- Hubert Walas
The dream of wealth.
At the end of 2019, the International Monetary Fund published a report that at first glance could have seemed a mistake. It presented the GDP growth forecast for Guyana, a small country in South America. According to IMF analysts, Guyana's GDP was going to grow by 86% in 2020. That is 14 times the GDP growth forecast for China. The reason for such bold estimates was the announcement of the beginning of oil production from the reserves discovered a few years ago on the Guyana coast. However, there are many indications that Guyana's wealth is under question and its achievement will cost a lot of effort.
Guyana - a country located in the northern part of South America, with an area comparable to the one of Belarus - is one of the smallest countries on the continent. In 80% it is covered with equatorial forests, which make the country relatively sparsely populated. The population, accumulated mostly on the coast of Guyana, is about 770,000, which isn’t much bigger than the population of Luxembourg. ⅓ of the population lives in the country's capital, Georgetown.
Historically speaking: Guyana is one of three countries with the same name formed from European colonies. To the east of Guyana is Suriname, once Dutch Guyana. Further to the southeast lies French Guyana - to this day the dependent territory of Paris. The Guyana referred to in the episode was once British Guyana. The country gained independence from the British in 1966. This is the only country in South America in which the official language is English.
Years of exploitation and state formation have made Guyana one of the poorest places in South America. As much as 40% of the population lives there on the poverty line. The economy of Guyana is currently based on two sectors - the first is agriculture, mainly in the form of sugar cane and rice, the second is the mining sector, in which gold and bauxite are mined.
Black Gold
Hence, the news that was announced in May 2015 looked like a real gift of heaven. ExxonMobil, an American company from the petrochemical industry, announced the discovery of oil-bearing sandstones, 200km off the coast of Guyana. The deposits were initially estimated at 4 billion barrels of oil, but at the beginning of 2020 these calculations doubled - to 8 billion barrels. Compared to neighboring Venezuela, which has the largest reserves in the world of 300 billion barrels, it may look modest. But for example, this is more than the oil reserves of Norway.
The true perspective of the fortune that happened to Guyana is given by the statistics of reserves per capita. With less than a million inhabitants, the country's oil reserves per capita place Guyana among the top three oil-rich populations. Behind Kuwait and the United Arab Emirates, but ahead of Qatar and Venezuela. However, further discoveries in the Guyanese Stabroek block are not excluded. In Georgetown it seemed that historical justice had finally arrived.
"We're moving from a very low base to a stratospheric leap," said Finance Minister Winston Jordan.
In this light, the 86% growth forecast made by the International Monetary Fund is starting to look more feasible. The IMF pointed out that Guyana's medium-term prospects are very favorable, citing oil production as the key to the expected growth. The country has also been named the fastest-growing economy in the world by the Nasdaq stock exchange.
The Dutch Disease
Why, instead of opening champagnes, should Guyana prepare for the storm that is coming?
"There is no way that such an explosion of money will be managed in the right way," said Amy Myers Jaffe, director of energy security at the Council on Foreign Relations.
With all this cash on the horizon, Guyana is unprepared for its rapid influx. The risk of chaos, corruption and internal war, as has happened in other countries in a similar situation, is high. Nobody has specified how to manage and share this wealth. There is no plan to start building and modernizing roads, communications and institutions in the country. There is also no plan to modernize the country's capital, Georgetown.
The pace of increase in public spending must be gradual to reduce bottlenecks related to the economy's limited ability to absorb capital. In order to avoid waste and minimize macroeconomic disruptions associated with the Dutch disease. The Dutch disease is a phenomenon of negative consequences that result from the sharp rise in the value of the national currency. This economic concept is usually associated with the paradox of a situation in which discoveries of new wealth result in harming the economy of the country. Valerie Marcel, from the think tank Chantham House, emphasized that Guyana may be struggling with a resource curse . It will be very difficult for Guyana not to be totally subordinated to the oil sector in the long run.
For these reasons, London based research center IHS Markit revised the forecast of the International Monetary Fund down to 30% GDP growth in 2020. This is still an incredible increase, but almost 3 times smaller than the one estimated by the IMF.
Exxon's backyard?
This is just the beginning of the problems. Since its discovery in 2015, ExxonMobil has remained a monopolist on oil extraction on the Guyanese shelf. Contracts signed with the American giant have been questioned by country’s political background. The opposition accuses President David Granger of transferring the nation's wealth to the corporation. The President's Energy Advisor Jan Mangal himself admitted that Guyana did not have any economic model during the negotiations with Exxon. "Ministers didn't ask oil and gas experts for advice." "Exxon will take whatever it can. People are just beginning to realize what they have lost."
According to industry analysts and transparency groups, in June 2016, a year after the first discovery, the company and Guyana renegotiated the contract on very favorable terms to Exxon. Clyde & Company, a London law firm hired by the Guyanese government to review the contract procedure, concluded that Exxon forced Guyana officials to sign a new contract before announcing new drilling results, "because knowledge of the discovery of" world-class deposits "could change the government's negotiating position."
In February 2020, the British non-governmental organization Global Witness, which deals with the documentation of corruption associated with the extraction of natural resources, published a report calculating how much the budget loses on the contract signed in 2016 with ExxonMobil. According to its records, the government will get 52 percent revenues, while the rest will go to corporations and cooperating enterprises. In the majority of such contracts, the state retains 65 to 85 percent of earnings for itself. It's a waste of over a billion dollars a year.
In addition to the dubious agreement with Exxon, Guyana is affected by political and ethnic chaos. On March 2, 2020, presidential elections were held in the country, which were not resolved by the time this material was created, on March 22. A national electoral commission ruled on March 6 that President David Granger won his second five-year term. However, soon after, observer groups, including the Organization of American States and the United Nations, questioned the counting process, while the United States and other Western nations signaled possible economic sanctions and visa withdrawals if any president was elected without a valid recount of votes. Granger, a 74-year-old retired army general, leads a multi-party coalition supported mainly by descendants of Africans brought to Guyana as slaves. His opponent is Irfaan Ali - a candidate of the Opposition People's Progressive Party who led the nation for 23 years until 2015. He is mainly supported by the Guyanese of East Indian descent, who were brought to Guyana as servants. The voices are almost evenly distributed according to the ethnic division of the society. It doesn't help build the consensus on managing the upcoming wealth.
Furthermore, the current crisis caused by the coronavirus epidemic and the oil war between Russia and Saudi Arabia cast a shadow on everything. At the time when the IMF report was created, the price of oil fluctuated around $ 70 per barrel, currently it fell to $ 20. Extrapolating this to the forecasts, we will get a 25% GDP increase in the case of the IMF and over 8% GDP increase in the case of IHS Markit. In addition, there is a general economic slowdown. Although, according to energy market analysts, the price of oil will probably rise after reaching a compromise between the Russians and the Saudis, a return to $ 70 / barrel is unlikely. With the continuous development of alternative energy sources in developed countries and the constantly growing supply on the market, oil can share the fate of coal. Developing countries such as China, India, Bangladesh and Indonesia will of course still need oil to sustain their development, but the golden era of oil seems to have gone forever.
Summary
The initial chances are not in favor of Guyana. There is a long and rich line of research in the field of social sciences that combines oil production with countless socio-political diseases, including debt crises, slow economic growth, corruption, conflict and authoritarianism. Even former success stories such as Venez ela are now infamous for political instability and a falling economy. Added to this is the unfavorable international situation and internal struggles for influence.
However, to dispel these dark clouds, the fact is that in the blink of an eye Guyana came into great wealth. Even with careful assumptions, Guyana can double or triple its GDP over the next 10 years. Although the key is to learn a lesson from the oil curse in other countries. On the other hand, ExxonMobil and potentially other companies should play a strong role in ensuring the success of this small nation. Not only because it is right, but also because in this way they ensure their own fate. Some time in the future, we will return to Guyana on this channel, to see how the country is doing in the new reality.
