Guyana’s potential oil prosperity and IMF’s words of caution

Jul 16, 2017 News

---

The International Monetary Fund (IMF) in its 2017 review of Guyana’s economy was keen to focus its attention on the nation’s potential oil wealth.
This is understandable as the oil and gas sector is one which could ultimately alter Guyana’s fiscal landscape, ability to access to concessional financing in the future, and its debt management portfolio.
From its report, (which all are free to have a read of by clicking on this link: http://www.imf.org/en/publications/cr/issues/2017/06/28/guyana-2017-article-iv-consultation-press-release-staff-report-and-statement-by-the-45010), it is clear that the IMF is already issuing cautionary words when it comes to oil and its murky nature.

COMPREHENSIVE FRAMEWORK
Once all goes well with ExxonMobil, Guyana is expected to become an oil-producer by 2020. In 2015, ExxonMobil made a significant oil discovery offshore, which is conservatively estimated to hold between 800 and 1,400 million barrels. Commercial production is planned to commence by mid-2020, with an output of 100,000 barrels/day.
On that premise, the Directors of the Fund were encouraged by the Government’s expressed intention to create a “comprehensive framework” to manage oil wealth.
The Directors said that it is important that this framework be in place prior to the 2020 budget.
They said, “As a new oil producer starting from scratch, Guyana is in a good position to put in place a framework that limits pro-cyclical spending and attenuates the impact of oil price volatility on the budget and the economy. Other fiscal structural reforms related to public financial management, procurement, and investment are important, to ensure that the oil wealth is used efficiently.”
Indeed, a “comprehensive framework” will be necessary as the IMF, which has years of experience in reviewing oil-rich nations, understands the importance of nations arming themselves with strict and regimented rules to ensure transparency before the oil starts pumping and the revenue starts flowing.
As simple as those statements appear, they are extremely important to the nation’s future with oil. Just think about it for a few seconds: Is there any sector in Guyana which has benefitted from a “comprehensive framework” that has allowed for transparency and the proper management of the wealth that was garnered?
In fact, the lack of a comprehensive framework for managing the wealth from Guyana’s other natural resources has left it decades away from the kind of meaningful development it could have achieved today.
Indeed, what the local authorities will be attempting here will be no easy task.
While the rest of the citizenry wait to hear of the details of the Government’s “comprehensive framework” for the oil sector, one can assume for the time being that the plan is one which entails the establishment of a Sovereign Wealth Fund (SWF), the strengthening of fiscal frameworks and systems at the Guyana Revenue Authority (GRA) and amendments to the relevant legislation.
Additionally, the local authorities have informed the IMF that they are working on other key elements of the fiscal regime, including drafting the Petroleum Law and establishing a Petroleum Commission. They intend to use future oil revenue to help meet key development objectives, based on a transparent and rules-based framework.
The authorities also reiterated their plans to anchor future oil wealth management in a comprehensive legal framework.

TRANSPARENT SPENDING
The International Monetary Fund was careful to stress on the importance of the Government putting in place, mechanisms to ensure the transparent spending of the oil revenue to come.
In this regard, Directors attached to the global organization emphasized that sound fiscal practices suggest saving a share of the oil revenue for future generations. They said, “Oil-financed spending should be transparent and channeled through the budget toward projects that enhance the economy’s physical and human capital”.
On a related note, the IMF commended the local authorities for drafting a Natural Resource Fund legislation and requesting the Fund’s technical advice on this topic.
IMF Staff still stressed the importance of transparency and good governance in the management of the oil industry and even welcomed the authorities’ plans to join the Extractive Industries Transparency Initiative and adhere to the Santiago Principles for Sovereign Wealth Funds.

GDP VS. GNP
Based on its projections, the IMF is of the view that oil will have a large impact on Guyana’s Gross Domestic Product (GDP). (GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. (http://www.investopedia.com/terms/g/gdp.asp)
On the other hand, however, the IMF noted that the oil sector will have a much smaller impact on the Gross National Product (GDP). (GNP is an estimate of total value of all the final products and services produced in a given period by the means of production owned by a country’s residents.
(http://www.investopedia.com/terms/g/gnp.asp.)
The IMF’s estimates and projections are based on data as currently compiled, but with a conservative ad hoc inclusion of oil production from 2020 onwards.
The Fund believes that the main direct effect on the domestic economy will be through fiscal revenue.
The revenue-sharing agreement sets the government’s share at 50 percent of “profit oil.” With 75 percent of total oil revenues initially allocated for “cost recovery,” the government’s share is only 12.5 percent, but will increase significantly after Exxon Mobil and partners recover their initial upfront investment.

ECONOMIC DIVERSIFICATION
The Fund projected that the development of oil resources and public investment will support medium-term growth. Its officers noted that economic growth is also expected to hover around 3½-3¾ percent during 2017–19, driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in rice production.
“This assumes that oil production starts in mid-2020 at 100,000 barrels per day for up to eight years, before gradually declining. The prospects of other fields (Liza-2, Payara and Snoek) are still in the exploration stage and could substantially increase oil production and proven reserves.”
The Fund noted that the long-term outlook for the nation hinges on the government’s ability to improve the business climate and use the oil windfall to increase potential growth through productivity-enhancing reforms and economic diversification.
The organization also stated that inflation is expected to be around 2½-3 percent over the medium term.

LOSING CONCESSIONAL LOANS
According to the IMF, oil revenue is expected to amount to 2.6 percent of GDP in 2020 and will rise to about 4.6 percent in 2021, which is the first full year of oil production.
The Fund believes that the shares of fiscal revenue and expenditure in GDP will decline, due to the larger increase in the latter with the start of oil production. It said that the oil is exported with 50 percent of Exxon’s (and its partners) proceeds repatriated through the current account and the remainder through the financial account.
“Several countries experienced competitiveness problems in other sectors after they became oil producers. These Dutch Disease considerations should be manageable given the magnitude of the windfall.”
With the aforementioned in mind, the IMF cautioned that as Guyana gets richer, there will be a loss of access to grants and concessional loans. They are assumed to taper off with the start of oil production.

---

---