The Inter-American Development Bank (IDB) will this year provide technical assistance for the establishment of a commercial court in Guyana or an alternative dispute resolution mechanism as it believes investment can only come when contracts can be enforced.

The bank in its country strategy for Guyana has highlighted improving the enabling environment for Guyana’s private sector which it has described as being small, fragile and in the midst of stagnation.

“Policy reforms are urgently needed to reduce transaction costs; promote trade, investment and competitiveness and foster private sector participation, opportunities and diversification, while ensuring the sustainable use of natural resources,” the bank said in its country strategy for 2002-5, which was recently made public.

The bank noted that a major obstacle to the development of the private sector was the weakness of the legal regime.

“...The financial market is impaired by the inefficient legal infrastructure causing delays in the realisation of collateral and inability to investigate, prosecute and speedily resolve commercial disputes,” the bank said, noting the backlog was up to 18 months. This ineffective court system, the bank said, inhibited prudent commercial lending and investment.

“An ineffective system of business laws (including corporate, bankruptcy, contract, consumer protection and private property laws) that is not consistently enforced and does not provide a fair mechanism for resolution of disputes can also contribute to the destabilisation of the financial system.” It added that significant investment would only materialise if legislation and contracts can be enforced and business practices, regulations and incentives are clear and predictable.

The IDB in August initiated a financial sector study to assess the need for additional reforms, the constraints to private sector development and a comprehensive approach to technical assistance requirements.

The need for a commercial court or an alternative dispute resolution mechanism has been identified to reduce uncertainty and costs and as well as to increase specialisation within the legal system.

Another technical co-operation project on the cards is the establishment of a credit bureau to reduce credit risk and to facilitate financial intermediation.

The IDB has supported significant financial sector reforms in Guyana including the piloting of the Financial Institutions Act of 1995. But the bank still sees the need for improvement in the accounting and financial disclosure standards in this sector. It notes that financial institutions established under other laws such as the New Building Society and credit unions escape from supervision though their operations may be significant enough to impact on the safety and the soundness of the financial system.

Guyana does not have a deposit insurance scheme in place but there may exist an implicit obligation for the government to honour the payment of deposits of failed institutions, the IDB noted. Technical co-operation to strengthen prudential supervision is expected to improve accounting, loan evaluation, on and off-site monitoring of financial institutions, bank risk management and dealing with problem institutions. The need for further reform to the FIA would be determined by the financial sector study.

The IDB says further clarification is also required of the ownership structure and relations between financial institutions and insurance companies, pension funds, local commercial/industrial entities and overseas banks.

Expansion of productive infrastructure and an environmental technology promotion project are also targeted to improve the enabling environment for the private sector to operate within.