Image courtesy of Dock Media Group & GCCI
In this week’s installment of the GBJ, we take a look in the mirror. We believe that the initial conditions matter, and that it is important for us to document and disseminate with clarity and precision, what we have inherited and where we are at a particular moment. In this vein, for the next few weeks we will unpack the IMF 2018 Article IV Consultation-Press Release and Staff Report. This report was published in July 16, 2018.
It argues, in summary, that Guyanese economic growth slowed and became more broad-based in 2017. Real GDP growth in 2017 was 2.1 percent. The non-mining GDP however rebounded from its contraction in 2016 and our external balance, the money Guyana brings in from its exports minus the money it spends on imports, turned negative due to weaker than expected export growth ( we have to sell more of our goods and services abroad) and higher oil prices. Inflation, i.e., the rate at which the average price of a basket of selected goods and services in the Guyanese economy has increased over time, remains relatively low, and GOG’s monetary stance is accommodative. I.e., the Central Bank has acted to expand the overall money supply to boost the economy as growth has slowed. A key economic marker on Guyana’s economic timeline is the expected commencement of oil production in 2020. This commencement of oil production and the additional oil discoveries have significantly improved the medium- and long-term Guyanese economic outlook. Guyana, broadly speaking, is a good place to make a long term bet on today!
Our local context: In 2015, ExxonMobil made a significant offshore oil discovery in Guyana. The field is conservatively estimated to hold between 800 and 1,400 million barrels. Following additional discoveries in 2017-18, recoverable resources are now conservatively estimated at around 3.2 billion barrels of oil. Commercial production is scheduled to begin in early-2020, with an output estimated at 100,000 barrels/day (bpd), rising to 300,000 bpd in 2025. Some recent estimates have production as high as 120,000 bpd in 2020 (Liza I) and rising to 340,000 bpd in 2025 (Liza I and Liza II combined). The graphic below shows estimated oil production in thousands of barrels per day, left vertical axis, and GOG oil revenue in billions of Guyana Dollars on the right vertical axis over the years 2020 through 2038.
The main direct effect of the oil sector on the domestic Guyanese economy will be through revenue in the GOG’s treasury. Under the revenue sharing agreement, seventy five (75) percent of oil production is initially allocated to “cost recovery” to ExxonMobil and its partners. The remaining 25 percent is considered “profit oil” and is shared 50-50 with the GOG. The agreement sets a royalty of 2 percent on gross earnings, which brings the initial GOG share to 14.5 percent of total oil revenues. The GOG’s share will increase substantially once “cost recovery” on the initial investment is met (in the late 2020s), and most of production consists of “profit oil.”
Evidently, these discoveries will provide Guyana with much needed and welcomed additional financial revenues for growth-supportive investments and social expenditure, as well as financial buffers against adverse economic shocks. However, oil discoveries tend to make non-oil sectors less competitive via the appreciation of the real exchange rate (Dutch disease) and can induce macroeconomic volatility (van der Ploeg and Poelhekke, 2009). How does a young woman in Ozama St. North Ruimveldt win this game? GBJ will take up aspects of this question in next week’s installment.