Guyana's Post Oil GDP Growth Rate and its Implications

Guyana’s Post Oil GDP Growth Rate and its Implications

Feb 16, 2020 Letters

Dear Editor,

While Guyana might indeed turn out to be the fastest-growing economy in the world in 2020 with a Gross Domestic Product (GDP) growth rate of 86% (IMF), one might note that there are other predictions, such as the 30% by IHS Markit and of course the IDB’s projection that Gross National Income (as against GDP), will grow by 39% in 2020. One might further note that a focus on 2020 only, is particularly shortsighted.
To think about even 2021, it would help to recall that a country’s GDP increases one-for-one with the annual amount spent by consumers, investors and government on all goods and services, and with its exports (the amount spent by foreigners on locally produced goods and services); but it decreases one-for-one with our imports. It’s also useful to note that the government’s debt service payments are accounted for in the same way as imports in the calculation of GDP. While this might seem to be all straightforward, the relationships between and among the things we add up to get GDP, are what determine what GDP eventually ends up being. Finally, the growth rate of GDP is simply the year-on-year change in GDP, expressed in percentage terms.
What all this means is that Guyana’s GDP growth rate will be significantly lower than the 2020 growth rate. To make the point dramatically, to the extent that the value of oil exports remains the same in 2021, Guyana’s 2021 GDP growth rate could even be zero if all the other elements in the GDP accounting identity, each individually or as an aggregate, remained the same as well. And if oil production remains the same but oil prices were to decrease on average for the year 2021, then the GDP growth rate could even be negative, if again all the other elements of the GDP accounting identity remained the same, each individually or as an aggregate.
What is likely to be the case in 2021? The IMF predicts that GDP growth will average 28% in 2020-2024 but this average includes the 86% projected for 2020. We ought to consider that exports from Guyana’s non-oil sector may not make up for zero-growth in the oil sector if that were to happen because of oil price stagnation. Even without the help of the so-called Dutch Disease, but perhaps with the help of policy decisions, the bauxite and sugar sectors have been compromised, with effects that could last into 2021. We cannot expect rice and timber exports to increase rapidly. While gold exports could very well increase, gold, being a commodity itself, is perhaps not the best indicator of the performance of the non-oil sector.

We can also expect investment and consumer expenditures to rise, boosting GDP; but depending on our ‘import coefficient’, there could well be a significant increase in imports and this would mitigate the effect of the expenditure increases on GDP and its growth. Further, the increased investment will largely come from FDI, and will therefore, imply a further deterioration of the current account of the balance of payments. Any Minister of Finance will, therefore, want to look to the item he or she has control over, i.e., government expenditures, to ensure that the decline in the growth rate of GDP from its 2020 level will not be politically and economically unacceptable. That Minister of Finance will not only have oil revenues that are available from the Natural Resource Fund, but also will have a rather enhanced ability to borrow (from abroad), should the need arise.

The general point is that we must not be swept away by the talk about the Guyana economy being potentially the fastest growing one in 2020. Moreover, we really ought to think, and think seriously, that whatever our GDP and GDP growth might be, we can be sure that our natural capital is being used up, on many fronts, to give us that GDP and GDP growth.

Thomas B. Singh
Director
University of Guyana GREEN Institute
& Senior Lecturer
Department of Economics
University of Guyana