Guyana setting bad pattern by spending all its initial oil profits

May 30, 2022 News

… Analyst says Exxon drilling for oil, Guyana digging “fiscal hole”
By Zena Henry
Kaieteur News – Guyana is bent on the development of much needed infrastructure and has dedicated the first haul of its oil profits to this year’s budget to assist with the financing of its many projects. Already issuing some precaution on “unsustainable” oil- reliant spending because of market volatility, the Institute for Energy Economics and Financial Analysis (IEEFA) is also pointing the country to keep gauge on its internal affairs as it begins to expend oil profits.
The Institute submitted in one of its recent assessment’s on Guyana’s oil sector that the country already seems to be mismanaging its funds and setting a “bad precedence” on how future spending of oil money will be conducted. The concern is raised because spending of the oil money should improve the country’s financial position by, among other things, helping to lower its debt and budget deficit. They are among the advice provided to Guyana by the International Monetary Fund (IMF) when such technical support was requested. IEEFA’s principle, Tom Sanzillo reminded that the four key objectives was that the money in the Natural Resource Fund (NRF) would be used to help firstly close the deficits, increase funding for budget needs, reduce debt and save for future generations.
With the passage of this year’s budget, what was observed, Sanzillo related, was that oil revenues were not enough to cover the non-oil budget deficit. The new revenue from oil production of G$127 billion (USD$ 606 million) fell short of the non-oil budget deficit which is calculated by subtracting the total amount of non-oil revenue (traditional sectors) from total government expenditures.

The 2022 budget does fund new needs Sanzillo pointed out, but does so in an unsustainable manner.
“The new revenues partially supported the government’s 37 percent increase in spending over last year’s budget. The higher spending level was made possible through a combination of new oil revenues and new borrowing.” So, while new spending should not have exceeded the amount contributed into the NRF, it did, Sanzillo noted. And this is despite the government agreeing that in any year, the amount of increased spending would not exceed the amount of the oil revenue received.
Also, the 2022 budget and the new oil revenues did not reduce debt, the analyst continued. “The government borrowed an additional G$87.7 billion (USD$420 million) in 2022. Guyana’s total indebtedness between December 2021 and December 2022 is expected to increase by 14 percent.”
IEEFA had pointed out in its earlier report that Guyana would have to go deeper into debt as a consequence of the oil and gas extraction. “So far, IEEFA’s estimate has proven to be accurate,”
Sanzillo reported. Additionally, there were no contributions made to Guyana’s SWF. “According to the IMF, Guyanese officials agreed initially to constrain annual spending to avoid exceeding the amount transferred to the NRF.” It was also mentioned that spending should have been further constrained by a fiscal mechanism that would retain 50 percent of the proceeds from the NRF in the NRF, but, “in this year’s budget, no money was transferred to the NRF, and overall spending exceeded the amount transferred to the NRF.

In announcing the use of the oil money to partly fund the country’s biggest budget, a hefty $552.9 billion, Vice President Bharrat Jagdeo had said that the oil revenues would reduce Guyana’s reliance on borrowing. He said that “The fiscal deficit this year, in this budget, would be lower than the fiscal deficit in last year, because from a financing perspective, that means we’d have to borrow less because some of the oil and gas revenue will go to replace the high level of borrowing that we have had.”

The Vice President had reminded that because of spending on more big capital projects, the fiscal deficit may widen, but pointed to oil revenues to help address the deficit and reduce financing needs.
He had emphasised also that it is better to use Guyana’s own resources, instead of continuing to build up debt unsustainably. With government having more access to funds and banks no longer having the ease of lending to the State, the Vice President expected a favourable effect on interest rates, as banks would be a bit more aggressive in seeking people to lend to. This makes up part of the government’s strategy to deliver an element of sustainability in finances, the VP had stated.

It was noted that while the withdrawal rule restricts withdrawals from the NRF to deposits made in the previous fiscal year, the first schedule of the Natural Resource Fund Act 2021 allows an exception in the first year, giving the government the latitude to withdraw the total balance in the Fund at once.
The government has also noted that the withdrawal is pertinent to address Guyana’s pressing development needs. Based on the fact that oil funds would be lumped in the budget to generally support expenditure, it is not clear whether any of the proposed sums will be used to address the key objectives the IMF pointed Guyana to.