By Kiana Wilburg
“When you are about to have a meal, there is only so much you can eat. If you consume too much, you would feel sick and that has consequences … It is the same with the economy and the oil fund…You must first understand how much the economy can absorb within a giving time, otherwise, pumping too much into the economy in a hurried manner will result in dangerous consequences.”
This comparison was made by Ramon Espinasa, General Coordinator at the Extractive Sector Initiative of the Inter-American Development Bank (IDB) as he spoke about the need for Guyana to avoid hasty spending of its oil money in the early years of production.
According to Espinasa, his advice to Guyana’s authorities would be to save part of the oil wealth not just for future generations, but in acknowledgement of the fact that the absorptive capacity for the funds that would be flowing in is very low.
The oil and gas expert who has over 20 years experience, said, “If you look at the proportion of the discoveries made and the size of the population, you realize that the impact of the oil revenues will be huge. Guyana has about 700,000 people and the reserves have already hit an estimate of $4B barrels of oil… The share of potential revenue to the population is therefore large, but the absorption capacity is still going to be low.”
Given the aforementioned, Espinasa said that there are three areas which the government should focus its spending on in the medium term. He said that these are the areas of infrastructure, education and health.
The IDB Expert said, “You need to use the oil to transform the population of Guyana by providing good health and giving high quality education. I would focus on that and save the rest but it is up to them to decide how to do it…”
Espinasa also said that the creation of a Natural Resource Fund is an excellent idea, since there will be temptations to spend all of the oil money. He stressed too that Guyana will need strong institutions to ensure the revenues are properly saved. (Espinasa’s full comments can be heard via this podcast link: https://blogs.iadb.org/caribbean-dev-trends/2017/12/13/7698/)
DRASTIC STRUCTURAL CHANGES
The International Monetary Fund (IMF) has not only addressed the need for Guyana to be mindful of its absorptive capacity, but has also called on the government to ensure that there are significant structural reforms to support the success of the sector.
According to the Fund, these reforms are also necessary to improve the business environment, increase resilience to external shocks, promote inclusive growth, and ensure that the oil windfall truly enhances the economy’s physical and human capital.
It was early last year that several government ministries and agencies among them the Guyana Revenue Authority (GRA), the Ministries of Finance and Natural Resources, and Bank of Guyana, received several recommendations that would go a long way to safeguard billions of dollars in oil revenue to come.
However, very few of the crucial recommendations made by the International Monetary Fund (IMF) have been implemented. In fact, the regulatory body had cause to point out again, that Guyana still needs to modernize revenue administration and strengthen public financial management capacity ahead of oil production.
The IMF said that it is pleased the government will keep the financial management areas as critical near-term priorities. The Fund said that it stands ready to provide technical assistance where needed.
One of the IMF recommendations to the local authorities last year, specifically the Natural Resources Ministry, was to ensure the establishment of a Cost Recovery Committee. It emphasized that this is necessary so that the government can be equipped to begin auditing bills submitted by the oil and gas operator. But this is far from being in place.
Finance Minister, Winston Jordan, noted that there would be a special Accounting Unit established at the Finance Ministry to track oil revenues. He said that this is necessary since the current accounting systems are simply inadequate.
He also noted that the Ministry has intentions to implement the other recommendations of the IMF as it relates to his sector.
Before oil revenue starts flowing into the economy by 2020, several international organizations and even local critics want to be assured that Guyana is equipped with robust accounting systems, which would ensure accurate reporting on the use of those funds.
The International Monetary Fund called on the Government to review the nation’s accounting systems, which is usually referred to as the Integrated Financial Management and Accounting System.
The Fund said that the Accountant General’s Department (AGD) attached to the Ministry of Finance should be tasked with the responsibility of undertaking such an analysis.
The IMF said that while the Department will take into consideration the functionality of IFMAS, it should also determine the gaps and developments needed to be ready for recording and reporting of petroleum revenues.
Critically, the Fund said it will be essential that treasury reforms are coordinated with those of the budget process. In this regard, the international body said that in the future, the Office of Budget is likely to update a budget classification system to cater to the petroleum revenue that would be flowing into the economy.
The IMF noted that the Accountant General also needs to align its chart of accounts with the revised budget classification. At critical parts of the medium-term planning process, the Fund said that key decisions will require the AGD’s inputs, therefore necessitating the Department to adapt from an annual to a medium-term mode of operations in line with budget execution.
“For example, it is important to decide how to show the (medium term) in- and outflows from the Natural Resource Fund in the budget documents as well as in the regular financial reports.
Based on the draft Natural Resource Fund Law, the reporting requirements of Natural Resource Fund are comprehensive and the AGD needs to develop new skills and knowledge to be able to prepare the required reports. Therefore, the AGD should ensure that the current rules and procedures are updated and start building capacity to meet these demands.”
The IMF has also identified a number of weaknesses, which exist within the tax systems of the Guyana Revenue Authority (GRA). But GRA Commissioner General, Godfrey Statia, has assured that the entity is working to correct these deficiencies.
He noted however that sweeping changes will not happen overnight. Statia said that it can take up to three years for GRA to smooth out the kinks in its systems.
Statia said that it was GRA that invited the IMF to visit the authority and conduct an assessment of its systems. Statia said he told the team that GRA is not interested in sugar-coated words. He wanted the IMF team members to be as outspoken as they could about the challenges facing the Revenue Authority.
In its report of May 2017, the IMF outlined GRA’s main strengths and weaknesses. The strengths included a highly qualified cadre of staff, extensive information available to taxpayers through a variety of channels, withholding and advance payment mechanism in place, independent graduated dispute resolution mechanism and strong external oversight mechanisms.
The weaknesses highlighted were no-segment based management of taxpayers, functional limitations of the IT system, Limited e-transaction system, lack of strategic and structured risk management approach, weak filing and payment compliance, de-centralized audit case selection process, absence of legislative tax rulings system and compliance improvement programme limited in scope and content.
Upon the receipt of the said report, the Commissioner General said that a further request was made that another study be done to advise GRA on the next steps in modernizing the Authority.
Statia said that this assessment was done in September 2017, a draft submitted in October and a final report done in December.
The Commissioner General said, “Suffice to say that many of the recommendations made by the team were either already work-in-progress, or envisaged to be implemented during 2018 and beyond.
The major recommendations of that assessment for January 2018 include produced monthly statements of total arrears and collectible arrears to inform debt management activities. “
“In 2007, PricewaterhouseCoopers (PWC) also did a diagnostic study for the Authority which was sitting on the shelves, and never implemented. In 2017, upon a visit to Guyana, a PWC partner and a former colleague from the Trinidad Tobago Internal Revenue, was on the team, and I was able to persuade her for PWC to do an update of the diagnostic study part with cost to GRA.”
Statia added, “This was completed in July 2017, and its findings were similar to those outlined in the IMF report. What stood out in their report however is the fact that GRA appears to be consistently under-budgeting revenue collection.
GRA is aware that the tax base is larger than the tax collections but under-budgeting masks the accountability of bringing the taxpayer base closer to reality by increasing taxpayer compliance or reducing tax avoidance or evasion.”
The International Monetary Fund has also called for the authorities to strengthen the powers of Bank of Guyana, as well as its programmes. While there is still more to be done, the IMF has reported that there has been progress as it relates to implementing the 2016 Financial Sector Assessment Programme (FSAP) recommendations, including enhancing the supervisory power of the Bank and establishing an emergency liquidity assistance framework, a national payment system and a deposit insurance scheme.
The Fund also welcomed the establishment of a Financial Stability Unit within the Bank to assess macro-financial vulnerabilities.
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