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A market in Guyana's capital Georgetwon. (Photo: David Stanley)
Wednesday, February 23, 2022
Perspectives

Guyana: The Next United Arab Emirates?


Guyana should follow Abu Dhabi-like policies for its development.

BY ARTHUR DEAKIN

In late January, the Guyanese PPP administration introduced a $2.6 billion budget for 2022, consuming 100 percent of the funds stored in its sovereign wealth fund (SWF). By year’s end, Guyana will add $975 million in new oil revenues to the SWF, a 70 percent increase compared to its 2021 balance. Critics, however, claim that the government focuses on short-term gains at the expense of sustainable savings and inter-generational wealth.

A front-loaded spending structure for an SWF is not unusual, especially for a historically underdeveloped country. The percentage of annual withdrawals from the fund will gradually decline as the economy matures, limited to 3 percent of total deposits made in the previous year. Therefore, better accountability mechanisms are fundamental to guarantee transparent spending, although observers should not overlook the total amount spent.

It is even more important to ensure that oil funds create a diversified, free-market economy that is not dependent on oil and gas. Guyana should look no further than the United Arab Emirates (UAE) to learn how to do this.

The UAE is a federation composed of seven different emirates, including the capital city of Abu Dhabi and the famous commercial hub of Dubai. Located in the Persian Gulf, the Middle East nation has 9.8 million inhabitants and produces nearly 4 million barrels of crude oil per day (bpd). The UAE is the 7th largest oil producer in the world, and it has enough crude reserves to last more than 100 years.

Comparably, Guyana is a South American country near the Atlantic Ocean expected to produce over 1 million bpd by 2027, about 25 percent of UAE’s total output. With a population of 800,000 people, more than 10 times smaller than the UAE, the per capita output of oil in Guyana will be the largest in the world—by a wide margin. This forecasted development will transform its economy into a regional powerhouse.

The UAE first discovered oil commercially in 1958, with its first exports in 1962. In 1967, the same year it joined OPEC, the capital city of Abu Dhabi was described as a “‘developing village’ that had ‘no road, no electricity’ and ‘only one school.’” Five decades later, the UAE has grown its GDP from $14 to $411 billion, becoming a symbol of a prosperous oil society that astutely managed its resources and diversified its oil-based economy.

The deliberate diversification of the UAE’s economy began as early as 1976 when it created the Abu Dhabi Investment Authority (ADIA) to “sustain the long-term prosperity of the country.” ADIA is now the second-largest SWF in the world, with over $800 billion in estimated public assets. In addition, a second SWF, Mubadala, was founded in the 1980s to invest in local and foreign companies. Together, they hold more than $1 trillion in assets under management.

HEAD START

To unbiased observers comparing the two countries, Guyana has a relative head start in managing its oil resources. In 2015, it created its first SWF just six years after its first commercial discovery, and the country is already investing in growing non-oil sectors such as manufacturing, trade, and agriculture. Nonetheless, these sectors will only thrive if they can compete on a global scale

Most of Guyana’s electricity comes from heavy fuel oil, making it among the costliest and dirtiest in the region. For its non-oil sectors to prosper, the government will need to move forward with developing a 300-megawatt gas-fired power plant, which will use associated gas from its recent oil discoveries to lower the cost of electricity by up to 90 percent. This gas project will be fundamental in improving the country’s overall competitiveness.

The government should also work with the private sector to develop logistics hubs, better roads, and free trade zones while simultaneously providing qualifying companies with subsidies, tax credits, and government-backed loans. The Abu Dhabi government, for example, guarantees up to 75 percent of small- and medium-sized enterprise (SME) bank loans, has a $4 billion research and development fund to help private firms come up with innovative ideas, and provides a 40 percent electricity discount for industrial businesses. It is also ironclad with its contracts, providing stability for large foreign investors. To ensure a prosperous future, Guyana should adapt these policies for its development.

Guyana could also develop a formal economic diversification roadmap, using Abu Dhabi’s 2030 Economic Vision as a model. By diversifying its revenue base among different sectors, upgrading the skilled capacity of its labor force, and creating more private-sector jobs (especially for women), Abu Dhabi’s non-oil exports grew from 13 percent in 2010 to 57 percent in 2018. Sectors outside of oil and gas now make up over 60 percent of Abu Dhabi’s GDP, including manufacturing, financial services, and trade. Cheap electricity has been a critical underlying component of this growth.

Although the UAE’s path has been good, it has not been flawless. Like most other Gulf Coast States, the public sector is overinflated and overpaid, while the private sector depends on a system of clientelism and connections. The UAE government controls both large and small contracts, which benefits the politically connected elite at the expense of entrepreneurial SMEs. Guyana has similar traits of patronage, but it can thwart rent-seeking behavior at its foundation by promoting a high-paying private sector based on a free-market, knowledge-based economy. This process begins by heavily investing in education and creating a stable, investor-friendly regulatory framework for businesses.

Regional integration, which the UAE pursued via the Gulf Cooperation Council, is also important in creating economies of scale and trade efficiencies. Guyana’s access to the Atlantic Ocean and its newfound energy resources will be attractive to northern Brazilian states that struggle to overcome energy insecurities and complicated maritime routes. Brazil’s presidential frontrunner, Luiz Inacio Lula da Silva, has an affinity for Brazil’s northern states—where he enjoys mass public support. During a Lula Presidency, it is likely that he will make the Guyana-Suriname “energy corridor” a priority.

Regional integration will have to be accompanied by a competitive private sector, cheaper electricity, free trade zones, better infrastructure, and the transparent use of its oil revenues. As Guyana’s economy grows 500 percent by 2030, it will look back to these “early” days of first oil to see what it did right and what could have been improved. An economic diversification plan, which follows the roadmap set out by the UAE, is a path that it will be glad it embarked on.

Arthur Deakin is Co-Director of the energy practice at Americas Market Intelligence, where he oversees projects in oil & gas, solar, wind and hydrogen power, as well as battery storage and electric vehicles.

 This article was originally published by Global Americans. Republished with permission. 

 

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