IDB notes growing concern country may fall victim to “Dutch Disease”

Sep 10, 2021 News

– cautions against becoming reliant on fossil fuels

By Kiana Wilburg

Kaieteur News – The current proven reserves in the Stabroek Block, which total over nine billion barrels of oil equivalent resources, along with the string of recent discoveries, will no doubt, produce changes in Guyana’s overall economic structure. One of the most immediate effects will be the increase in the country’s Gross Domestic Product (GDP).
But, an increase in GDP does not translate to higher standards of living for citizens, who are the true owners of the oil wealth. In light of this irrefutable fact, the Inter-American Development Bank (IDB) recently urged Guyana to place greater focus on ensuring the oil wealth leads to economic transformation and not the mere doubling of GDP. The financial institution said the impact of the additional revenue on a country with a GDP of US$3.5 billion and a population of 773,000 needs to be carefully managed so as to promote inclusive, sustainable growth that benefits the Guyanese people.
The IDB asserted in one of its latest loan briefs that ensuring true economic transformation is not going to be a walk in the park for local authorities, while adding that there are already concerns about the challenges that lie ahead for the new oil producing State.
In this regard, the IDB said it has noted concerns that Guyana may fall victim to the so-called “Dutch Disease” because of the large increase in the country’s income. (Dutch Disease is a concept that describes an economic phenomenon where the rapid development of one sector of the economy leads to a decline in other sectors. It is also often characterised by a substantial appreciation of the domestic currency.)

If, as expected, the Guyana dollar becomes stronger, the IDB said it makes non-oil and gas exports more expensive, and therefore less competitive. “Thus, the discovery of oil and gas, while a very positive development, could cause the contraction of the other parts of the economy,” expressed the IDB via its loan brief. On another important note, the IDB noted that many countries across the world are moving to cleaner energy sources, such as solar and wind. With this in mind, it urged Guyana to be mindful; to look ahead and ensure that it does not become reliant on only this sector.
It appears, however, that the government is keen on avoiding the Dutch Disease, at least, as it has approached the IDB for assistance in developing a strategy that will allow it to make the best of the opportunities presented by the oil wealth, while simultaneously building an economy that will survive after the fossil fuels are gone. The PPP/C Government’s loan request totals US$1,817,764.
According to the loan documents seen by Kaieteur News, the funding would be spent on five components.
Component I is called: Strengthening the technical capacity of the government to lead economic transformation in Guyana. It is expected to include a forum for infrastructure opportunities, targeted investor workshops to assist in structuring specific Public Private Partnership (PPP) projects, public consultation, and awareness building through strategic communications to investors, stakeholders and the general public. The government is proposing to use US$882,000 from the loan for this activity.
As for Component II, this is titled: The Economic Diversification and Mid-Term Development Strategy. This component will support several activities, such as the engagement of a strategic advisor on economic development, consultations with stakeholders to identify and select on potential, technical exchanges with countries that have successfully developed using growth strategies, provide consultancies to support the review of existing development strategies, facilitate consultations, and provide insight into success stories on economic diversification. It was noted in the project document that US$279,000 has been budgeted for this purpose.
With respect to Component III, this is expected to focus on creating investment opportunities for the private sector and will support the engagement of a strategic advisor for public-private partnerships to develop a PPP framework for Guyana, including proposed legal and regulatory recommendations. It was noted that US$369,000 has been budgeted for this activity.
The fourth component will see expenditure on awareness and diffusion, and will include a forum for infrastructure opportunities, targeted investor workshops to assist in structuring specific PPP projects identified under Component three, and ensure public consultation and awareness building through strategic communications to investors. This is expected to cost US$170,000.
Component Five caters for financing any contingencies that need to be tackled during project execution. Over US$117,000 was budgeted for this purpose.
As regards execution, it was stated that the Ministry of Finance will oversee all the coordination activities with the relevant stakeholders.