Press Release No. 02/42

Press Release: IMF Approves a Three Year PRGF Credit for Guyana

September 13, 2002

The Executive Board of the International Monetary Fund (IMF) has approved a three-year credit under the Poverty Reduction and Growth Facility (PRGF) for an amount equivalent to SDR 54.55 million (US$73 million) for Guyana. The Executive Board determined that Guyana's Poverty Reduction Strategy Paper (PRSP) provides a sound basis for Fund concessional financial assistance. As a result, Guyana will be able to draw immediately up to SDR 5.55 million (about US$7.3 million) from the credit.

The Executive Board also approved additional interim assistance for Guyana under the enhanced Heavily Indebted Poor Country Initiative (HIPC) of SDR 4.13 million (about US$5.4 million) to help Guyana meet its debt service payments on its existing debt to the IMF.

The PRGF is the IMF's concessional facility for low income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a PRSP. This is to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion on Guyana, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"The authorities are to be commended for completing a comprehensive Poverty Reduction Strategy Paper (PRSP) that was prepared through a participation process involving civil society and the donor community. The PRSP lays out Guyana's poverty-reduction strategy, and provides a good basis for guiding current and future macroeconomic programs. The authorities are encouraged to use the PRSP as a vehicle for enhanced dialogue between officials and civil society in order to build and strengthen the broad consensus on reforms that will be needed going forward. The completion of the PRSP fulfils one of the prerequisites of the completion point under the enhanced HIPC Initiative, which with satisfactory progress should be expected to be reached next year.

"The three-year program being supported under the PRGF is based on the PRSP. The program's objectives are to speed up output and employment growth in an environment of macroeconomic stability, and to reduce poverty on a sustainable basis. To achieve these goals, the program includes a mix of sound fiscal, monetary, and incomes policies, combined with structural reforms, governance strengthening measures, and social programs.

"The policy agenda under the authorities' program is ambitious, and will need to be implemented with determination in order to achieve Guyana's growth and poverty-reduction objectives. In this regard, the authorities' commitment to the objectives embedded in the PRSP and the progress made recently in policy implementation are encouraging.

"The authorities' fiscal program aims to improve public sector savings and place the public debt burden on a downward path, while at the same time making room for increased expenditure on poverty-reducing programs and critical investments in the sugar industry. To achieve these goals, the program includes a reform of the tax system that will promote revenue stability and economic efficiency. It is essential that these reforms broaden the tax base, reduce high marginal tax rates, improve the equity and predictability of the tax system, and strengthen tax and customs administration. In addition, meeting the fiscal objectives will require restrained public sector wage growth, and prudent debt management.

"Monetary, incomes and financial policies under the program aim to preserve low inflation, while continuing to strengthen the financial sector and its supervision. In this regard, success in maintaining low inflation will help to relieve the adjustment burden felt particularly by the poor and promote private sector growth.

"The structural agenda in the program envisages reforms that are critical for raising the economy's long-run growth potential, reducing poverty, improving governance and public sector efficiency, and promoting a stable and equitable environment for private sector activity. It includes a comprehensive modernization plan for the sugar sector, steps to make public procurement and public investment more efficient, a strengthening of budgetary and expenditure management systems, and a public sector modernization program. Another key element of the reform agenda is the restructuring and privatization of the state-owned commercial bank. Determined action in all these areas, as well as in institutional strengthening, will be essential for securing Guyana's long-term growth potential.

"The Executive Board endorsed Guyana's PRSP as a sound basis for Fund concessional financial assistance and approved a new three-year PRGF arrangement. It also agreed to Guyana's request for additional interim relief under the enhanced HIPC Initiative," Mr. Aninat said.

ANNEX

Recent Economic Developments

In the context of economic stabilization and structural reform programs, actions taken since the late-1980's in the fiscal, monetary, exchange rate, and structural areas lowered inflation, and led to a sharp increase in output in 1993-97 and a substantial reduction in poverty. However, the initial gains from stabilization and the first set of structural reforms have largely been exhausted. Since 1998 per capita output has declined as a result of adverse movements in the terms of trade, a real appreciation of the currency, and a slowdown in the implementation of critical structural reforms. In 2001, real GDP is estimated to have increased by 1.4 percent in 2001 after contracting in the previous year.

A three-year Enhanced Structured Arrangement Facility (ESAF) arrangement (later succeeded by the PRGF) was approved by the IMF in July 1998 (see Press Release No. 98/29) and in July 2001 its commitment period was extended by the Executive Board to end-2001. Slippages in fiscal and structural policies lead the 2001 PRGF-supported program off track in the first half of 2001, and the program's midterm review could not be completed.

Beginning in mid 2001, however, corrective policy actions were taken to help contain the fiscal deficit. Overall borrowing by the nonfinancial public sector rose in 2001 to 7.7 percent of GDP from 6.5 percent in 2000. This increase mainly reflected the need to cover for a weaker financial performance of the state-owned bauxite companies, lower central government revenues associated in large measure with a decline in import tax revenues, and higher noninterest expenditures, particularly on electricity subsidies.

Monetary policy implementation remained prudent, as evidenced by the continued control over inflation. Inflation declined to 1.5 percent at end-2001, and has risen to around 6 percent in mid-2002, reflecting in part higher utility prices. Short-term government treasury bill interest rates fell to around 5 percent in mid-2002, and the 12-month rate of growth of broad money was around 9 percent in mid-2002 (down from around 12 percent in the preceding 12-month period). Credit to the private sector increased by 1.0 percent in the 12 months to mid-2002.

The external current account deficit widened from 15.3 percent of GDP in 2000 to 18.8 percent in 2001. Exports declined by about 3 percent year-over-year in 2001, mostly reflecting lower bauxite exports. Imports were flat, as a small increase in import volume was offset by lower imported fuel prices. The terms of trade improved by about 8 percent in 2001, largely as a result of lower fuel prices. Net capital inflows including official grants fell in 2001 primarily reflecting lower private sector inflows, and the balance of payments deficit was covered by HIPC debt relief. Official gross international reserves remained at comfortable levels.

The implementation of structural reforms regained momentum, and this has continued in 2002. The Guyana National Cooperative Bank was offered for sale, implementation of the plan for modernizing the Guyana Sugar Company has commenced, the strengthening of government procurement has begun, and technical work on tax reform has been initiated

A new three-year PRGF arrangement has been requested by the authorities in support of a program which builds on the adjustment and reform momentum exhibited since mid 2001.

Program Summary

Based on the authorities' PRSP, the program envisages a gradual increase of output growth over the medium term as the implementation of structural reforms begins to impact positively on productivity and competitiveness. The prime sectors of growth are expected to be agriculture, mining and construction, and related services.

Real GDP is projected to increase gradually over 2002-06, rising from 1.8 percent of GDP in 2002 to 4.2 percent in 2006. Inflation is expected to remain in the low single digits over the medium term. The external current account deficit is expected to increase in 2003-4 to about 24 percent of GDP, reflecting temporally higher concessionally financed public investment spending associated with the restructuring of the state-owned Guyana Sugar Company Ltd. (GUYSUCO).

The nonfinancial public sector (NFPS) deficit, after grants, is expected to widen from 7.5 percent of GDP in 2002 to12.2 percent of GDP in 2004 also owing to the impact of the GUYSUCO project, while gross international reserves should stay at comfortable levels of close to four months of imports.

The authorities are committed to efforts to raise public savings and improve the efficiency and governance of public services and of capital spending in order to raise the economy's long run growth potential and reduce poverty. In this context, a prudent public sector wage policy will be followed, and government procurement and investment practices, and budgetary and expenditure management will be reformed. Public capital investment will focus on modernizing the key sugar sector and implementing growth-oriented poverty-reducing projects financed with external support, including relief under the HIPC Initiative for external debt service.

Structural reforms in the financial and tax systems will seek to improve efficiency and encourage private investment. Measures envisaged should broaden the tax base, reduce high marginal tax rates and improve administration. Efforts will also be made to restructure publicly owned bauxite companies, freeing up resources for poverty reduction.

Guyana joined the IMF on September 26, 1966, and its quota¹ is SDR 90.9 million (about US$120 million). Its outstanding use of IMF financing currently totals SDR million (about US$94 million).