March 17, 2017
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
A staff team from the International Monetary Fund (IMF), led by Mr. Marcos Chamon, visited Georgetown during March 6–17 to hold discussions for the 2017 Article IV Consultation. Ms. Srobona Mitra, the FSAP mission chief, joined the concluding meeting. The team met with Finance Minister Winston Jordan, Natural Resources Minister Raphael Trotman, Public Infrastructure Minister David Patterson, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, the opposition party, labor unions, and other stakeholders.
Guyana’s economy continued to expand, although growth was uneven. In 2016, subdued agricultural commodity prices and adverse weather conditions led to a contraction of agriculture, with negative spillovers to manufacturing and services. Additionally, delays in public investment remained a drag on construction. Nevertheless, GDP was buoyed by very large increases in gold output, including from new mines, with total real GDP increasing by 3.3 percent despite a contraction in non-mining GDP. In 2017, the mission projects real economic growth of 3.5 percent driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in rice production. Despite weather-related shocks to food prices and excess demand during Guyana’s Golden Jubilee, inflation remained subdued at 1.5 percent at end-2016, and is expected to be around 2.5 percent at end-2017.
Increased exports of gold and improved terms of trade helped Guyana achieve a current account surplus. In 2016, the current account balance improved to 3.5 percent of GDP from a 5.7 percent deficit in 2015, reducing the overall BOP deficit. Reserve coverage remained at about 3.5 months of imports. The anticipated start of oil production in 2020 will provide a significant boost to exports and official reserves in the medium-term.
The fiscal deficit widened relative to 2015, but was smaller than budgeted. The 2016 nonfinancial public sector deficit is estimated at 2.9 percent of GDP, lower than the budgeted 5.5 percent. Despite slower than expected growth, fiscal revenue increased due to improvements in tax administration and higher royalties from the mining sector. Expenditure increased less than projected mostly due to lower than budgeted public investment. In 2017, the deficit is projected to increase to about 7 percent of GDP, due in part to delayed capital spending from 2016 and the reclassification of subsidies to state owned enterprises as financing instead of revenue to the receiving enterprise.
The mission welcomed the authorities’ plans to establish a comprehensive legal framework for managing oil wealth. The authorities are preparing draft legislation for a fiscal regime for oil revenues, and a sovereign wealth fund. The IMF stands ready to provide technical advice in these areas. The mission commended the authorities for refraining from non-concessional external borrowing against future oil revenue and urged them to continue to maintain a prudent external debt stance. The mission encouraged the authorities to continue to strengthen public procurement and public investment management in line with international best practices. Improving the appraisal, selection and execution of projects could enhance the efficiency, timeliness and quality of public investment.
Fiscal consolidation would help slow debt accumulation before the onset of oil revenues. The debt-to-GDP ratio is projected to reach 61 percent of GDP by 2019. However, debt sustainability risks remain moderate. Authorities noted that the debt to GDP ratio will decline rapidly after the start of oil production, dropping to under 50 percent by 2020. The mission recommended fiscal adjustment to safeguard against downside risks. The adjustment could be achieved by curtailing the growth of current expenditure, supported by public enterprise reform. The mission welcomed the VAT reform which broadened the tax base while reducing the rate from 16 to 14 percent, and encouraged authorities to continue to strengthen tax administration. The mission also welcomed the authorities’ interest in issuing a long-term domestic bond to substitute for short-term domestic financing, and help develop capital markets. The mission stressed the importance of settling government balances at the Bank of Guyana (BoG). Going forward, authorities are encouraged to consolidate government accounts at the central bank and establish a Treasury Single Account in line with international best practices.
Sustaining growth hinges upon improvements to the business climate, private sector confidence, reinvigorating construction activity and productivity-enhancing reforms in key sectors, including agriculture. The mission welcomed the progress in liberalizing the communications sector, and the authorities’ plans to increase the contribution of low cost renewables to the energy matrix, improve transportation links, and modernize the payment system. Addressing these long-standing structural impediments will stimulate construction, help raise productivity in traditional sectors, facilitate diversification into higher added-value activities, and make growth more inclusive. The mission encouraged the authorities to press ahead with the overhaul of the sugar industry, while being mindful of the large social impact and providing a safety net to protect those affected by that process.
The monetary policy stance should remain accommodative given low inflationary pressures and weakness in economic activity. However, pass-through from the VAT reform to inflation should be closely monitored. Guyana remains vulnerable to external shocks due to its dependence on imported oil and the concentration of exports on a few commodities. The mission noted the recent increase in exchange rate flexibility, which should facilitate adjustment to external developments, and safeguard reserves. The inter-bank foreign exchange market appears segmented and illiquid, and could be further developed, including by enhancing the transparency of market activity. The mission recommends that any official foreign exchange purchases and sales use a market mechanism similar to the one used for auctioning treasury bills.
This year’s consultation included an in-depth assessment of Guyana’s financial sector under the IMF and the World Bank’s Financial Sector Assessment Program (FSAP).
Key findings include:
- The financial oversight framework continues to be strengthened. The authorities have introduced a more structured approach to supervision, expanded the supervisory and regulatory perimeter, and drafted a Crisis Management Plan. The FSAP recommended making supervisory oversight, from routine supervision to intervention and resolution, internally consistent. The authorities are already taking steps in this direction.
- Weak activity in a few key sectors led to a notable increase in Nonperforming Loans (NPLs), and a decline in private credit growth. While banks’ reported capital adequacy ratios and profitability are high, slow collateral recovery, unrecorded related-party exposures and loan misclassifications account for inadequate provisioning. The more timely and effective enforcements recently initiated by the BoG must be continued to address these supervisory gaps.
- The BoG’s supervisory guidelines should be revised to eliminate reduced provisioning requirements for “well-secured” portions of NPLs. The BoG should also encourage banks to cease use of overdraft lending for commercial purposes; revise the definition of related parties to reflect international standards; and increase the minimum capital requirements from 8 to 12 percent of risk-weighted assets to enhance loss absorbency.
- Banks’ strong interlinkages with the domestic and regional sovereigns; complex ownership structures; and substantial related-party lending can amplify potential shocks. Stress tests found the banking system resilient to severe shocks, but there are vulnerabilities in some institutions. Credit and deposit concentrations are high, and underpin the need for requiring banks to have contingency funding plans. Systemic risk assessment should track the ownership linkages of banks, private sector balance sheet strength, and house price growth.
- Operationalizing the crisis management framework will require proper sequencing and substantial amendments of the Financial Institutions Act (FIA). An effective resolution regime and a formal framework for emergency liquidity assistance are prerequisites for a Deposit Insurance Scheme. The FIA should give BoG powers and tools to carry out orderly resolution of banks and prevent Courts from reversing BoG’s actions.
- Losses of correspondent banking relationships (CBRs) continue to be a major concern for trade finance and remittances. While Guyana has commendably exited the Financial Action Task Force monitoring and concluded a National Risk Assessment, it should continue to strengthen its Anti-Money Laundering and Combating the Financing of Terrorism framework in line with international standards. Stronger supervisory and regulatory regimes, in line with the FSAP recommendations, and regional CBR accounts to help international banks exploit economies of scale could help ameliorate the problem.
- The FSAP also provided advice on strengthening insurance and pensions supervision, improving access to finance, and upgrading payments and settlement infrastructures to improve financial development.
The IMF Executive Board is expected to discuss Guyana’s Article IV consultation in late April 2017. The mission is grateful to the authorities and other Guyanese stakeholders for their availability, collaboration, and hospitality.