Apr 19, 2023 News
…says country’s reliance on oil money poses significant risks
Kaieteur News – While Guyana has emerged as one of the world’s fastest-growing economies with the development of its oil and gas sector, the World Bank in an April 2023 Report cautioned once again, that authorities must be mindful of the risks associated with overreliance on oil revenues.
The financial institution said, “The government’s aggressive investment programme seeks to structurally transform the non-oil economy. Nevertheless, Guyana’s increasing reliance on the oil and gas sector, a weak institutional base, and a fragile political environment pose significant risks to long-term development.”
Expounding on its position, the World Bank said the extractive sector is becoming the dominant source of growth and fiscal revenues. It said this increases the country’s susceptibility to oil-related shocks, which requires proactive management. It was keen to note that prudent management and use of the Natural Resource Fund (NRF), as well as strengthening the medium fiscal management framework are critical to preventing the economy from overheating.
Further to this, the bank said that oil production has environmental consequences that must be carefully considered, adding that the sector may face additional risks as the world transitions away from fossil fuels.
The World Bank also stressed that addressing climate change risks remains central to poverty reduction for Guyana given that sea level rise and flooding expose a large segment of the population to food insecurity and job losses.
Another key matter it said authorities should keep watch of was ethnic and political polarization. It said these two issues pose important risks to social cohesion and sustainable growth.
With respect to its outlook of the economy, the World Bank said it is expected to expand at an annual average rate of 24.9 percent over the medium term due to continued expansion of the oil sector. It said real non-oil Gross Domestic Product (GDP) is projected to expand by an average of 7.2 percent per year including through positive spillovers from the oil sector with the implementation of the Local Content Act of 2021.
With respect to inflation, the World Bank said it will remain elevated due to increased government consumption and higher input costs. As such, it said poverty reduction will depend on efforts to boost the purchasing power of poor and vulnerable households, as well as on translating the good performance of the non-oil economy into jobs.
The World Bank report further noted that increased exports of oil, gold, and bauxite will result in an annual average current account surplus of 24.8 percent of GDP over the medium term. In this context, it said the international reserves position will gradually improve to above 5 months of projected total imports.
This newspaper understands that the fiscal deficit is projected to average 12.4 percent of non-oil GDP as the increase in capital spending outstrips inflows from the NRF. The World Bank also noted that public debt is expected to remain low at approximately 20 percent of GDP.
Guyana’s oil industry is poised to expand this year with the onset of Prosperity, the nation’s third Floating Production Storage and Offloading (FPSO) vessel. It will join the Liza Destiny and Liza Unity in the Stabroek Block, taking production from 400,000 barrels of oil per day to approximately 600,000 barrels of oil.
These operations are being led by an ExxonMobil-led consortium which has received the blessings of the PPP/C government to pursue an aggressive exploration and production campaign. Those efforts have thus far lead to the discovery of 11 billion barrels of oil equivalent resources.
Notably, these operations as well as the unlocked resources are shackled to the fiscal terms of a contract which the government itself has demonized as being the worst on planet earth. The country only stands to gain a two percent royalty and a 50 percent take of profit oil after Exxon and its partners have recouped their expenses.
In spite of well known criticisms of the deal, the administration has refused to make any move to alter the fiscal terms of the deal in such a manner that would allow more oil revenues to be channeled to the people of Guyana.
Government has maintained that it would not renegotiate the contract since doing so would harm investor confidence and render the country an unfriendly investment climate that cannot be trusted to respect the sanctity of contract.
The administration has also stressed that tampering with the fiscal terms could land Guyana in a legal battle with Exxon and even its subcontractors for due compensation all fronts.
Significantly, the administration has said that it will not interfere with the deal since billions of dollars worth in investment decisions have been made because of it, and would therefore slowdown economic growth.
It has also sought to justify its position by noting that the very Stabroek Block deal requires the consent of Exxon and partners before any material changes can be made.
ExxonMobil, through its subsidiary, Esso Exploration and Production Guyana Limited (EEPGL), has categorically stated that it has no interests in altering the terms to Guyana’s benefit.
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