Under Article IV of the IMF’s Articles of Agreement, the IMF is mandated to hold bilateral discussions with member countries annually. Today’s article seeks to extrapolate and review the findings and recommendations of that report for Guyana for the fiscal year ended 2017.
The IMF report acknowledged that economic growth slowed in 2017, albeit Guyana’s macroeconomic outlook remains favourable. This premise is largely underpinned by the impending oil production in 2020. As such, the report posited that the extractive industries and public investment will be key drivers of economic growth over the medium term. It was also emphasised that strengthening private sector confidence, reducing the cost of doing business, and advancing productivity-enhancing reforms are essential for the sustainability of growth in the short term, and for realising the full benefits of oil, once it materialises.
A comprehensive set of recommendations was presented, but space precludes a detailed review and discussion of these in a single article. However, the author shall examine a few of the recommendations highlighted therein for now.
To this end, the author examines hereunder two of these recommendations: Reducing cost of doing business, and strengthening private sector confidence.
Now, when we speak of confidence in an economy, there are different dimensions in relation to this notion, in that there is private sector confidence and also consumer confidence; and, of course, foreign investors’ confidence.
Firstly, consumer confidence is an important factor in the overall economic development of an economy. In fact, economic development is driven by consumer demand, and not only on the basis of low inflation or macroeconomic stability. Therefore, the level of consumer confidence about future levels of income and job prospects determines the rate of savings, spending and investing, borrowing, and the level of tax revenue in the economy as well. Theoretically, an optimistic outlook on the economy increases consumers’ confidence in regard to their personal financial situation, which may increase the level of consumers’ expenditure within an economy. Hence this in turn leads to higher demand, which ultimately spurs economic growth (Sergeant et al, 2011).
It is against this background that policymakers should seek to create an environment in which consumer confidence is optimal. Having the right mix of fiscal and monetary policies aimed at encouraging investment and generating sustainable employment is deemed critical. Such policies should therefore consider the following:
(1) The level of taxation – higher taxes reduce disposable income, which in turn affects the level of spending in the economy – that is, it constrains spending.
(2) Adequate regulation and supervision of the financial sector to ensure stability in the banking system. This has implications for the level of investment and savings.
(3) The level of debt – unsustainable debt levels will influence future fiscal policy, often leading to higher taxes and cuts in government spending. This, in turn, will have a negative impact on economic growth.
(4) Inflation and interest rates — inflation should be kept at a rate which does not significantly erode purchasing power, while interest rates should not make the cost of borrowing too high, as this can dampen investment and expenditure.
It is important to also have, in addition to these, effective management of fiscal resources, and measures should be put in place to mitigate external shocks and improve resilience (Sergeant et al, 2011).
Turning now to the private sector and development – in developing countries, the private sector drives the economic growth that is needed to alleviate poverty. Therefore, more can be done to create the right incentives and policy frameworks for doing business to contribute to economic development. With the right incentives, businesses can drive low carbon growth through green investments (ODI, 2010). Empirical evidence confirms that a good investment climate and open and competitive markets can help to ensure a good development impact, but these are rare in developing countries like Guyana.
Research has found that in developing countries there is a great deal of government intervention in the market; for example, through industrial policies that often distort the markets. The Overseas Development Institute has thus argued that the time is now ripe for a new type of industrial policy – moving away from picking winners, offering subsidies and import protection. Rather, the intelligent and carefully prioritised government policy is to encourage and facilitate private sector development in promising high growth sectors, and in a market friendly manner. In so doing, the ODI (2010) has presented some practical proposals premised on extensive field work:
(1) Consult business to identify growth sectors that could be transformative – enabling economies to move from low skilled commodity-based industries to sectors with more scope for technological progress and the building of human capital.
(2) Help these sectors grow by identifying, again consultation with business, priorities for reform.
(3) Work with business to encourage business models that are pro-development.
In conclusion, it is becoming increasingly recognised that the private sector has an important role to play in low carbon growth in developing countries; but can only achieve such potentials when the right policy frameworks are in place.
