Policies sound but imbalances remain large - IMF
May 13, 2007
The International Monetary Fund (IMF) in its Public Information Notice (PIN) on Friday said its Executive Directors commended the Guyana Government for implementing sound macro economic policies but that domestic and external imbalances remain large and the economy continues to be vulnerable to shocks.
The IMF said growth in Guyana rose to nearly five per cent, after a decline of two per cent in 2006 reflecting a strong aggregate demand driven by a recovery of private sector credit, strong remittances and foreign direct investment.
The institution also called on the Government of Guyana to resist calls to expand the list of VAT-exempted items.
It said inflation fell to below four per cent, following a decline in international fuel prices and a stable exchange rate. The overall external position widened to 28 per cent of GDP in 2006 from nine per cent in 2004, as a result of the rapid growth in both consumer and capital imports.
According to the IMF, 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 six per cent of GDP. "Notwithstanding, foreign international reserves increased to US$278M (three 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, FDI and debt relief in the context of the Multilateral Debt Relief Initiative (MDRI)."
According to the PIN, the latter, together with improved growth performance, led to a significant improvement in the public debt sustainability outlook.
The PIN said that despite the continuation of the 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 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. As a result of the government's continued emphasis on infrastructure, total public expenditures were estimated at 25 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 PIN said.
It said the Guyana dollar remained broadly stable since mid 2004 reflecting a balanced foreign exchange market.
According to the PIN, Guyana has made progress with the Millennium Development Goals with the attainment of two indicators: eradication of extreme hunger and achievement of universal primary education. "It is also likely to achieve another two by 2015 (reduce child mortality rate and provide access to safe drinking water to more than half the population) but significant financing will be needed to meet the targets for the other four."
The IMF its directors welcomed the introduction of VAT, calling it a cornerstone of the government's fiscal reform programme. They also commended the government 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 document said government should remain focused on maintaining low inflation and guarding against potential pressures from the rapid increase in private sector credit. The IMF directors called for measures to strengthen liquidity management and develop foreign exchange markets. They look forward to continued close cooperation to sustain Guyana's growth and structural reform agenda, possibly in the context of programme support.