiscal effort for the period ahead, a few other Directors stressed the importance of better balancing medium-term fiscal objectives with the need to support growth in the near term. Directors looked forward to measures to boost the efficiency of public enterprises and steps to ensure that the Amaila Falls Hydropower project is economically viable. They recommended careful consideration of the risks and contingent liabilities arising from that project, and welcomed the authorities’ efforts to pursue international best practices in its management.

Directors agreed that monetary policy conduct must remain alert to price developments and the emergence of excessive leverage in the financial system. Tightening the monetary stance in the period ahead could rein in credit growth and safeguard foreign exchange reserves. Directors took note of the staff assessment that, although Guyana has benefitted from a relatively stable exchange rate, greater exchange rate flexibility over the medium term could cushion external shocks as commodity exports expand. A few Directors, however, were not persuaded that greater exchange rate flexibility would be desirable.

Directors welcomed the continued improvements in financial sector soundness and oversight. Guyana’s banks remain liquid and prudential indicators have been strengthening. Against this backdrop, Directors encouraged the authorities to act preemptively should rapid credit growth undermine asset quality and inflation risks mount.

Directors supported ongoing efforts to modernize the traditional sectors, notably sugarcane cultivation, and improve the business climate. They also recommended putting in place an effective and transparent fiscal framework for the extractive industries, including the establishment of a sovereign wealth fund and adherence to the Extractive Industries Transparency Initiative.

Directors encouraged the authorities to build on Guyana’s subscription to the Fund’s General Data Dissemination System by further improving the timeliness of data provision and dissemination.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.