Guyana Economic Report for 2006[1]

GUYANA 1. RECENT ECONOMIC PERFORMANCE A. Overview Economic activity in Guyana was quite robust in 2006 with real GDP growth estimated at 4.7% compared with a revised figure of -1.9% in 2005. This strong performance resulted in part from a substantial turnaround in the core production sectors, particularly sugar and rice, following the flood-induced contraction in 2005. A strong surge in investment spending, both public and private, associated with the hosting of CWC 2007 matches; and heightened domestic demand together with an absence of any significant pre- or post-election violence which marred the country’s last three general elections (general elections were held in mid-2006), contributed to the outturn. With respect to prices, the consumer prices index showed low growth primarily on account of falling oil prices in particular and generally lower import prices. Public finances were characterised by solid gains particularly on the revenue side, as income tax collections reflected the buoyancy in the economy. On the expenditure side, one-off election-related outlays and accelerated transfers to the Guyana Sugar Corporation (Guysuco) for the Skeldon Estate Modernisation Project contributed to the growth in non-interest expenditure. Significant debt write-off within the context of the Multilateral Debt Relief Initiative (MDRI) as well as tail-end relief under the Enhanced Highly Indebted Poor Countries (E-HIPC) initiative, led to higher grant receipts in 2006. The monetary sector continued to be relatively liquid as deposit growth outpaced credit demand. Increased economic activity characterised by the growth in domestic consumption and investment precipitated deterioration in the country’s external current account position, resulting in some pressure on the exchange rate. Although the new Living Standards Measurement Survey did not start in 2006 as originally programmed, anecdotal evidence suggested that poverty levels might have been positively impacted given the rise in income associated with strong aggregate demand. Similarly, the growth in the economy together with a number of short-term employment programmes, especially those aimed at the ongoing country-wide clean up and beautification, would have had lowered the rate of unemployment. B. Sectoral Performance Real GDP growth was estimated at 4.7% in 2006 compared with revised growth of -1.9% in 2005. This relatively strong broad-based performance was driven by creditable outturns in both the agriculture and nonagriculture sectors. Mining and Quarrying was the only subsector estimated to have registered a decline during the review period. Sugar Following the severely flood-affected 2005 output performance which pushed sugar output to 246,050 tonnes, the lowest level in over a decade, sugar production grew by 5.5 percent to 259,588 tonnes in 2006. However, this volume was still well below the 5year production average of 297,858 tonnes as well as the record high of 331,067 tonnes recorded in 2002. A stronger output performance was thwarted primarily by above average rainfall levels which adversely affected both planting and reaping conditions, and also served to reduce the sucrose content in harvested canes thereby limiting sugar yields. This notwithstanding, the ongoing modernisation project in the sector led to higher levels of mechanisation with an associated reduction in average production cost. In many respects, 2006 can also be considered a watershed year for sugar as it marked the commencement of the new price structure governing the EU sugar regime. Exports to that crucially important market were subjected to the first price cut of 5% from Guyana 56 CDB Annual Economic Review 2006 July 1, 2006. This reduction is expected to be applied until October 2008 when an additional 20% reduction will be applied. Rice Output of rice also rebounded in 2006, recording growth of 12.4% compared with a 14.1% contraction in 2005. Rice production rose from 277,531 tonnes to 307,041 tonnes in 2006 on account of more favourable weather conditions in addition to improvements in husbandry practices, seed quality, and better drainage and irrigation. The improved performance was also buttressed by greater public sector support over the review period particularly through the ongoing implementation of the EU-funded rice competitiveness project as well as the agricultural support services project. Among other things, the interventions were designed to enhance production and boost productivity by increasing research and extension services, and infrastructure development, and by providing farmers improved access to credit. The turn-around in the sector was also evident in rice exports as buoyant prices and further market penetration particularly in Haiti led to a 25.8% increase in export volume. The robust export growth was also supported by strong demand in the European market following the mid-year ban on European imports of genetically engineered rice products, which affected supplies from the US. Mining and Quarrying Output performance in the mining and quarrying subsector continued to be adversely affected by structural changes ongoing in the sector, involving the closure of large operations. Output of gold and bauxite continued to contract. Gold The closure of the Omai goldmine in the second half of 2005 contributed significantly to the contraction in gold production by 25.3% to 200,000 ounces in 2006, compared with 267,556 ounces in 2005. This primarily reflected the past dominance of the Omai operation. However, when controlled for Omai, declarations from small and medium-sized operators over the same period grew by some 23.1% as record high gold prices served to sustain significant investment in the sector. Gold prices on the London second fix rose to a $725 an ounce in mid-2006 up from a low of $253 an ounce in 1999. The outlook for further price growth remains robust given the relatively weakness of the dollar coupled with a forecast of lack-lustre performance in equity markets. In addition, two new medium- to large-scale exploratory operations which commenced during the year served to boost expectations of higher production levels in Guyana the future. Diamond declarations declined by 7.5% to 330,000 carats. Bauxite In spite of some consolidation in bauxite operations during the year,including the commencement of operations by a large foreign entity which purchased the former state-owned bauxite company as a going concern during the last quarter of 2005, the year 2006 proved very challenging for production, which contracted by 9.8% compared with growth of 6% in 2005. Production of all grades of bauxite fell: chemical grade (CGB) by 6.5% to 164,663 tonnes; metal grade (MAZ) by 2.8% 1,251,057 tonnes; and calcined bauxite (RASC) by 43.6% to 120,000 tonnes. In the latter case, depressed prices forced the temporary closure of one of two major operations during the year. Other Preliminary estimates indicate a creditable performance by other sectors and inustries in 2006. Significant growth was recorded in forestry oeprations (11%), distribution (10%) and engineering and construction (12%). The increased activity in forestry was largely driven by strong export demand, while the growth impetus in distribution and construction was precipitated by robust domestic demand, particularly in relation to CWC 2007 preparations. Real output in the manufacturing sector, in transport and communications, as well as in financial services grew by 4%, 10%, and 8%, respectively, in 2006 compared with growth rates of 2%, 9.5%, and 6.5%, respectively, in 2005. The increased output in the manufacturing sector reflected in part further market penetration in both the Caribbean and North American for high-end wood products. Growth in the telecommunications operations continued to benefit primarily from liberalisation in the wireless segment of the market. C. Prices, Wages and Employment Consumer prices rose by 4.2% in 2006, about half of the prices growth in 2005, as high oil prices which persisted during the first half of the year declined substantially during the second half. On the other hand, inflationary pressures were fuelled by a shortage in the availability of fresh produce as a result of adverse weather conditions during the first quarter of the year, coupled with an upward movement in the cost of medical and personal care. Further prices growth was also triggered by a gradual depreciation of the Guyana dollar against the US dollar during the year. The industrial relations climate, particularly with respect to public sector wage negotiations, continued to be quite tense. Government, while appealing for further CDB Annual Economic Review 2006 57 fiscal restraint, instituted a 5% pay increase across the board (6% for the disciplined services and teachers) in the face of accusations from the leading public service trade union of unilateral action and lack of adequate consultation. With respect to employment, official estimates continued to be unavailable due to capacity issues in the Bureau of Statistics. Proxy indicators, including the volume of personal income tax collections coupled with the apparent boom in the construction sector and the growth in aggregate demand, suggested that unemployment levels would have fallen during the year. D. Fiscal Policy and Debt Operations Government’s fiscal position improved somewhat over the review period as ongoing improvements in the institutional arrangements governing both revenue and expenditure management continued to bear fruit. In particular, greater transparency was achieved with respect to budget administration through the systemwide use and greater functionality of a new Integrated Financial Management and Accounting System (IFMAS). Customs administration also benefited from the further upgrade of its information technology capacity. In relation to debt forgiveness, Guyana received debt stock reduction under the MDRI from both the World Bank and IMF during the year. Current revenue rose by 11.1% to G$62.4 bn in 2006, as both direct and indirect taxes collections increased. The growth in personal income taxes in part reflected the rise in economic activity, particularly in the labour intensive construction sector. The unification of the personal income tax rate, at 33 1/3% in January 2006, replacing the former two-tier system of 20% and 33 1/3%, also contributed to the rise in collections. In an effort to neutralise the negative welfare effect of taxrate unification on employees, Government increased the personal income tax allowance from G$240,000 per annum to G$300,000 per annum. Consumption tax collections as well as trade tax inflows continued to be relatively buoyant on account of robust import growth. In relation to current expenditure, outlays rose by an estimated 9.7% to G$62.2 bn in 2006 relative to 2005 and stemmed from one-off spending associated with general elections coupled with flood relief efforts during the first half of the year. Personal emoluments rose by some 8.3% to G$20.1 bn, reflecting Government’s 5% and 6% pay awards to public servants for 2006, while interest payments remained relatively constant at G$7.1 bn. Consequently, the recurrent account outturn improved from a deficit of G$0.5 bn in 2005 to a surplus of G$0.2 bn in 2006. On the capital side, expenditures 58 CDB Annual Economic Review 2006 rose by 19% to G$41.8 bn as Government implemented major upgrades to airport and road infrastructure, and rehabilitated as bridges and drainage.. Substantial resources were also expended to complete the construction of the new sports facility. Notwithstanding the higher capital outflows, a substantial increase in the volume of grant inflows (from 8.6% of GDP to 13.4% of GDP) associated with the new debt relief assistance package, served to contain the overall deficit after grants to 13.4% of GDP in 2006 compared with 14.3% of GDP recorded in 2005. With respect to debt operations, Guyana benefited from a $283 mn reduction in external debt stock under the MDRI5 during the year. As such, total external debt as at end 2006 fell by 16.4% to $920 mn. The IDB continued to be the largest single creditor, accounting for some 55.7% of the external debt stock.6 On the domestic side, public debt grew by 5.2% for the first nine months of the year to G$72.8 bn ($364.1 mn) largely on account of an increase in T-Bill issuance to mop up excess liquidity in the banking sector. E. Financial Sector The Bank of Guyana’s primary monetary policy objective continued to focus on containing inflation and maintaining international reserves in the context of a floating exchange rate system. In 2006, the central bank sought to further strengthen its institutional capacity and prudential oversight through the development of bank risk management supervisory standards. The Bank has strengthened its capacity to monitor private money transfer operations in an effort to more adequately gauge the volume and development impact of remittance flows. Developments in the monetary sector were characterised by relatively strong credit demand consistent with activity in the real sector. For the first nine months of the year, credit to the private sector grew by 17.9% compared with 9.1% for the corresponding period in 2005. Mortgage loans continued to be an important driver, growing by an estimated 34.6%, up from 25.1% one year ago. This reflected the public sector low and middle income housing drive coupled with an aggressive marketing campaign on the part of commercial banks. Of particular importance was a turnaround in credit demand in both the 5 The relief was provided by the IMF ($65 mn) and International Development Association (IDA) ($218 mn). Debt cancellation from the IMF was based on disbursed outstanding debt as at end-2004 while IDA used a cut off date of end-2003. 6 Guyana is currently negotiating with IDB for debt relief similar in nature to the relief provided under the MDRI. Guyana manufacturing and mining sectors. After consistent weak and sometimes negative growth in recent years, credit to these sectors expanded by 36.5% and 176.1%, respectively, reflecting new investment in the sectors. Deposit growth was also robust. Demand deposits expanded by 35.6%, up from 8.3% in 2005, while the rate of growth of quasi-money, at 11%, was 40% higher than during the previous year. This resulted in increased liquidity in the banking system. Given the relatively thin capital market and limited domestic investment opportunities as seen by the financial institutions, many banks explored regional investment options, putting pressure on official reserves holdings and contributing to exchange rate depreciation, although the net foreign assets of the banking system rose by 31% in compared with growth of 23.1% in 2005. With respect to interest rate developments, the prime lending rate (computed on a weighted arithmetic average basis for all commercial banks) and the small savings rate held firm at 14.54% and 3.38% respectively. However, the average rate on time deposits trended downwards on account of the high level of banking system liquidity. F. External Sector In spite of the recovery of commodity exports coupled with strong remittance inflows, the external current account deteriorated markedly. The current account deficit widened by 15.4% to $181.4 mn as merchandise exports and unrequited transfers abroad expanded by 9.1% (to $601.3 mn) and 29.2% (to $216.1 mn), respectively. This notwithstanding, import demand continued to be quite high with merchandise imports increasing by 12.9% to $885 mn. Developments in the capital account were also favourable. Inter alia, robust foreign direct investment principally associated with the telecommunications and mining sectors coupled with a sizeable reduction in debt service requirements translated into a $244.1 mn surplus in the capital account and a $61.8 mn increase in the net foreign assets of the central bank. However, the strong demand for hard currency to finance consumption, intermediate and capital goods coupled with the need for increased levels of foreign exchange to satisfy the portfolio decisions of commercial banks, resulted in a marginal depreciation of about 1% of the Guyana dollar to G$200.75 to the US dollar. 2. MAJOR POLICY ISSUES Linkage between indebtedness and growth - making debt relief count A major challenge facing Guyana appears to be the sustainability of positive rates of economic growth that are significant enough to enhance the quality of life and cause a marked reduction in poverty. When the country’s growth performance over the last decade is juxtaposed against substantial debt relief within the context of the HIPC and the MDR Initiatives, it raises questions regarding the efficacy and impact of the exercise. While it may be argued that the linkages between the reduction in debt burden indicators and growth may been weaker than initially perceived, other factors, including the overall policy environment, policy implementation mechanisms, and the appropriate time-frame for assessment, also need to be taken into account. Indeed, Guyana’s experience is similar to that of a large number of other HIPC countries. In spite of this, the rationale underpinning the intervention is unquestionable. A large body of empirical analyses investigating the effect of indebtedness on growth, resource flows and investment pattern provide good evidence of a significant and negative relationship in many countries. An explanation for the differences in outcomes provides a useful first step in seeking to improve the development impact of debt relief. Recent research work7 on some 80 developing countries tends to lend support to the argument that the quality of policies and institutions do matter in seeking to determine aid effectiveness and nonlinearities in the debt-growth relationship. This seems to be the case in Guyana. While a number of positive impacts particularly in relation to social sector policies and indicators can be discerned, a number of structural weaknesses have only recently begun to be addressed. These centre on improving the quality of public sector management specifically as it relates to enhancement in public investment management, improvement in audit and financial management capacity. as well as stronger accountability and transparency in the public procurement process. These interventions are expected to foster a more development-supporting environment. Improving the nexus between debt relief and growth will only be possible if Guyana is able to stay the course with respect to the full implementation of these policy and institutional reforms. Private Sector Development - growth take off Guyana’s modest growth success over the past decade 7 Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link’ IMF Working Paper WP/05/223 Guyana CDB Annual Economic Review 2006 59 is explained in part by the absence of robust private sector activity and the concentration of the country’s output base. These two factors expose the country to supply shocks and increase its vulnerability to them. Against this background, significant output volatility is not surprising. Output diversification through rapid private sector development is of paramount importance to enable the country to smooth consumption and investment as well as sustain income growth. At present, private sector firms are predominantly small and medium- sized, although a few large-scale operations also exist particularly in mining, finance, and agro-business. Two of the main factors that tend to hinder sustained private sector growth involves the efficiency of disputes settlement arrangements and limitations on access to credit. With respect to the legal system, many private sector entities have cited chronic delays in the administration of justice as a critical business bottleneck. Among other things, this reflects the need for the filling of several key vacant positions within the justice systemr as well as the need for the establishment of an information management system and the computerisation of various functions particularly with respect to the deeds registry. While there is effort to address the situation, most notably with the establishment of a Commercial Court as a division of the High Court, is aimed at bringing speedy resolution to commercial disputes, there is clearly need for further and urgent action in the area.. With respect to access to credit, while domestic credit has shown healthy growth in the recent past, the relatively low rate of lending to the private sector in comparison to the situation in the rest of the CARICOM region suggests that structural issues need to be identified and addressed. serious nature of this issue. The second was the need to respond rapidly to critical infrastructure damage precipitated by the floods in 2005, and to a lesser extent 2006. This included rehabilitation works particularly with respect to roadways, bridges and sea defences. The third involved heightened activity in relation to the staging of CWC 2007. Composition The composition of Government’s investment programme was therefore characterized by a relatively substantial increase in the area of General Public Services (GPS), particularly expenditure in relation to Administration and Planning as well as for Public Safety. Outlays for GPS rose by some 14.7 percentage points to 21.8% of total investment spending. Among the major projects which began during the review period include the launch of the National Drug Strategy Master Plan (2005-2009). This initiative details Government’s strategic interventions aimed at creating a safer environment by among other things, bolstering the police force through additional staffing and the construction of new police stations and outposts. Efforts have also been made to strengthen the country’s justice sector through the allocation of resources aimed at reducing the backlog of court cases and streamlining court procedures. In the area of Economic Infrastructure, while total public sector investment spending fell off by just over 10 percentage points to 33.7% due to the completion of a number of large scale road projects, particularly the CDB-funded four-lane highway, substantial resources have been expended to widen and upgrade a number of strategic roadways in the country. These include major rehabilitation works to the New Amsterdam highway in addition to the construction of two new additional roadways near that town in recognition of the growing importance of the town as a hub for commercial activity. With respect to drainage and irrigation works, significant outlays have gone into strengthening critical infrastructure in an effort to avoid a repeat of the widespread damage caused by the extreme weather conditions in December, 2005, and to provide added environmental protection for both sugar and non-sugar agricultural lands. With respect to social services, spending rose by 6 percentage points to 33.7% as Government sought to boost quality, access, and delivery of social services in an effort to further reduce the incidence of poverty in Guyana. In relation to education, the two main initiatives pursued were the continuation of the Basic Education Access Management Support project which Guyana 3. PUBLIC SECTOR INVESTMENT PROGRAMME The PSIP in 2006 continued to broadly reflect Government’s stated policy objectives. These include improving and expanding the country’s economic infrastructure in an effort to spur private sector investment while at the same time aiming to build human capital and reduce poverty through increased provision of and improved access to social services. In addition, three developments also significantly influenced Government’s investment spending over the review period. The first development centred on the need for a comprehensive response to a rise in criminal activity,, including crimes involving violence. While not as widespread as in the late nineteen-nineties, the slaying of a government minister and other unsolved homicides during the year were testimony to the 60 CDB Annual Economic Review 2006 has the enhancement of the pedagogical environment as its primary objective; and the Education For All - Fast Track Initiative which seeks to expand the number of teaching and resource centres across the country. In the health sector, the bulk of resources were targeted towards the ongoing implementation of the Health Sector Programme. This programme seeks to expand the availability of health services particularly to remote areas of the country. Financing The bulk of funding for the PSIP continued to be sourced externally. In 2006, approximately 59.6% of total investment spending was financed from external sources while the remainder was funded out of domestic revenue. With respect to grant-funded investment, approximately 53.3% of the total external disbursements was through grants, particularly from IDA, CDB, the EU and IDB. Being a HIPC country, all of Guyana’s external funding continued to on concessionary terms with positive implications for the country’s debt dynamics. 4. MEDIUM-TERM PROSPECTS The medium-term prospects for Guyana continue to be mixed. On the one hand, the outlook for growth is enhanced by the strong FDI inflows evident in the mining sector, particularly in respect of gold and bauxite, as well as in the services sector, including telecommunications. Domestic private sector investment in tourism and related services have also picked up in recent times. However, the sustainability of this growth is difficult to predict. In view of the dominance of public sectorelated activity, particularly in sugar and energy, much hinges on the consolidated public sector performance. Currently the country’s diversification strategy with respect to sugar, though critically necessary for the survival of the industry, represents a large contingent liability and potential fiscal risk. Against this background, an increase in private sector involvement in operations ownership and management (over and above the supply of sugarcane) should be a Government priority. The debt relief provided in 2006 as part of the MDRI has enhanced the country’s debt profile and its debt dynamics. However, the challenge for the country is to see how best to translate this ‘new’ fiscal space into tangible and beneficial growth outcomes which can provide a durable impact on growth and poverty reduction. Guyana CDB Annual Economic Review 2006 61