Today’s article is the final piece of a series of articles on the emerging oil-and-gas sector in Guyana. It is fitting that I conclude this subject matter by examining in some more detail the likely economic impacts of oil on the economy. I shall therefore do so from the point of view of two scenarios – best case and worse case — using the figures I computed last week.
The first being in a worst case scenario, we assumed Guyana should earn approximately US$34.5 million, representing earnings from royalties only at current oil price on the world market, which is below US$50 per barrel. And in the best case scenario, we established oil earnings should be about US$247million, or Gy$50 billion. Hopefully, depending on production, this could be greater.
The table below illustrates some key macroeconomic indicators which were extracted from the Bank of Guyana’s Annual Report for 2016.
GDP at market price recorded as at the end of 2016 was $711 billion; aggregate expenditure was recorded at G$775.7 billion, giving rise to a resource gap of $64.1 billion (BOG annual report, 2016).
Key Macroeconomic Indicators G$ BillionKey Macroeconomic Indicators G$ BillionGDP at market price 711.7Aggregate expenditure 775.7Resource gap 64.1National Budget (2017) 250Production (GDP by sector) Sugar 15Rice 36.8Gold 171.1Bauxite 19Timber 8.3Other (fish & shrimp, beverages, foods, re-exports, vegetables, rum & spirits) 46.3Projected Oil revenues (worse case) 7Projected oil revenue (best case) 50
‘Resource gap’ in economic terms is defined as the difference between investment and domestic savings. Using these indicators as the basis for the sake of computing and interpreting oil revenues relative to GDP, oil revenue will contribute about 1 percent to GDP from this perspective – that being revenues from royalties only. In a best case scenario, we could deduce from the table above that oil earnings represent about 20 percent of the national budget (2017 national budget) and 7 per cent relative to GDP. It would be interesting to know how the oil revenues will be spent; or, rather, how it would be allocated in the economy. At this stage, we do not know if the country will receive that amount in the best case scenario, hence these variations are premised on pure assumptions.
In order for there to be positive economic impacts, there needs to be identified a series of developmental avenues that will create and foster long-term growth and development for the economy. For example, how will the local private sector benefit? What portion of the revenues will they be able to capitalise on? What opportunities are going to be available? Currently, a few private companies have established strategic alliances with the oil companies, to lend support services.
These are, of course, positive for the economy; but how many are local companies? Guyana is historically known for receiving what I would describe as ‘drizzles’ from such like foreign direct investments. Take, for example, gold: large foreign companies operate in the gold mining sector, but the greater part of the profits is redirected to the foreign country. I am afraid that it would appear that a similar pattern is developing with the emerging oil-and-gas sector. We have seen that one local law firm publicly announced a large number of foreign companies are rushing into Guyana to get a bite of the oil benefits. The good thing about this is that it will boost the confidence level of both foreign investors and local businesses in the economy, and in turn consumer spending as well. Confidence in an economy is of critical importance. However, the downside to this would be that the greater part of the profits will be shipped out to the foreign countries, so Guyana will never experience the larger and broader benefits that it may bring or generate.
With that said, I now conclude the oil discussion, and we now have to wait and observe how the oil-and-gas sector will actually develop; what decisions policymakers are going to make in these regards, and how those decisions would impact the economy in real terms. Of course, as these developments materialise, this column will weigh in on those matters. We can only hope for the best at this point.
