Pre-production oil revenue borrowing misguided, poor economic advice

Dear Editor,

I refer to the article titled “Guyana should go the route of resource-based borrowing” published on January 15, 2017, in another newspaper.

The recommendation that Guyana should go the route of pre-production oil revenue borrowing is misguided and a poor economic prescription.

Resource-based borrowing should not be confused with pre-production oil revenue borrowing, for there are fundamental differences between the two – the main difference being timing. Borrowing on pre-production oil revenue ignores the multiple risks facing the realisation of such revenues. While preliminary results show that Guyana may realise the commercial production of oil in the future, these signals should not be taken as forgone conclusions.

The industry still faces multiple risks in commercialising oil production. Oil companies have not yet ruled out all geological risks that may hinder the extraction process. Concerns about the quality of oil available, the actual amount of reserves, the scale of production and other market and financial risks still loom large. Pre-production oil revenue borrowing would essentially be putting Guyana’s economy and Guyanese taxpayers at risk of over-indebtedness and at the mercies of multilateral lending institutions. Going this route could lead to more taxes on families and businesses coupled with harsh financial and economic consequences with the slightest setback in the oil industry.

There are policies that are more critical for laying a strong foundation for the oil industry and the economy that the Government should prioritise at this stage. These include:

• Develop industry-specific legislation that provides a legal framework for the oil industry

• Policy reforms such as realigning education and skills training policy and the development of appropriate labour standards to meet the needs of the oil industry

• Develop appropriate legislation to strengthen the legal systems to be able to deal with dispute resolution that may arise within the industry in a timely manner

• The development of environmental standards specific to the oil industry that ensure environmental preservation without hindering the industry. For example, holding oil companies accountable in the event of spills that can have serious environmental consequences

• Develop fiscal management, accountability, and oversight mechanisms to ensure oil revenues – whenever realised – are properly managed and directed towards building a strong economic foundation for long-term growth. Such mechanisms include setting up of designated trust funds backed by appropriate legislation and earmarked for specific development purposes with funding from oil revenue.

These are common-sense policies that do not require pre-production oil revenue borrowing and are more critical for the operation, commercialisation, effective management, and sustainability of the oil industry as it matures. Ensuring current tax revenues are having meaningful changes to communities in the areas of affordable housing, safe and clean communities, quality and affordable health care, and upgrading the nation’s transportation system are more important priorities at this stage. These are critical public investments with high long-term returns and form the backbone of economic take-off.

It is also important for the Government to develop a national economic policy with clear developmental priorities that would utilise oil revenues. Taking on new debt to fund projects in a fragmented and random manner would be a colossal mistake. The identification of projects should be done within a broader economic strategy with specific developmental outcomes. The development of such strategy must include local government and civil society participation. More importantly, such strategy must focus on policies that would foster broad prosperity for all Guyanese and not enrich political elites and the wealthy.

While I have reservations with the Dutch disease argument in its totality – a situation where the discovery of a natural resource leads to economic underdevelopment – one can easily recognise why countries which found oil became worse economically instead. Short-sighted Government policies that focus on political gains at the detriment of prudent macroeconomic policies are the root cause. Borrowing on pre-production oil revenues is one such short-sighted policy.

Adding new debt to Guyanese taxpayers in a premature manner and on revenues that are far from being realised is a receipt for economic failure. Already, recent changes to the tax laws have increased the burden on taxpayers, especially the poor and most vulnerable. Allowing time for economic adjustments to take place and for the full impact of these policies to be realised while laying the foundation for the oil industry and investing in basic public services critical for economic growth are not just good economic policy but also good governance.

The coalition government has an opportunity to lay a solid foundation for Guyana’s future. Resisting the temptation of pursuing political gains at the expense of the nation’s economy and the economic future of the Guyanese people is necessary. By making policy choices that are more critical to economic growth and a strong foundation for the oil industry given its adolescent age, the coalition Government can achieve both economic and political gains – a win-win approach.

Sincerely,

Dhanraj Singh

Economist