IMF commends Guyana for sound macroeconomic policies
May 13, 2007
THE Executive Directors of the International Monetary Fund (IMF) have welcomed Guyana’s introduction of Value Added Tax (VAT) and say the authorities should resist calls for further exemptions as the country looks to build on the growth of 2006.
In a Public Information Notice (PIN) the directors, having concluded 2006 consultations with Guyana, said the introduction of VAT is “a cornerstone of the authorities' fiscal reform programme, as planned.”
They commended the authorities for reversing some of the recent large increases in government spending, noting that adherence to the commitments in the 2007 budget would provide a sound basis for the achievement of fiscal sustainability.
&It will be critical for the government to address quickly revenue shortfalls that may arise in the implementation of the VAT, and to resist calls to expand exemptions to it,” the IMF directors stated.
The IMF supported the authorities' request for technical assistance in the taxation area and welcomed the government's intention to appoint members to the National Insurance Reform Council, and urged them to develop a reform programme for the National Insurance Scheme. They called for steps to better prioritise the public investment programme.
According to the IMF, growth in 2006 rose to nearly five per cent after a decline of two per cent in 2005, reflecting strong aggregate demand driven by a recovery in private sector credit, strong private remittances, and foreign direct investment.
Inflation fell to below four per cent, following a decline in international fuel prices and a stable exchange rate. The overall external position has widened to 28 per cent of Gross Domestic Product (GDP) in 2006 from nine per cent in 2004 as a result of rapid growth in both consumer and capital imports, the IMF stated.
It noted this was in large part due to the increase in fuel prices since 2004 and the ambitious public investment programme, including the modernisation of the sugar plant at Skeldon which amounted to about six per cent of GDP.
The IMF commended the authorities for implementing sound macroeconomic policies, resulting in a better growth and inflation performance and an improved debt sustainability outlook.
However, they noted that domestic and external imbalances remain large, and that the economy continues to be vulnerable to shocks. The directors commended the authorities for pursuing a prudent monetary policy.
&The authorities should remain focused on maintaining low inflation and guarding against potential pressures from the rapid increase in private sector credit,” the directors stated.
They welcomed the efforts to further strengthen the financial system, which they said remains fundamentally sound, by enhancing the supervisory framework and modernising the reporting system.
They noted that the central bank's oversight of private lending may need to be strengthened to contain any possible weakening of bank assets accompanying rapid credit expansion.
The directors considered that the exchange rate system has served Guyana well, and that the current level of the exchange rate is broadly appropriate. A number of directors called for measures to strengthen liquidity management and develop the foreign exchange market.
The IMF directors agreed that the authorities' reform agenda focuses appropriately on improving competitiveness to strengthen growth prospects, speeding up progress in poverty alleviation, and reducing vulnerability to shocks.
The directors encouraged the authorities to proceed quickly with the planned reform of the sugar sector to achieve lasting improvements in its competitiveness, and to explore the scope for greater private sector involvement in the sector to minimise the public sector's risk.
They welcomed plans to address the high cost of electricity through a public-private partnership to construct a hydroelectric power plant.
A sound legal framework for the partnership should be developed quickly to help manage fiscal risks and public sector costs, they noted, adding that timely implementation of the National Competitiveness Strategy will be important to foster an investor-friendly climate and stimulate private investment.
The IMF directors welcomed the improvement in Guyana's debt outlook.
They called on the authorities to persevere with their efforts to improve statistics and strengthen the institutional capacity of the Bureau of Statistics, in order to support economic policy formulation and development objectives.
They emphasised that adequate data on poverty indicators will be essential in the preparation of a new Poverty Reduction Strategy Paper, and called on the authorities to finalise quickly their work to improve the statistical database in this area.
The directors said they look forward to continued close cooperation between the authorities and the staff to sustain Guyana's growth and structural reform agenda, possibly in the context of programme support.
For 2006, foreign international reserves increased to US$278 million (3 months of imports of goods and services) by end-December 2006, as the widening of the current account deficit was more than covered by official disbursements, foreign direct investment, and debt relief in the context of the Multilateral Debt Relief Initiative.
The latter, together with the improved growth performance, led to a significant improvement in the public debt sustainability outlook, the directors noted.
Despite the continuation of a very ambitious public expenditure programme, the public sector deficit declined from 13.6 per cent of GDP in 2005 to 11.2 per cent in 2006, primarily as a result of the improved performance of the public enterprises and an increase in grants.
Excluding the government's investment in the modernisation of the sugar plant, the deficit is estimated at five per cent of GDP, they noted, adding that as a result of the government's continued emphasis on infrastructure, total public capital expenditures were estimated at about 25½ per cent of GDP in 2006.
Total government social spending also remained high at about 23 per cent of GDP. Wage policy supported the fiscal effort as public sector wage increases were kept in line with inflation, the IMF directors stated.
The recovery of private sector credit that began in 2005, has picked up along with the continued strengthening of financial sector indicators, they noted, adding that the credit expansion reflects partly rapid growth in mortgage lending as a result of increased government land sales and leases and preparation for the Cricket World Cup.
The IMF directors pointed out that the Guyana dollar has remained broadly stable since mid-2004 at about G$200 per U.S. dollar, reflecting a balanced foreign exchange market. The real effective appreciation of the Guyana dollar in 2005 has been partially reversed by the recent depreciation of the U.S. dollar relative to the euro and by the widening inflation differentials with some trading partners, they said.
There was significant progress with structural reforms, the most notable being the implementation of VAT on January 1, 2007 as envisaged under the recently expired programme supported by the Poverty Reduction and Growth Facility (PRGF), the directors noted.
They stated that despite some delays, there was also progress with strengthening public sector expenditure management, improving governance, and the construction of a modern sugar factory. The Bank of Guyana has already begun to implement many of the recommendations made by the Financial Sector Assessment Program conducted in 2005.
The IMF noted that Guyana has also made progress with the Millennium Development Goals (MDGs) with the attainment of two indicators (eradicate extreme hunger and achieve universal primary education).
It is likely to achieve another two by 2015 (reduce child mortality rate and provide access to safe drinking water to more than half of the population) but significant additional financing will be needed to meet the targets for the other four, the IMF directors stated.
They said the preparation of the Household Income and Expenditure Survey (HIES) - which would allow a comprehensive measure of poverty - is nearly completed and will inform the government's next Poverty Reduction Strategy Paper.