IMF warns Guyana to moderate spending on public investments

…says “baseline” vs “aggressive” spending reduces chance of Dutch disease
…urges equal levels of saving, spending during first 5 years

The International Monetary Fund (IMF) has recommended that Guyana adopt a “baseline” approach when it comes to spending oil money on public investments, in order to avoid the dreaded “Dutch disease” that is known to plague oil rich economies.
According to the fund, in its most recent report on Guyana, using an “aggressive” instead of a “baseline” spending model can have several negative macro-economic effects on a country that already has an infrastructure and development deficit.
“Dutch disease is lower under the “baseline’” approach,” the IMF team said. “Rapid growth in public investment spending in the “aggressive” approach would dampen private consumption and investment significantly due to large crowding out effects”.
The report added, in addition to higher real interest rates from large public sector borrowing in the short term, massive front-loading of Government investment spending would lead to higher inflation and more pronounced appreciation of the real exchange rate, adversely affecting export competitiveness.
According to the report, such spending would result in reduced output from the trading sector and, thus, worsens the “Dutch disease” effects. The report noted that the “baseline” approach reduces the chance for the crowding out of private buying. In addition, the report warned, the effect of investment from the increased Government spending is dampened.
“Despite the relatively lower amount of public investment spending to improve infrastructure compared to the “aggressive” approach, non-oil output growth in the medium- and longer-term are higher as public investment reinforces private investment, thus, minimising the effects of ‘Dutch disease’ and crowding out of private demand,” the report noted.

Spending
Despite this, however, the fund acknowledged that large transfers of oil money to the budget are expected over the next five years, as well as accumulated savings in the Natural Resource Fund (NRF). It, therefore, urged equal spending and saving during the first five years as the best option in Guyana’s context to help prevent the Dutch disease.
Based on projected oil prices and production, it noted that transfers to the budget will amount to a cumulative 32.7 per cent of non-oil GDP (Gross Domestic Product) over 2020 to 2024 and the balance in the NRF would amount to 30.1 per cent of non-oil GDP by end-2024. This presents an opportunity to scale-up capital and current spending to address infrastructure gaps and human development needs”.
“Staff views the implied roughly equal shares of saving versus spending of the oil income during the first five years as appropriate—it should contain “Dutch disease” effects. Staff emphasised the need to continuously monitor the economy’s absorptive capacity and to stand ready to scale back spending if signs of overheating or spending inefficiencies emerge”.
The Natural Resources Fund (NRF) Act remains the only piece of legislation specifically for the oil and gas sector that fully ventilated and passed. It creates the NRF fund and oversight committee, which will save and oversee oil revenue for Guyana.
Finance Minister Winston Jordan has previously said that oil revenue, when it arrives, will be divided into three parts: monies to go into the budget, money to be held as a buffer and monies to be saved for future generations. However, he has sought to downplay the amount of money Guyana will earn in 2020.
The report also notes that recommendations from past reports had included warning Guyana to keep its fiscal deficit reduced, make public investment implementation more efficient and to avoid non-concessional loans from external organisations.
“The authorities’ policies have been broadly consistent with these recommendations,” the report observed. “In addition, the authorities continue to benefit from Technical Assistance (TA) delivered by the Fund and other providers”.