Risks vs. Reward… Oil can increase Guyana’s economic challenges

Feb 14, 2018 News

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–World Bank Official
By Kiana Wilburg

The local oil and gas debates have been fraught with critiques about how citizens will stand to benefit from the sector and how much will be put aside for future generations. But even as reward is fundamental to the oil and gas industry, so is risk.
At the recently concluded Guyana International Petroleum Business Summit (GIPEX), World Bank Senior Country Officer, Pierre Nadji, was one of the eminent minds who highlighted the risks facing Guyana as it inches closer to oil production.
Nadji articulated that, indeed, oil can bring transformational changes and even revolutionise the society. However, the challenges in getting to those outcomes are enormous.
The Senior Country Manger said that there are several challenges which will remain with Guyana, with or without oil. These include vulnerability to the effects of climate change, high susceptibility to commodity prices due to a lack of economic diversification, an underdeveloped investment climate and lack of infrastructure to support private sector growth.
The official also added that Guyana’s education systems still face challenges in terms of building the right skills to meet the market demands.
“With oil, some of these challenges are likely to be exasperated. The economy could be exposed to greater volatility once oil production begins. This will put much greater pressure on fiscal monitoring policies to maintain the macroeconomic stability.”
“In that sense, I would like to stress the importance of fiscal sustainability/ fiscal consolidation. This is essential to address vulnerabilities and reduce debt accumulation. Financial sector strengthening is critical to private sector development and enhancing banking sector resilience.
“The 2008 financial crisis was not long ago and you want to be able to handle the flow of money that would be coming into the country.”
The official said it is essential for the authorities here to establish a mechanism to save oil revenues which would be important to reduce the risk of currency appreciation as well as improve the welfare of future generations. There are many examples of this, Nadji commented.
OTHER RISKS/ CRUCIAL QUESTIONS
As witnessed in many countries, the World Bank official said that natural resource discovery is often associated with rapid currency appreciation, which leads to a loss of competitiveness. He said that this affects especially traditional sectors such as manufacturing and agriculture. Nadji said that this could be a risk in Guyana.
Additionally, Nadji noted that there are some crucial questions which must be considered.
“What will happen to agriculture or what will happen with the urban development of Georgetown? We have seen property value increase tremendously with government having limited capacity controlling all sorts of investments. What will happen with the population in Guyana?”
As one considers the aforementioned, the official said one should also bear in mind, the importance of civil society and the willingness of the people in working for a common objective. Nadji said, too, that what drives staff at the World Bank group is eliminating poverty and improving shared prosperity.
In that sense, he said it is crucial that a country has a shared vision about the future. If the oil becomes a curse as seen in a few countries, Nadji noted that poverty can increase, and wealth, rather than being shared, ends up being overly concentrated in some provinces.
He said that the risks regarding issues of corruption such as misappropriation of funds also calls for increased governance transparency. He said that this is essential. The World Bank official believes that Guyana has made some important steps. It became a member of the Extractive Industries Transparency Initiative (EITI). The officer noted, too, that the Government is on the right path with its green state development strategy.
EITI STATUS
The International Board of the Extractive Industries Transparency Initiative (EITI) has approved Guyana’s application to become a member of the prestigious anti-corruption body which demands good governance in oil, gas and other mineral resources.
Head of the EITI local chapter, Dr. Rudy Jadoopat, has said that the next step is for Guyana to submit its first EITI report within 18 months. He said that it must meet all the strict EITI Requirements which are covered in the EITI Standard 2016 (See link for more information on this: https://eiti.org/document/standard.)
Fredrik Reinfeldt, Chair of the EITI, said that the expected growth of the oil and gas sector in Guyana is both a huge opportunity and a big challenge. He said that the further development of the mining sector is also an important focus of public debate.
Further, Reinfeldt noted that implementing the EITI rules will help Guyana lay the foundation for transparent and accountable management of its natural resource wealth.
Minister of Natural Resources, Raphael Trotman, is also pleased with Guyana’s success in this regard. He noted that the Government of Guyana has approached the EITI process with a commitment to transparency and openness as well as a recognition, acceptance and deliberate effort to foster the truth that the resources of this country belong to every Guyanese in equal measure.
Trotman asserted that this EITI initiative has the potential to deliver significant benefits to the Guyanese economy through increased accountability and transparency, translating into more informed public policy debates and guidance on managing our resource endowments.
He said that it also has the potential to increase the confidence of business and enhance Guyana’s reputation as a sound investment destination.

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