A Suggested Medium-Term Fiscal Framework for Guyana

Guyana is growing rapidly, and fiscal policy plays a critical role in ensuring that the country's wealth is managed effectively and equitably.Issues of long-term fiscal and debt sustainability, while not of pressing concern, remain important as oil is an exhaustible resource.Issues of possible overheating, absorptive and institutional capacity constraints, together with inflationary and real exchange rate pressures, are likely to remain priority concerns for fiscal policy.These considerations suggest adoption of a comprehensive fiscal policy framework that guides public spending decisions based on a medium-term fiscal framework (MTFF) and updated public investment management (PIM) and public financial management (PFM) frameworks.The MTFF should be based on a medium-term fiscal anchor.Fiscal policy in resource rich developing countries (RRCs) usually has to balance several, and sometimes competing, policy objectives.In particular, fiscal policy has a crucial role to play in (i) promoting and maintaining macroeconomic stability, (ii) safeguarding the sustainability of public finances, (iii) ensuring an equitable intertemporal distribution of oil wealth across generations, and (iv) meeting the economy's physical infrastructure and human capital needs, while taking into account absorptive and institutional capacity constraints.Key fiscal policy challenges for Guyana over the near-and medium-term will likely have to focus on containing possible overheating / inflationary pressures, loss of competitiveness, and absorptive capacity constraints.With the help of oil revenues, first transferred to the budget in 2022, and debt financing the government has started investing heavily to address large development needs.As currently Guyana has one of the lowest public debt ratios in the world, under reasonable baseline scenarios public indebtedness and issues of fiscal or debt sustainability are not likely to be of major concern, in the absence of large and persistent negative shocks to oil prices or oil production.Stress tests carried out using the lowincome country debt sustainability framework (LIC-DSF) suggest that long-term fiscal and debt sustainability could come under risk only if there are adverse shocks to real GDP growth, exports, and/or commodity prices.However, accumulation of savings under Guyana's Sovereign Wealth Fund (the Natural Resources Fund, or NRF), are rising and could provide a substantial buffer against such shocks.Therefore, issues of overheating, absorptive and institutional capacity constraints, and 'Dutch disease' concerns through inflationary and real exchange rate pressures, are likely to be more pressing policy challenges over the short-and medium-term. 1 Expenditure growth rules can help with containing overheating pressures and capacity constraints.An expenditure growth rule is particularly desirable when scaling up public expenditures in the presence of absorption capacity constraints, and if the volatility of resource revenues requires precautionary savings.However, expenditure growth rules by themselves cannot ensure fiscal sustainability or intergenerational equity, and hence need to be accompanied by a suitable fiscal policy anchor.Such an 1 Dutch disease describes a situation where natural resource windfalls increase the demand for non-traded goods, which would then draw production factors away from non-resource-traded sectors and generate an appreciation of the real exchange rate, thereby eroding competitiveness of the non-resource sector.©International Monetary Fund.