Revisiting key economic issues raised by the IMF

Mar 12, 2017 News

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By Kiana Wilburg

A delegation from the International Monetary Fund (IMF) is currently in Guyana until March 17.

And just as they did last year, the body will be reviewing Guyana’s economic health and issue a report on its findings.
As we await the 2017 report, it is imperative to revisit some of the key issues raised by the delegation in last year.

GUYSUCO
In its 2016 report, the IMF welcomed the progress made by the Government on public enterprise reforms. In the same breath, it noted with some degree of concern that transfers to the Guyana Sugar Corporation (GuySuCo) were equivalent to 1.8 percent of GDP in 2015 and was budgeted to be about 1.3 percent of the GDP for last year.
The IMF Staff urged the authorities to adopt a restructuring plan for the sector that will improve cost efficiency, productivity, and alternative revenues streams, drawing upon the reforms proposed by the Commission of Inquiry. The international delegation said that the scope and pace of reform should take into account social implications.
In this regard, it appears that the Government is making “some” headway.
Finance Minister, Winston Jordan, opined that based on the allocation for sugar in the 2017 budget, government has indeed started the process of reducing the billion-dollar bailouts to the sector.
He said, “When we started in 2015, we started with $12B; then 2016 we had $11B going towards the sector; and for 2017 we have $9B. So there is a process of reduction that is taking place and I dare say that for as long as GuySuCo exists, in whatever shape or form, there will have to be a process of transfers until it can be brought into a better state. It is what we call too big to fail…”
The Finance Minister said that the sector is one which has too much history for it to simply be abandoned. He said that it is a considerable part of the economy, both in terms of the Gross Domestic Product and employment. Even in the area of foreign exchange earnings, the Finance Minister said that the sugar industry plays a part in that.
The economist noted that while sugar is too big to fail and transfers would continue in some form, future allocations would have to be targeted to a substantial improvement in the state of the company.
He expounded, “The transfers can’t continue to go down a black hole as Prime Minister Moses Nagamootoo has said on several occasions. Indeed, any structural adjustment of the kind that has to take place in GuySuCo is going to be extremely painful. All that we can do is ease the pain and hope that the measures that will be put in place will yield early fruit.”

POWER SECTOR
According to the IMF, Guyana depends heavily on imported oil for its power needs. The body said that the nation’s installed power generation capacity is about 83 percent oil-based and 17 percent biomass (bagasse) – fueled. This capacity translates into a generation mix that is almost entirely dominated by oil based generators, which supply about 95 percent of the country’s power consumption.
The IMF said that the oil-dependent power generation mix contributes to macroeconomic volatility. It said that high oil prices widen the external current account deficit, increase fiscal transfers to the public utility Guyana Power and Light (GPL) and reduce oil tax revenues due to the limited pass-through in the domestic fuel pricing regime. Accordingly, it advised the authorities here that adverse oil price shocks consume foreign exchange and fiscal resources. Volatility in oil prices quickly propagates to the external and fiscal sectors.
Additionally, the IMF said that high electricity costs and tariffs are a drag on competitiveness and growth. In this regard, it pointed out that oil price shocks increase the cost of power generation. When those costs are passed on to users, the body said that they increase the cost of production and constrain investment. Interestingly, the IMF pointed out that the average retail electricity prices were among the highest in the region in 2014.
The body said that GPL’s relatively high rate of technical and commercial losses also contributes to high electricity prices.
“Although the recent decline in oil prices has provided some respite, Guyana remains exposed to oil price corrections. Oil-dependent power generation is at odds with the vast renewable energy potential. The country has extensive hydro power potential, estimated at 7600 MW, which by far exceeds its annual consumption and installed capacity.
“Various studies have identified 67 sites as suitable for hydro power generation. Guyana’s climate is also suitable for wind and solar power generation while its sugar and rice industries provide opportunities for co-generation of electricity from biomass (sugarcane bagasse and rice husk).”
The IMF added, “A transition to a green power matrix will bolster resilience to shocks while reducing its carbon footprint, but has been delayed by various constraints. Interest in developing Guyana’s hydro potential dates back to the first oil shock of 1974-75.”
The body noted that plans to build a large hydroelectric project at Amaila Falls began in the late 1980s and evolved through several proposals and rounds of negotiations, but implementation had been constrained by the project’s large size, complexity, cost, and Guyana’s limited fiscal space.

NATIONAL ACCOUNTS
The IMF noted that the compilation of national accounts has been strengthened in the past decade, but some limitations remain in certain areas. In 2010, the Gross Domestic Product (GDP) was rebased with 2006 prices to reflect the structural changes since the transition to a market-based economy.
The Fund asserted that this resulted in a more than sixty percent increase compared to the old GDP, based on 1988 prices. The IMF stated that Caribbean Regional Technical Assistance Center (CARTAC) missions have provided technical assistance on national accounts, which helped strengthen production-side GDP compilation, the rebasing of national accounts and medium-term projections. It recommended in 2016 that further work could entail compilation of expenditure-side GDP and quarterly GDP.
Additionally, the body stated that the Bureau of Statistics (BOS) could increase the coverage of surveys, particularly with respect to the services sector. Since January 2010, the BOS has adopted a new household income and expenditure survey (HIES) and has expanded the basket of the Consumer Price Index and revised its weights.
Furthermore, the IMF said that the coverage of the CPI could be further broadened to reflect price movements in areas other than Georgetown. It said that there is also room to improve the timeliness of statistics on labour markets, gender and poverty.

REFORMS
There is scope for productivity-enhancing reforms in key sectors. With this in mind, the Fund noted during its review, the importance of lowering production costs in the sugar and rice sector given their high social impact and deteriorating market outlook.
The mission pointed out that Guyana’s extensive renewable energy resources could help achieve a durable reduction in electricity costs, which are among the highest in the region. It said that this could strengthen competitiveness by promoting value added industries.
The staff said, too, that improving the connectivity of small green technology electricity generators to the grid could help increase supply and reduce energy losses. It also stressed the potential of business outsourcing, telecommunications and ICT services as other areas for diversification.
Additionally, it was pointed out that population aging will put pressure on the National Insurance Scheme. In this regard, it recommended that increasing the statutory retirement age can help place finances on a more sustainable economic footing, and also contribute to a higher potential output.

BUSINESS CLIMATE
The IMF will also be focusing its attention in the area of Guyana’s business climate. In its 2016 report, the body said that it encouraged the authorities to further strengthen the business climate in priority areas.
At the time, it cited the World Bank’s 2015 Doing Business Report which ranked Guyana 137th out of 189 countries in terms of ease of doing business. The IMF staff noted several areas in which Guyana lags behind its regional peers, such as access to electricity and credit, and resolving insolvencies.
Furthermore the 2015–16 World Economic Forum’s Global Competitiveness Report ranked Guyana 121st out of 140 countries in terms of competitiveness, noting weaknesses in transport infrastructure, electricity and telecommunications, institutional quality, ICT, and innovation.
The IMF last year recommended that the public investment programme can help relieve structural bottlenecks such as transportation and electricity that have long been identified as impediments to growth and economic diversification.
(To be continued)

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