Article:

Guyana GDP to grow fourteen times as fast as China’s next year: IMF

02 Nov 2019

South America may be battered by weak growth, unrest and austerity but one of its smallest
countries is about to experience the fastest economic growth on the planet.

Guyana, a country of 780,000 that neighbors Brazil and Venezuela in the region’s northeast
corner, will see its economy balloon 86% next year after expanding 4.4% this year, according to
the International Monetary Fund. That’s 14 times the projected pace of China and driven by
Exxon Mobil Corp.’s discovery of oil.

“We’re moving from a very low base to a stratospheric leap," Finance Minister Winston Jordan
said in a telephone interview from Georgetown.

South America’s only English-speaking nation owes the anticipated windfall to offshore oil
deposits discovered in 2015. At the moment, the country doesn’t produce any crude, though its
neighbor Venezuela holds the world’s largest reserves.

While Guyana’s $4 billion annual gross domestic product is about a tenth the size of Vermont’s,
it will expand to about $15 billion by 2024, according to the IMF.

The government plans to use some of the money derived from its royalties to build highways to
connect coastal towns to the sparsely populated interior, which has gold, diamond and bauxite
deposits, Jordan said. The oil sector will represent about 40% of the economy within five years,
the IMF calculates.

The fund says its forecast may be subject to large revisions, since even small changes to the
projected oil output in 2020 would result in big swings in the overall economic performance.

Exxon has partnered with Hess Corp. and China’s CNOOC Ltd. to develop one of the world’s
biggest new deepwater oil discoveries off the country’s coast.
Exxon said it will begin pumping from its first well next month, and by 2025 Guyana will
produce at least 750,000 barrels a day.

Total SA, Tullow Oil Plc and Repsol SA are also among the companies exploring for oil in
Guyana’s waters.

The government expects the initial $300 million a year in revenue from profit-sharing and
royalties to more than double after a second offshore well starts production around 2022. That
money will go directly to a sovereign wealth fund the country established this year, which will be
used for “inter-generational" savings, to protect against oil price swings, and to fund
development plans, Jordan said.
Commentary:

This article discusses the consequences of Guyana’s unprecedented economic growth (increase
in the Real GDP of an economy over a period of time) 1. Owing to the discovery of offshore oil
reserves, Guyana’s GDP expanded by ‘4.4%’ in 2019 and is expected to grow ‘86%’ in 2020.
This ‘stratospheric leap’ of additional output immensely benefits Guyana but comes with a few
costs. With an increase of ‘$11 billion’ in its GDP (from 2019-2024), Guyana’s unemployment
levels may fall, but it may have to combat excessive inflation.

1
Boundless. "Boundless Economics." Lumen. Web. 13 Oct. 2020.
A rise in oil exports may result in an increase in net exports, a component of AD (C + I + G +
(X-M)), leading to an outward shift from AD 1 to AD 2. Subsequently, the real output will increase
from Y 1 to Y 2, and the price level would change from PL1 to PL2. Thus, economic growth will
occur with the oil sector contributing to ‘40%’ of the GDP in the first five years. Consequently,
the unemployment rate would fall, increasing the average income of households and improving
the average living standards over a period of time. However, since the oil extracting MNCs
might be capital intensive, the jobs may not increase in proportion to the output. Increased
economic growth would also mean increased revenue for the government in the form of taxes
and ‘royalties’. This revenue will be allocated towards implementing supply-side policies such as
building highways. These highways will link mineral-rich interiors of gold, diamond, and
bauxite, causing potential economic growth. Along with that, due to excessive exports, Guyana’s
trade balance can improve which may strengthen its currency in the long run. However,
economic growth may come at the cost of sustainability. Other than that, the extraction of oil
may harm the environment by causing air and water pollution. Therefore, green GDP might act
as a better indicator of estimating the benefit Guyana would receive from this rapid economic
growth.
As Guyana’s AD rises, it may have to face demand-pull inflation; this relationship can be shown
on Guyana’s short-run Phillips curve. Due to excessive oil extraction, the operating point of the
economy shift from A to B. Subsequently, the unemployment rate will go down from U1 to U2,
but as a cost, the inflation rate will increase from P1 to P2. This inverse relationship between
unemployment and inflation leads to a conflict between two major macro-economic objectives:
price stability and low unemployment. The rising demand-pull inflation rates may motivate the
producers to produce more due to increasing profits, but the real purchasing power of households
may fall because the real value of money decreases, so despite a rise in consumer expenditure, it
will lead to a degradation in average living standards of the economy. However, it isn’t certain
that inflation will occur post economic growth. If Guyana’s operating much inside the production
possibility curve, then it would have a lot of spare capacity. Therefore, a rise in AD won’t change
the price level as the cost of factors of production will remain relatively constant in the short run.

Many MNCs are exploring oil in Guyana, which might increase FDI. A constant flow of FDI in
an economy means a stable and strong exchange rate. As FDI in Guyana increases, the value of
GYD would appreciate significantly, making imports cheaper. However, if FDI gets
uncontrollably high, then the majority of assets of Guyana would be owned by companies based
out of the country. This would lead to a loss of sovereignty because the MNCs would try to
influence the economic policies in their favor. They might even become monopolies, forcing out
domestic firms from the extraction market. Also, repatriations may act as leakages for Guyana,
reducing the net foreign exchange flowing in the economy.

Because the government has established a wealth fund for intergenerational savings, Guyana’s
economic growth will be sustainable. So, even if oil prices take a hit or the resources are
exhausted in the future, the government can fall back on these savings and resurrect the
economy. As oil reserves are explored and production increases, in the long run, the AS of
Guyana would also increase, causing good deflation. This deflation will counteract the inflation
caused by sudden economic growth in the short run. However, due to over-dependence on the
primary sector, Guyana will undergo an unbalanced sectoral growth.

In conclusion, the predicted economic growth is a boom for Guyana. However, it has to focus on
diversifying the economy because the oil sector will represent 40% of the whole economy in the
future.

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