Wednesday, May 27, 2009

Guyana’s financial system sound despite global turmoil - IMF

Guyana’s financial system sound despite global turmoil - IMF

Posted By Stabroek staff On May 22, 2009 @ 5:30 am In Local News | 68 Comments

The International Monetary Fund has observed that direct spillovers from the global financial crisis on Guyana’s banking system have so far been limited.

According to the Article 1V consultation, “The banks remain well capitalized and profitable, and the financial system is sound.” However, the directors supported “heightened financial supervision to limit potential contagion and continued monitoring of the still high level of non-performing loans.”

Moreover, they welcomed the progress being made on financial sector reforms and on legislation to prevent money laundering and the financing of terrorism.

On February 27 this year, the Executive Board of the IMF concluded the Article 1V consultation with Guyana.
And according to a release on Tuesday, the directors noted that by implementing prudent fiscal and monetary policies, the authorities here had maintained macroeconomic stability in 2008 despite external shocks and social pressures.

But sustaining these policies will be critical to reduce vulnerabilities associated with commodity price volatility and possible spillovers from the global crisis, the release stated. The directors also commended the “commitment of the authorities to further entrench macroeconomic stability, strengthen the financial system, and implement structural reforms.”

They noted too that the administration had reduced petroleum product excise taxes temporarily in 2008 in order to limit the pass-through of higher international fuel prices to consumers, effectively diffusing social pressures while helping to contain inflation.

Meanwhile, they commended the government for reinstating the excise taxes in recent months as international oil prices have abated, to protect the fiscal position. Going forward, the release noted, the authorities were encouraged to focus on targeted support to the most vulnerable.
The directors welcomed too the commitment to sustain the fiscal consolidation effort and agreed that a more gradual deficit reduction than previously envisaged was justified in the context of the global slowdown.

While the administration’s plan to return to the target laid out in the medium-term fiscal framework by 2012 was welcomed, a few IMF directors considered that a faster move toward convergence would reduce risks to fiscal sustainability.

The identification of contingency measures in case of a shortfall in revenue or more difficult access to financing would help protect priority spending and avoid reductions in growth-enhancing capital expenditures, they advised.

The progress made in the area of fiscal reforms, including the successful implementation of VAT, was welcomed. The IMF directors cautioned, however, against a further expansion of the list of zero-rated VAT items and a weakening of the rules-based system for granting tax exemptions.

The reduction in the rate of inflation was also commendable. The directors said that they supported continued vigilance and readiness to adjust monetary policy to keep inflation low as needed. They noted that the exchange rate appeared broadly aligned with fundamentals, and the current exchange rate policy had served Guyana well. In this context, a number of directors stressed that a stable exchange rate was critical to the goal of maintaining macroeconomic stability.

The release noted further that despite external shocks and social pressures, macroeconomic stability in Guyana was preserved in 2008. “Growth decelerated to about 3 percent owing to a sharp shortfall in sugar production, but end-2008 inflation declined to 6.4 percent (6.8 percent target). The fiscal deficit widened to 7.9 percent of GDP (6 percent target) due to measures adopted in early 2008 to reduce the impact of high fuel prices, most of which have since been eliminated. So far, the financial system has been relatively unaffected by the global turmoil,” the IMF Executive Board stated.

In the meantime, higher growth is projected for 2009 with a recovery in sugar output expected to offset a slowdown in the other sectors of the economy.

Lower oil import prices would compensate for a decline in commodity export prices in 2009.

According to the IMF Executive Board, Guyana still faces other significant challenges, including lower worker remittances in 2009 and preferential sugar export prices in the years ahead, while downside risks include a lower-than-projected increase in sugar production and a more protracted than currently envisaged global slowdown.
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