Home News Mid-year report shows economy in serious danger of ‘Dutch disease’ – financial...
…as productive sectors in decline, FDI driven by preparations for oil
The 2019 Ministry of Finance Mid-year report is out and according to one financial analyst who perused the document, it shows that Guyana is headed towards an unhealthy dependence on oil and potentially the dreaded Dutch disease.
According to economist Dr Peter Ramsaroop on Saturday, the report shows that Foreign Direct Investment (FDI) is being driven at the moment by the oil sector, which is counterbalancing the uninspiring performance of the traditional sectors.
“Imports of intermediate goods into Guyana in the first half of the year expanded by US$170.4 million to US$706 million, driven largely by other intermediate goods, chemicals, parts and accessories imported growing significantly on account of oil and gas activities.”
“Imported capital goods increased substantially, by US$155.2 million to US$423 million, primarily attributed to a substantial expansion in mining machinery, again, supported by oil and gas activity,” Ramsaroop said.
However, these are the very conditions that can lead to the ‘Dutch disease’; an economic term used to define an imbalance in the local economy of an oil producer that can include rising currency values, non-competitive exports and the decline of traditional sectors.
“These are not indicators of a diversified economy that is growing but rather one that is now leaning towards sole dependency on one industry,” he said, noting that the Dutch disease is creeping in but there are no concrete measures to address it.
Ramsaroop noted that Government’s projected growth rate of over 4 per cent is supported largely by this imbalance in investments in the petroleum sector and not the traditional sectors. He made it clear that such investments have little trickle-down effects to small or medium-sized businesses.
According to the Bank of Guyana’s recently released first-quarter statistical bulletin, sugar experienced a major decline of 34.3 per cent, owing to the restructuring process the Guyana Sugar Corporation is undergoing. On the other hand, the decline of rice output by 9.3 per cent was attributed to the paddy bug infestation and the increased costs of production.
The mining and quarrying sectors exhibited lower production. According to the bulletin, there was a 4.9 per cent decline in gold declarations. The Bank cited particular mining companies. Troy Resources output declined by 40.4 per cent, while Guyana Goldfields showed slight increases.
One of the worst-hit sectors was the bauxite industry, which contracted by 24.4 per cent in terms of production.
The Bank attributed this to industrial unrest at the Russian-owned bauxite company, RUSAL.
“Analysis of the non-petroleum economy would reveal that the economy has not only been reeling from stagnation but rather, is regressing by as much as double-digit figures with even more troubling signs on the horizon,” Ramsaroop said.
“What the Minister of Finance would wish to silence in the report that the inflation rate – already calculated using suspect and conservative figures for a Consumer Price Index (CPI) – has also been revised upwards by more than the growth he projects.”
Among the measures that have been touted to prevent the resource curse is a ‘depletion’ policy. Last year, this publication had quoted former Vice President for Strategy and Policy Development at BP, London, and visiting professor at King’s College, Nick Butler, as making this suggestion.
Butler had said that a depletion policy would help to set the pace of growth in the oil sector. He said the idea behind this is to phase production over a long period, avoiding a gold rush and allowing local companies to build up their capabilities to enable them to win a share of any oil-related activity.
“They don’t need to develop it all at once. I would support a depletion policy where you limit what you produce year by year to manage the inflow of money so that the exchange rate is not destroyed by this one single, successful industry,” he was quoted saying.
That covers everything from the development of a new port, infrastructure, engineering support and all the other essential onshore services from food to accommodation for the oil workers.
Butler noted that if Guyana is to get this wrong, it would have devastating effects for agriculture and local businesses. It would also mean employment will become less.
It was only this week that, in the wake of a Bloomberg report critiquing Guyana’s unpreparedness for its oil and gas sector, Finance Minister Winston Jordan had admitted that indeed, Guyana is not at the stage where it ought to be ahead of first oil.
This comes even as ExxonMobil is headed towards 2020 first oil, having found billions of barrels of oil in the Stabroek Block since 2015 and Tullow, a British-based oil company with shares in the Orinduik and Kanuku blocks, has also recently found oil.