‘Natural Resource Curse’ could befall Guyana with excessive spending of oil dollars- IMF warns

Oct 14, 2022 News

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Kaieteur News – The International Monetary Fund (IMF) has projected that between 2023 and 2025 Guyana will see a massive ramp up in its oil production in the ExxonMobil-operated Stabroek Block. But with the Government already fixated on rapid spending of the imminent revenues to fuel its development agenda, the financial institution said there can be economic consequences that could befall the nation such as ‘natural resource curse.’

For those who may not be aware, the ‘natural resource curse’ is a phenomenon where a country rich in gold, diamond, or oil struggles to make prudent use of these resources, thereby leading to declining growth in other traditional revenue contributors. Countries like Nigeria, Angola and the Democratic Republic of Congo are often cited as examples of this state of affairs.

The IMF issued this warning in its September 2022 report which focused on Guyana’s economic well being and medium to long term prospects.

The Fund was keen to point out that oil production increased by 57 percent in 2021 to 110,000 barrels of oil per day (bpd). With the coming on stream of three additional fields—Liza-2 (in February 2022), Payara (at the end-2023) and Yellowtail (in 2025)—oil production is projected to reach over 800,000 bpd by 2026. Exxon is also pushing for approval for a fifth project which is expected to be reviewed this quarter and all things being equal, come on stream by 2026-2027.

The IMF has also noted that Guyana’s commercially recoverable petroleum reserves might reach over 11 billion barrels, the third largest in Latin America and Caribbean and one of the highest levels per capita in the world.

The financial institution said such significant resources could help Guyana address infrastructure gaps and human development needs.

It warned however that there are a few risks authorities ought to consider in dealing such matters. It said while higher global oil prices and additional gas and oil discoveries could significantly improve Guyana’s long-term economic prospects, increased dependence over time on oil revenue could expose the economy to oil price volatility. In addition, the Fund said, “Excessively rapid increases in government spending from oil revenues could subject Guyana to the ‘natural resource curse’ with significant inflationary pressures, eroding competitiveness from real exchange rate appreciation, and governance concerns.”

Kaieteur News previously reported that the Government has approved the transfer of US$607M ($126B) from the Natural Resource Fund. According to the IMF, Guyana’s rules governing the fund also allow it to take a minimum of US$500 million in any given year for budgetary needs.

In addition to the IMF’s concerns about the country’s ability to effectively spend and absorb such expenditure, it also expressed concern about the impact of new waves of the COVID-19 virus associated with new variants, and delays in vaccinations.

It said too that prolonged disruption of international commodity markets and heightened oil price volatility, aggravated by the repercussions from the Russian invasion of Ukraine, also represent (both downside and upside) risks to the outlook.

Furthermore, the IMF said the country must be mindful of impacts from its constrained labour market and the skills gap.

In fact, the IMF said the findings of the product-space and occupation-space analyses by a leading consultant in 2020 revealed how strategic diversification and workforce training can lead to a wealthier and more inclusive Guyanese economy.

The Fund said too that strategies on migration laws, local content requirements and educational funding will be key going forward. With the low base in education and growing demand for skilled labour, the IMF said the country needs to make a serious effort to reduce youth unemployment and build human capital – knowledge, skills, creativity, and well-being – by improving the education and health system.

It said such conditions are essential if the population is to effectively benefit from the wealth generated by the production of oil and other natural resources, as well as to generate ways to add the value needed to achieve the desired diversification of the country’s economy.

To fill the specialized labor gaps in the short term, it said the country will need to re-attract the Guyanese Diaspora and attract foreign professionals as did many Gulf countries including Kuwait. For encouraging the influx of Diaspora, it said the international experience suggests a multipronged approach including with creating a Diaspora ministry, and for some countries, especially in the transition economies, encouraging joint venture enterprises with Diaspora members. It said too that providing access to professional networks has worked quite well.

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