Guyana flags reduced oil profits under ExxonMobil deal; preparations needed for price shocks IMF

Last Updated on Tuesday, 18 June 2019, 0:18 by Writer

The International Monetary Fund (IMF) has pointed to lingering uncertainty about how much profit oil Guyana will actually rake in, even as that global financial watchdog says it is ready to help the country prepare for oil price shocks.

Preliminary findings of a 2019 Article IV official visit show that Guyana is well on its way to achieving 4.4 percent growth this year, largely due to construction and the services sector ahead of oil production in 2020.

However, the IMF mission said the Guyana government was wary that it could earn less profit oil annually because earnings would eventually be re-injected in the development of new fields. “The rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field,” the IMF said.

The authorities told the IMF that Guyana was developing “strategies to mitigate such a possibility, including a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.”

The team of officials from the Washington DC-headquartered fiscal and monetary organisation noted Guyanese authorities were concerned about a gap in the Stabroek Production Sharing Agreement through which some of the oil earnings could leak. “The authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues,” the IMF added.

In the area of steep oil price movements, the IMF offered its Technical Assistance programme to help Guyana develop over the medium term the necessary infrastructure for a suitable monetary policy framework that facilitates economic growth and adjustment to oil price shocks while maintaining price.

Also suggested was a continual assessment of Guyana’s monetary policy stance to reflect changes in macroeconomic outlook or risks surrounding the outlook. The IMF mission adds that it encourages exchange rate flexibility as part of the monetary policy framework, given the expected large and potentially volatile foreign inflows from oil production.

In the area of spending, the IMF welcomed Guyana’s enactment of the Natural Resource Fund (NRF) legislation but recommended the development of a fiscal framework that limits borrowing and achieves a balanced budget in the near- to medium-term.

Achieving that target, the IMF recommends that the annual non-oil deficit should not exceed the expected transfer from the NRF to ensure that excessive public expenditure does not lead to debt growing at the same time as the NRF accumulates.

Saying that the spirit of the NRF needs to be preserved to save part of the income from oil as net wealth for future generations, the IMF at the same time called on Guyana not to spend huge amounts of cash in a short period of time.

“The pace of scaling-up public spending needs to be gradual to reduce bottlenecks from absorptive capacity constraints, avoid waste, and minimize macroeconomic distortions related to Dutch disease that has often inflicted economies experiencing sizable increases in resource-based income,” the IMF said.