Guyana Economic Review 2016

A Review of the Guyana Economy in 2016 M. DaCosta, K. Dublin, and S. Williams August 2017 I. Growth and External Sector Developments 1.

Guyana’s economy continued to grow in 2016, but at a slower rate than in the previous year. In 2016, there was a slowdown in agricultural production, reflecting adverse weather conditions as well as stagnant agricultural commodity prices. The slowdown in the agricultural sector also affected performance of the manufacturing and services sectors.

Additionally, delays in public investment remained a drag on construction. These delays partly reflect deliberations by the administration to take stock of all existing public sector projects, as well as to set new priorities. As in previous years, GDP growth for 2016 largely stemmed from strong gold output from new mines, with total real GDP increasing by 3.3 percent (Table 1).

2.

The economy is expected to grow at a faster rate in 2017. Realizing this will depend on continued strong performance in the mining sector, stabilization in agricultural production, and the launch of public sector infrastructural projects geared towards bridging the coastal and hinterland divide. These projects include the construction of the Linden to Lethem Road, a fixed bridge across the Essequibo River, and a road from Parika to Goshen.

Table 1. Guyana: Selected Economic Indicators Proj.

2013

2014

2015

2016

2017

(Changes in percent) Real GDP

5.2

3.8

3.1

3.3

3.5

Consumer prices (average)

1.9

0.7

-0.9

0.8

2.3

Consumer prices (end of period)

0.9

1.2

-1.8

1.5

2.6

Private investment

8.3

8.3

8.3

8.0

8.2

Public investment

8.6

8.2

5.6

6.9

8.7

-13.3

-9.6

-5.7

0.4

-2.0

4.0

3.5

3.5

3.6

3.6

205.4

206.4

206.5

206.5

n.a.

(In percent of GDP)

Current account balance Gross official reserves (months) Exchange rate/per US$ (average) Source: IMF

2

3.

In 2016, inflation remained restrained at 1.5 percent, largely as a result of continued low international oil prices. The inflation rate would have been considerably lower were it not for the impact of adverse weather conditions on food production, as well as the high consumption during Guyana’s Golden Jubilee celebrations. Inflation continued to be subdued in 2017, reflecting low international oil prices.

4.

Guyana achieved a current account surplus in 2016 due to strong gold exports and continued low international oil prices. In 2016, the overall balance of payments deficit fell, as the current account balance reached a surplus of 0.4 percent of GDP, showing a turnaround from a 5.7 percent deficit in 2015. The increase in the quantity of exports of gold was large enough to offset the combined decline in exports of bauxite, sugar, rice and timber, and in remittances.

Imports continued to fall in 2016, reflecting low oil prices. This strong performance of the current account, together with increased foreign investment in oil exploration and regional investment in the services sector, allowed the Bank of Guyana’s foreign reserves to remain at the equivalent of about 3.6 months of imports.

5.

The exchange rate depreciated in the latter half of 2016. However, the exchange rate was not flexible enough to prevent an appreciation of Guyana’s real exchange rate, reflecting the impact of a strong U.S. dollar. Recent adverse shocks to export commodity prices were offset by lower oil prices. In the case of gold, lower export prices were counterbalanced by higher volumes.

6.

Guyana remains vulnerable to large terms of trade shocks given its dependence on imported oil and the concentration of its exports on a few commodities. The IMF has classified the exchange rate regime as a de facto stabilized arrangement, with very limited movements that are insufficient to offset external shocks. Exchange rate flexibility, together with appropriate fiscal and monetary policies, is needed to contain the current account deficit and boost growth.

7.

There is an increased dependency on gold exports for the supply of foreign exchange. This reflects both reduced foreign exchange earnings from the traditional exports of sugar, rice, bauxite and timber, as well as strong performance of gold exports. However, the authorities have indicated that there are irregularities in the gold market, possibly understating gold exports.

8.

The foreign exchange market showed signs of instability in the first half of 2017.

Reports in the press and from some private sector bodies pointed to occasional difficulties in obtaining foreign exchange from commercial banks. Part of the explanation appeared to be that there had been a significant increase in purchases of currencies from Barbados and Trinidad and Tobago in exchange for U.S. dollars. In response, the Bank of Guyana instructed banks and cambios to cease purchases of Trinidad and Tobago and Barbados dollars, as well as limit the spread between the buying and selling rates to three Guyana dollars.

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II. A Review of the Budgetary Outturn during the period 2012-2016 Introduction 9.

Fiscal policy is defined as the use of government spending and taxation to achieve certain economic objectives such as sustainable growth and poverty reduction. A common characteristic of fiscal policy is that these objectives are financed primarily by taxation or other compulsory transfers that are imposed on the private sector. A government may also finance a portion of its activities during a specific period by borrowing which has a number of important implications. In developing countries such as Guyana, the government sector is usually responsible for a large part of economic activity and through its spending and resource mobilization, directly and indirectly influences the way in which resources are used in the private sector. Given the impact of government operations on the economy as a whole, poor fiscal management in many countries has been a major factor underlying such problems as high inflation, a large external current account deficit, and slow economic growth.

Measuring Fiscal Performance 10.

The budgetary outturn provides information on several aggregates that are derived from the government’s statement of operations that are useful for assessing fiscal performance. The aggregates of interest that are: the operating balance, and by implication, revenue receipts and current expenditures; capital expenditure; the overall balance; financing; and debt. The two important balances that emerge from this analytical framework are the operating balance and the overall balance. The operating balance is an important focal point for analysts because it is a measure of the ongoing sustainability of government operations.

Adjusting the operating balance to take account of capital expenditure produces the overall balance which is financed by borrowing. The overall deficit, which by definition is equivalent to net lending/borrowing, is itself a summary measure of the extent to which the nonfinancial public sector is either putting financial resources at the disposal of other sectors in the economy or utilizing the financial resources generated by other sectors. Table 2 summarizes the budgetary outturn of the nonfinancial public sector (NFPS) in Guyana during the period 2012-2016 and highlights the aggregates that are important for the analysis of effectiveness of fiscal policy.

4 Table 2 Guyana: Nonfinancial Public Sector Operations (In percent of GDP) 2012

2013

2014

2015

2016

Revenue and Grants

25.6

24.6

23.6

27.8

28.0

Current Expenditure

19.5

19.6

21,1

22.5

24.0

6.8

6.5

7.1

8.1

9.5

0.9

0.8

1.0

1.0

0.9

6.1

5.0

2.5

5.3

4.0

10.7

8.6

8.2

5.6

6.9

-4.6

-3.6

-5.7

-0.2

-2.9

4.6

3.6

5.7

0.2

2.9

Net external financing

3.6

2.8

2.0

-0.9

1.2

Net domestic financing

1.0

0.8

3.7

1.1

1.7

External

63.7 47.7

57.9 41.8

51.9 39.6

48.3 35.9

49.6 33.8

Domestic

16.0

16.1

12.3

12.4

15.8

Of which: Transfers Interest 0perating Balance Capital expenditure Overall balance Financing

Total public sector gross debt (end of period, in percent of GDP)

Source: Guyana—IMF Staff Report for the 2017 Article IV Consultation

Revenue Receipts 11.

Although revenues and grants of the NFPS declined in 2013 and 2014, receipts increased between 2012 and 2016 as a percent of GDP. Receipts from revenues and grants increased from 25.6 percent of GDP in 2012 to 28.0 percent of GDP in 2016. This improvement in fiscal receipts was particularly marked in 2015 and was sustained at a similar level in 2016, despite slowing rates of economic growth in both years. The increase in receipts during the latter part of the period was achieved primarily as a result of improvements in tax administration and higher receipts from royalties in the expanding mining sector. In addition, despite the introduction of exemptions from excise duties for newer vehicles and an increase in the threshold for nontaxable income, revenue receipts were also positively impacted by increases in fuel excises which were increased as international oil prices declined, and by the VAT reform which broadened the tax base while reducing the rate. 1

1

The VAT reform in 2016 broadened the tax base to include electricity and water consumption which was done at the same time as the rate was reduced from 16 percent to 14 percent. Other Income tax measures include lowering the personal income tax rate by about 2 percentage points and the corporate tax rate on non-commercial firms from 30 percent to 27.5 percent.

5

Current Expenditures 12.

Current expenditures mainly comprise wages and salaries, the provision of goods and services, and transfers. Current expenditures increased consistently during the period, rising from 19.5 percent of GDP in 2012 to about 24.0 percent of GDP in 2016. Since the substantial debt relief received in 2006 and 2007 under the Multilateral Debt Relief Initiative, interest payments have not been a significant proportion of total expenditures. The increasing share of national income attributable to current expenditures is due to several factors. They include expanded services provided to communities in the interior of the country, recent increases in wages and salaries, and transfers made to the non-financial public enterprises (NFPEs) to offset financial losses. The pronounced increase in expenditures in 2016 can be explained by one-off charges, such as improved procedures for managing the expenses of several public-sector agencies that were consolidated into one accounting framework, the implementation of a program to catch up with overdue maintenance, and efforts to restructure the operations of a number of public enterprises. While increased expenditures by the NFPS can have a positive impact on growth in the short run, a determination of the long-term impact is more uncertain, given the likelihood for associated developments such as increased debt and debt service payments.

13.

The NFPEs deserve special attention. They play an important role in production, employment, and exports in Guyana’s economy. The NFPEs, as a group, have been characterized for several years by poor financial performance, an outcome which can be traced in large part to the implementation of policies that do not focus exclusively on the objective of maximizing profits. Given this history, the central government, which owns and controls the NFPEs, has found it necessary to provide substantial budgetary subsidies/transfers to these enterprises to prop up their operations.

14.

The sugar industry, in particular, has suffered from structural problems that are reflected in an inefficient system of production. GuySuCo, the vertically integrated state-owned enterprise, operates with a business model that is structured around efforts to protect employment levels while operating in an international sugar market characterized by depressed prices. 2 This model has proven to be unsustainable. To address GuySuCo’s financial difficulties, the central government has made transfers to the company for several years. These transfers placed a significant burden on the budget, and totaled 1.8 percent of GDP in 2015. In recent years, the government has undertaken steps to overhaul the industry, some of which entail substantial upfront costs. Among these steps was the closing down of operations at one underperforming sugar estate. Despite these restructuring measures transfers to GuySuCo still accounted for 1.5 percent of GDP in 2016. Following the recommendations made by the Commission of Inquiry into GuySuCo (2015), reforms have been introduced across the NFPE sector that are designed to improve cost efficiency and productivity. These measures have produced improved

2

Moreover, it is anticipated that the sugar quota that was available to Guyana in the EU will be dismantled in 2017.

6

financial performance of the power utility, the Guyana Power and Light, which in 2016 did not require subsidies for its operations. 3 Operating Balance 15.

The net result of the nonfinancial public sector’s current operations, revenues and expenditure, was an operating surplus throughout the 2012-2016 period. Despite the increase in revenues and grants as a percentage of GDP, the increase in current expenditures as a share of GDP was more pronounced and the operating surplus fell from 6.1 percent of GDP in 2012 to 4.0 percent of GDP in 2016. These surpluses, a component of national savings, are a summary measure of the sustainability of government operations that support implementation of the public-sector investment program. Given the relatively large share of GDP that is devoted to the payment of taxes, any efforts to increase in the operating surplus or savings of the nonfinancial public sector in future years should probably focus on controlling the growth of current expenditures, particularly transfers to the NFPEs. Capital Expenditures 16.

The provision of infrastructure involves policy decisions about the levels and composition of investment. Capital expenditures, as represented by implementation of the public-sector investment program, focus on making improvements in infrastructure that have been identified as impediments to growth and economic diversification. The level of capital expenditure has declined gradually as a percentage of GDP throughout the period 2012-2016.

The decline was particularly sharp in 2015 when expenditures fell to 5.6 percent of GDP, from an average of 9.2 percent of GDP in the previous three years. This was mainly due to a delay in the start-up of the investment program that was related to the change in government following the elections.

17.

To expedite project approval and execution, the government has streamlined the project procurement and approval process and this contributed to an increase in public investment to 6.9 percent of GDP in 2016. Nevertheless, this level was well below the average achieved during the period 2012-2014. A notable feature throughout the period is that much of the public investment program was financed by donors who extended loans to the government of Guyana on concessionary terms. A comprehensive assessment of the extent to which the public investment program has contributed in a meaningful way to a reduction in poverty and addressed other social-welfare needs in Guyana would require a functional classification of annual expenditures which is currently not available. 4

3

However, the utility continues to be plagued by frequent power outages and higher tariffs relative to those in other Caribbean countries, http://www.doingbusiness.org/data/exploreeconomies/guyana/getting-electricity 4 The classification of functions of government is a detailed classification of the socioeconomic objectives that the government aims to achieve through various kinds of outlays. A functional classification would, for example, distinguish expenditures according to the following categories: housing, health, education, security, and environment.

7

Overall Deficit 18.

The size of the overall public-sector fiscal deficits is largely determined by the implementation of the capital expenditure budget, after taking into account the operating surpluses. During the period 2012-2015 the overall deficit declined from 4.6 percent of GDP to less than 1 percent of GDP in 2015. The outturn in 2015 can be considered an anomaly and is explained by the sharp decline in capital expenditures during that year. With the pick-up in the public investment program in 2016 the nonfinancial public sector deficit widened to 2.9 percent of GDP. 19.

Given the direct relationship between the public sector deficits and the reliance on borrowing, both foreign and domestic, and ultimately the impact on inflation, targeting a reduction in the level of debt and inflation requires limiting the size of the overall fiscal deficit. Some caution needs to be exercised, however, given that the successful implementation of the NFPS capital expenditure budget has both an impact on the size of the overall deficit as well as on growth in the short term. The options for reducing fiscal deficits that are available to the government are constrained by the specific characteristics of the budgetary framework in Guyana and the related sources of financing. Recognizing that economic growth and poverty reduction are priorities of the government and that the availability of financial resources in the public sector is limited, consideration should be given to involving the private sector in the implementation of the public sector investment program, thereby avoiding too rapid a buildup in public sector debt. Examples of private-sector options that could make a meaningful contribution to the public sector investment program include public private partnerships and direct foreign investment in the non-oil sector.

Financing 20.

The overall deficit is financed by borrowing from foreign and domestic sources.

However, the greater share of financing comes in the form of concessional loans provided by external donors that are directly linked to specific capital expenditure projects. Domestic financing of the deficit, although accounting for a relatively small share of total financing at the beginning of the 2012-2016 period, increased as a share of financing throughout the period.

Financing from domestic sources has been raised mainly through the issuance of short-term Tbills.

Debt 21.

Government debt is considered unsustainable if it either is projected to rise indefinitely as a share of GDP or if the cost of debt servicing absorbs an excessive amount of resources. Total public sector debt, which stood at 63.7 percent of GDP in 2012 declined to 49.6 percent in 2016. This development is partly explained by the decline in the nominal stock of external public debt which accounts for the larger share of total public sector debt. The external public sector debt declined from US$1.4 billion in 2012 to US$1.2 billion at the end of 2016. 5 At the same time, GDP rose at a faster pace than debt, resulting in the decline in the debt/GDP ratio.

5

Bank of Guyana, 2016 Annual Report

8

The origins of the improvement in the debt profile can be traced to the Multilateral Debt Relief (MDRI) provided by the IMF, the World Bank, the IDB, and other creditors which amounted to US$611 million during 2006-2007. This followed the initial debt relief provided by the Paris Club agreement in 2004. On the basis of its current profile, public sector debt in Guyana can be considered to be sustainable.

External Debt 22.

Multilateral institutions—particularly the Inter-American Bank, the Caribbean Development Bank, and the World Bank—are the main external creditors. They finance the major share of the public-sector investment program. Multilateral Debt Relief and Petro-Caribe debt write offs have helped reduce Guyana’s external debt burden from 47.7 percent of the GDP in 2012 to 33.8 percent in 2016. External debt has a long maturity profile and low average interest rates, reflecting the concessional terms on which loans are extended.

Domestic Debt 23.

The decline in the domestic debt burden has been less pronounced, falling from 21 percent of GDP in 2009 to 15.8 percent of GDP in 2016. At present, the domestic debt comprises short-term T-bills with maturities of up to 1 year. Developing longer-term domestic debt instruments in the form of long-term bonds would provide a more stable and predictable source of government financing, lengthen maturities, and meet the demand for longer-term instruments from banks, insurance companies, and pension funds. Proceeds from the sale of such bonds would provide stable financing to the public sector investment program.

Fiscal Policy and Selected Objectives 24.

This review of the budgetary outturn in Guyana during the period 2012-2016 is also an analysis of the extent to which fiscal policies achieved specific objectives such as promoting sustainable growth and a reduction in poverty. The analysis focuses first on two broad economic indicators—growth and inflation—that are impacted by fiscal policy and are regarded as indicators of good fiscal management. To evaluate whether policies have yielded results that fall within acceptable ranges, these indicators are assessed against comparable figures in other Caribbean countries. Table 3 indicates that in Guyana growth rates of GDP during the period 2012-2016 exceeded average growth rates in other Caribbean countries while inflation rates were consistently lower. The difference in inflation rates was particularly marked in 2015 and 2016. On the basis of these outcomes, fiscal policy in Guyana can be considered to have contributed to an environment in which the economy achieved a notable degree of success relative to the rest of the Caribbean.

25.

Reference can also be made to the evolution of per capita income in Guyana over time which can be considered a proxy for poverty reduction. GDP per capita increased from $6393.5 in 2012 to $7248.2 in 2016, (2011 constant US$, purchasing power parity) 6. This

6

World Bank national accounts data.

9

improvement in per capita incomes indicates that fiscal policy contributed to some degree of success in enhancing living standards in Guyana.

Table 3 Selected Economic Indicators (Annual percent change) Guyana--Real GDP

2012

2013

2014

2015

2016

4.8

5.2

3.8

3.1

3.3

1.3

1.9

2.5

1.1

-0.8

2.4

1.9

0.7

-0.9

0.8

4.0

2.5

2.5

1.5

8.2

Selected Caribbean Countries Real GDP (average) Guyana--Consumer Prices (average) Selected Caribbean Countries Consumer Prices (average)

Source: Statistical Appendix, IMF World Economic Outlook, April 2017.

Conclusion 26.

Economic growth is projected by the government to continue at around 3.5 percent a year during 2017-2019, driven by an increase in public investment, continued expansion in the extractive sector, and a recovery in agricultural production. Achieving this projected level of growth depends on the resolution of constraints in the agricultural sector, including the identification of new export markets, as well as the re-direction of gold production through officially sanctioned channels. The oil sector plays no role in this scenario since production is not projected to start until mid-2020. The long-term outlook beyond 2019 will depend on the government’s ability to improve the business climate and the use of the oil windfall to increase growth through productivity-enhancing reforms and economic diversification.

27.

Continued expansionary fiscal policies are anticipated, due in part to an intensification of capital spending needed to ease structural constraints, potentially higher public sector wages, and spending in support of the NFPEs. Against a background in which the continued growth in tax revenue receipts is uncertain, these developments will impact the NFPS deficits which will in turn lead to an increase in public debt. The likely result is that the public debt-to-GDP ratio will increase through 2019, along with the rate inflation, before gradually declining following the receipt of oil revenues.

III. Financial Sector Developments and Risks Introduction 28.

At the end of 2016 the six commercial banks in Guyana held assets totaling $467 billion. This was equivalent to about two-thirds the size of the country’s economy.

Banks hold most of the country’s private financial savings and also serve as bankers to public sector bodies and other financial institutions. Nonbank financial institutions (NBFIs) held assets totaling $205.8 billion, equivalent to 29 percent of GDP or 31 percent of total assets of the

10

financial sector. 7 The most important NBFIs by asset size are the New Building Society, insurance companies, pension schemes, and finance companies.

Recent developments 29.

Bank lending to the private sector grew at a sustained rapid pace during 2010-2012, with the yearly rate of growth averaging 21 percent. Most of the growth originated in lending to real estate. Mortgage lending rose by 24 percent a year between 2008 and 2012. However, there were significant increases in lending to other sectors, including rice growing and manufacture, gold mining, construction, distribution, and other services. Consumer lending for vehicles and other durables also expanded sharply. Since 2013, however, the pace of bank lending has slowed, and in 2016 it grew by only 2.4 percent. Lending to business stagnated in 2015 and 2016, and mortgage lending grew by just 4 percent last year.

30.

Deposit growth has slowed too, falling from a brisk pace of 13 percent a year in 2010-2012 to 3½ percent during 2013-2015. In 2016 deposits experienced no growth. Despite this, the liquidity of the banking system exceeds regulatory levels by a substantial margin. This situation implies that credit growth has slowed because of weak demand, a shortage of what the banks would term qualified borrowers, or retrenchment by the banks after a period of rapid growth and a rise in nonperforming loans (NPLs). 8 In recent annual reports some banks suggest that the downturn in lending reflects a slowdown in some sectors and weak domestic demand. 9 In its latest country report, the IMF attributes the lending hiatus as a reaction by banks to the increase in nonperforming loans. 10 This factor is also suggested in the 2016 annual report of the Guyana Bank for Trade and Industry (GBTI), which notes that efforts during that year centered on improving the quality of the loan portfolio and that improving NPLs is a key goal for 2017. 11 31.

In recent years asset growth in nonbank financial institutions has been sluggish also, with the rate in 2015 and 2016 in the range of 1-2 percent. Loans, investments, and other claims on the private sector fell in 2015-2016 and mortgage loans increased in 2016 by 1 percent. The New Building Society accounts for about 30 percent of the total assets of NBFIs. Its deposits as well as loans and other claims on the private sector showed little change between 2014 and 2016. 12 Bank of Guyana 32.

Two key developments in the finances of the central bank in 2014-2016 were a fall in international reserves and the sharp decline in government deposits. The bank’s gross foreign assets peaked at US$856 million at end-2012, but fell to US$598 by end-2015 mainly 7

Bank of Guyana, 2016, p.34.

The Global Competitiveness Report for 2015-2016 issued by the World Economic Forum states that in Guyana access to finance was the third most important constraint to doing business. See http://www3.weforum.org/docs/gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf 9 See for example, the 2016 annual reports of GBTI and Citizens Bank.

10 IMF Country Report, 2017, available at: http://www.imf.org/en/Publications/CR/Issues/2017/06/28/Guyana-2017Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-45010 11 https://www.gbtibank.com/images/cms_images/2016/FINANCIAL-STATEMENTS-COMPILATION.pdf 12 Bank of Guyana Annual Report 2016, pp34-38.

8

11

due to lower capital flows to the public and private sectors. Foreign assets experienced small declines in 2016 and through the first quarter of 2017.

Table 4: Guyana: Financial Sector Indicators (billions of Guyana dollars) 2010

2011

2012

2013

2014

2015

2016

Bank of Guyana Total assets Foreign assets Government deposits Government overdraft

240.4 158.7 69.7 --

240.6 162.7 60.8 --

259.5 175.0 57.3 --

234.7 160.2 52.1 --

208.0 137.5 21.4 --

188.8 123.6 -2.3

222.7 127.0 -21.3

Commercial Banks Total assets In percent of GDP Private sector deposits % change Loans to private sector 1/ % change Business Individuals Mortgages % change mortgages

296.1 64.4 182.7 13.8 105.2 19.8 50.0 21.4 33.8 23.8

328.2 62.4 208.4 14.1 128.0 21.7 63.3 24.5 40.2 18.9

378.1 64.9 233.5 12.0 155.4 21.4 80.1 26.8 48.5 20.6

413.6 67.4 242.9 4.0 178.8 15.1 91.2 30.9 56.7 16.9

421.8 66.4 247.4 1.9 196.7 10.0 101.7 30.9 64.1 13.1

442.9 67.5 259.6 4.9 208.2 5.8 101.7 34.9 71.6 11.7

467.3 65.8 259.5 -213.2 2.4 102.0 36.7 74.5 4.1

Source: Bank of Guyana 1/ Includes mortgage loans. Source: Bank of Guyana Statistical Bulletin Table 2.10(b).

33.

The central government’s position shifted from that of a large net depositor in the range of G$60-70 billion during 2009-2013 to a borrower beginning in November 2016. By the end of 2016 the government’s overdraft totaled $21 billion, and this increased to $27 billion at the end of April 2017. The Bank of Guyana’s Statement of Financial Position as at December 31, 2016 and the Bank’s Statistical Abstract present the government’s borrowing as negative deposits on the liabilities side of the balance sheet. It does not appear under advances (or claims on the government) on the assets side. 13 An alternative, and more transparent, presentation would be to show government borrowing as loans to the government, rather than negative deposits.

13

Bank of Guyana Annual Report 2016, pp.86-87.

12 Key issues affecting the financial sector Interest rates 34.

Since 2000, a feature of the banking system has been wide interest rate spreads, i.e. the margin between lending and deposit rates. This situation continues. At the end of May 2017 the spread between average deposit rates and average lending rates was 11.82 percent. 14 In the Caribbean region only Jamaica registered a spread of such a magnitude (Chart 1). In other regional countries spreads ranged from 3 percent (The Bahamas) to 5-8 percent in Suriname, Barbados, Belize, and Trinidad and Tobago. Over the past decade the average spread in middleincome countries has been close to 7 percent. 15

Performance 35.

The overall financial performance of banks over the past 5 years has been mixed.

According to the Bank of Guyana and IMF risk-based capital to asset ratios have been adequate, averaging 24-25 percent. However, the average ratio of nonperforming loans (NPLs) to total loans has risen in recent years, from 5½ to 6 percent in 2011-2013 to 12.9 percent in May 2017.

According to the Bank of Guyana the increase in NPLs in 2016 originated in the manufacturing, household, and wholesale and retail distribution sectors. One domestic bank accounts for half of

14

Source: Bank of Guyana. The Bank’s Annual Report for 2016 (p.34) confirms that the spread between the small savings rate and the prime lending rate was 11.74 percent.

15 World Bank, available at: http://data.worldbank.org/indicator/FR.INR.LNDP. For comparative financial sector indicators, see World Bank data available at: http://wdi.worldbank.org/table/5.5#

13

all NPLs, even though it accounted for one-fifth of all loans. 16 In addition, profitability, measured by the return on assets has been low, averaging 2.6 percent during 2012-2016, and may be overstated due to inadequate provisioning. While the proportion of nonperforming loans has increased, provisions have fallen from an average of 71 percent between 2010-2013 to 46 percent at end-2016. 17 Risks 36.

The main risk in the banking system is that persistent slow growth in the demand and/or supply of loans combined with a weakening of one or more key sectors or industries could worsen the situation regarding nonperforming loans, particularly in domestic banks.

While the overall NPL ratio is a cause for concern, a more important worry is that the average does not reveal the higher ratios and risks faced by certain domestic banks.

37.

An additional risk is associated with the ownership structure of some domestic banks, which is dominated by large manufacturing groups. In these structures there could be a risk that related party loans and other transactions might exceed prudent levels. The failure of CLICO Financial Group in 2008 was due in part to the large size and complexity of related transactions. In Guyana’s case, the IMF’s 2016 Country Report states that related party lending is a source of vulnerability, while the 2017 report indicates that some related party exposures are unrecorded.

38.

Other risks include the cost of compliance with the international and domestic regulations being put in place, including the requirements of banks to report to the U.S. government on balances held by U.S. taxpayers under the FATCA regulations. Perceptions of weak compliance can lead to a further loss of correspondent bank relationships.

Conclusion 39.

The 2015-2016 period has been one of challenge for banks in Guyana as they faced weak activity in some sectors, high NPLs, rising compliance costs, and low profitability. In response, the banks appear to be focused on strengthening their balance sheets, working to reduce NPLs, and cautiously seeking new lending opportunities. Some banks expect continued low demand in 2017 and continued weakness in loan quality.

40.

In such an environment, the banks’ size and importance require that they be monitored and analyzed thoroughly to mitigate the risks discussed above as well as risks related to the potential costs of failure of one or more institutions. In the absence of deposit insurance, costs of failure will likely be borne by depositors, investors, and taxpayers. 18 Banks and other financial institutions are regulated by the Bank of Guyana. Like regulators elsewhere,

16

IMF Country Report June 2017, p.6.

IMF Country Report June 2017, p.32.

18 The collapse of CLICO’s operations in Guyana led to substantial losses for the National Insurance System and policy holders.

17

14

the Bank will need to be proactive in minimizing failures, while having resolution plans in place to address failures, should they occur, in an equitable and orderly manner.