Aug 24, 2017 News
In the first few years of oil production, Guyana can expect to rake in as much as $380M. This is according to Natural Resources Minister, Raphael Trotman.
The Leader of the Alliance for Change (AFC) told Kaieteur News that about three or four weeks ago, the International Monetary Fund (IMF) submitted a report to him and the Finance Minister, Winston Jordan. He explained that the report looked at Guyana’s fiscal preparedness for the oil sector as well as the projected gains.
“Based on that report, the IMF predicts that Guyana will earn $380M a year, in the first couple years, before we get into the billions. So it is a lot of money that will be coming. They have already started advising us on how much money will come from taxation, from profits, from royalties…”
He also reminded that the International Monetary Fund, in its 2017 review of Guyana’s economy, was keen to focus its attention on the nation’s looming oil wealth.
An overview of that report shows that the IMF is already issuing cautionary words when it comes to oil and its murky nature.
The International Monetary Fund was careful to stress on the importance of the Government putting in place mechanisms to ensure the transparent spending of the oil revenue to come.
In this regard, Directors attached to the global organization emphasized that sound fiscal practices suggest saving a share of the oil revenue for future generations.
They said, “Oil-financed spending should be transparent and channeled through the budget toward projects that enhance the economy’s physical and human capital.”
The IMF on a related note commended the local authorities for drafting a Natural Resource Fund legislation and requesting the Fund’s technical advice on this topic.
IMF Staff still stressed the importance of transparency and good governance in the management of the oil industry and even welcomed the authorities’ plans to join the Extractive Industries Transparency Initiative and adhere to the Santiago Principles for Sovereign Wealth Funds.
Based on its projections, the IMF is of the view that oil will have a large impact on Guyana’s Gross Domestic Product (GDP). (GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. http://www.investopedia.com/terms/g/gdp.asp)
On the other hand however, the IMF noted that the looming oil sector will have a much smaller impact on the Gross National Product (GDP). (GNP is an estimate of total value of all the final products and services produced in a given period by the means of production owned by a country’s residents. http://www.investopedia.com/terms/g/gnp.asp.)
The IMF’s estimates and projections are based on data as currently compiled, but with a conservative ad hoc inclusion of oil production from 2020 onwards.
The Fund believes that the main direct effect on the domestic economy will be through fiscal revenue.
The revenue-sharing agreement sets the government’s share at 50 percent of “profit oil.” With 75 percent of total oil revenues initially allocated for “cost recovery,” the government’s share is only 12.5 percent, but will increase significantly after Exxon Mobil and partners recover their initial upfront investment.
According to the IMF, oil revenue is expected to amount to 2.6 percent of GDP in 2020 and will rise to about 4.6 percent in 2021, which is the first full year of oil production.
The Fund believes that the shares of fiscal revenue and expenditure in GDP will decline due to the larger increase in the latter with the start of oil production. It said that the oil is exported, with 50 percent of Exxon’s (and its partners) proceeds repatriated through the current account and the remainder through the financial account.
It said, “Several countries experienced competitiveness problems in other sectors after they became oil producers. These Dutch Disease considerations should be manageable given the magnitude of the windfall.”
The IMF cautioned that as Guyana gets richer, there will be a loss of access to grants and concessional loans. These are assumed to taper off with the start of oil production.
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