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The IMF 2018 Visit: Fact vs Fiction

Thursday, July 19, 2018

The period 2014-18 has been very challenging. GDP and government revenues took a substantial blow from the decline in energy prices and the gas production shortfall. Gas shortages started in late 2010. The effect on tax revenues was masked by buoyant energy prices and were revealed only with the 2014 energy prices fall. Gas production is now recovering due to the fiscal incentives. In the meantime, everything, except violent crime, has slowed.

The International Monetary Fund (IMF) has a bad reputation because its patients tend to be in the later stages of their illness and therefore have to take stronger medication, or suffer worse consequences. The 2018 Article IV concluding statement is therefore written in diplomatic language to encourage the patient to be more responsible. It identifies comforting facts but repeats some unpleasant truths.

The positives are that the “economy shows signs of improvement from the second half of 2017, with return to positive growth expected in 2018 following two years of recession.” Improvement in gas production had a positive impact on production in the downstream petrochemical sector. It affirmed that headline inflation was at historically low levels as a result of the decline in aggregate demand and that unemployment, although rising, was relatively low. It also noted that “Financial buffers remained substantial, with HSF and sinking-fund assets at 30 per cent of GDP and gross FX reserves at 9.4 months of imports at end-2017”.

The non-energy sector dampened the overall growth, reflecting weak activity in construction, financial services and trade; continued shortage of foreign exchange (FX) and slow implementation of public investment projects. (This contrasts sharply with Minister Imbert’s projections for the non-energy sector). The report noted that Government reduced expenditure considerably by cutting transfers and subsidies and its purchases of goods and services. Government debt (including Government guaranteed debt) had risen to 61% of GDP but this was below the self-imposed “soft target of 65%”.

The report projects that the economy will return to a modest growth path “as energy projects come on stream and the recovery takes hold in the non-energy sector.” Unsurprisingly, it expects natural gas production to lead growth, but that there will be continued challenges in the oil sector and that the non-energy sector will recover slowly stabilising growth in the medium term (3-7 years). Whilst both Government and the IMF agree that the economy will return to growth, they differ sharply on the rate of growth. The mid-term review projects growth of 2%, 2.2% and 2.5% for 2018-20. The IMF projections are at 50% lower for each year.

The report points out several risks to the recovery process, including lower energy prices, delays or disruptions in energy-related projects and output, pending completion of the oil and gas tax regime reform.

Delays in the implementation of the ongoing fiscal adjustment and persistence of forex shortages could weaken market confidence and drive up funding costs. Tightening financial conditions could stress balance sheets and undermine the non-energy sector’s capacity to import and produce. Rising US rates and further US-dollar appreciation could worsen competitiveness and pressure the currency.

The report spends a considerable time (approximately 25% of the statement) dealing with the issue of forex. It notes that the market continues to be out of balance with demand exceeding supply and that this will have a negative impact on the non-energy sector and any diversification effort. It expects further volatility in energy prices, arguing that the market should be brought into balance given the low inflation rate and Government expenditure either by providing the foreign exchange or changing the pricing. Without market stability, reserves will continue to decline.

The report notes the effort to manage spending and that the fiscal deficit has narrowed. It argued that containing expenditure should remain a priority, noting that transfers to utilities represent a “significant fiscal burden”. It also agreed with the Government’s efforts to make its expenditure more efficient and looked forward to the World Bank report on this area.

The revenue expenditure gap is substantial. Revenue from taxes in the 2017/18 budget is $38 billion whilst expenditure is $54 billion. The difference is met by selling assets or financing devices such as the National Investment Fund (NIF), which manages to convert a bond issue (a loan from the public) into “revenue” thus reducing the current year deficit. Higher energy prices only narrow the gap and real growth of 1 to 2% is insufficient to close this gap.

The report notes that maintaining the current policy puts the burden of adjustment on fiscal, monetary and structural policies. “This requires ample reserve/fiscal buffers and adjustments with larger growth effects. Country experiences suggest that preserving a peg regime can provide a helpful anchor for undiversified economies, but only with large financial buffers and credible fiscal adjustments under persistent shocks.” We have neither.

The report identifies two priorities; first completing the adjustment, while insulating the economy from future commodity swings; and creating an enabling environment for the non-energy sector to be an engine of growth through: improved FX access, business-friendly environment, diversification efforts, reduced crime, and growth-friendly, efficiency-enhancing public investments. These require leadership and management.


Mariano Browne


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