The Guyanese government needs to address underlying weaknesses in the country’s proposed Sovereign Wealth Fund’s design to maximize its effectiveness, according to a report released Wednesday by the United States-based Natural Resource Governance Institute.
In the document, analysts praised government for taking a number of commendable steps in its plan to save a portion of the country’s forthcoming oil revenues in a new sovereign wealth fund.
“Guyana has a one-time opportunity to use transform its oil wealth into well-being,” said co-author and Natural Resource Governance Institute consultant Andrew Bauer. “But this requires getting the sovereign wealth fund rules right.”
Guyana would be following in the footsteps of other regional oil producers such as Colombia, Trinidad and Tobago and Venezuela in creating a special fund to manage oil wealth if policies outlined in the Ministry of Finance’s “green paper”—a government report and consultation document—are implemented.
Special funds like the one Guyanese officials are considering have been used to prevent harmful boom-bust cycles and save oil money for future generations.
But NRGI experts say a poorly conceived fund can leave a country worse off than not having a fund at all, especially if fund managers invest in risky assets, fail to mitigate the negative effects of oil revenue volatility, or prevent debt crises.
In their discussion of the government paper, NRGI analysts commend the Ministry of Finance for a sturdy policy grounding, especially the suggested bureaucratic structure for the fund. They also congratulated the government for public consultation prior to establishing the fund.
At the same time, the authors of the NRGI analysis urge officials to address significant underlying problems with the proposed fund design. Chief among them are rules governing how much money enters the fund and how much the government can withdraw for budgetary spending. Under the government proposal, a portion of the country’s oil revenue would be saved in the fund, though the government would still be allowed to borrow.
“Guyana could end up in a situation where it is saving money and earning low interest while it borrows at a higher interest rate,” said NRGI co-author Andrew Bauer. “And in this way, the country ends up losing money.”
He and his co-authors say that the proposed rule is unlikely to smooth government spending and does not constrain overall expenses. The government could over-borrow based on the prospect of large oil revenues, which are a decade away.
“Borrowing on the back of future natural resource revenues is a big risk for new oil producers like Guyana,” said NRGI senior economic analyst David Mihalyi. “We have seen this ‘presource curse’ lead to accumulation of unsustainable debt followed by economic crises in several countries, including Ghana, Mongolia and Mozambique.”
The NRGI analysts also encourage the government to strengthen its rules around how money in the fund can be invested. The government proposal already incorporates important elements, such as a list of eligible investments and a rule that the fund can only invest abroad. However, Bauer, Mihalyi and co-author Fernando Patzy stress the need for rules to prohibit purchases of particularly risky assets, such as commodities and derivatives, as well as strictly constraining and overseeing asset managers.
“It is not too late to make sure that happens,” Bauer said.
Guyana’s Finance Minister, Winston Jordan has already defended the Guyana model of the fiscal rule, saying that it takes into consideration the state of the country. “You hear all kinds of things about this man coming and say all kinds of things… The rule is one which recognises that Guyana is at a very low level of development and will require significant resources in the earlys so the rule is fashioned in a way where we can take out significant portions of the money in the early days but as you ramp up to 500,000 barrels, 750,000 barrels and so on when more money is coming in you take less,” he has said. “The percentage will go down as you ramp up so we don’t have anything that says it must be four percent of current expenditure and all this foolishness… all this thing that is being represented by Andrew Bauer and this person and don’t do this and that.
“At the end of the day, I think we, as Guyanese, must try to fashion something that is for us because our circumstances – if it’s not unique is different to all the different places that they are trying to tell you what happened and this and so on but nobody has come here and said ‘based on what you- Guyana- have I suggest you do this”. Everybody is coming here with a fixation; oh, it;s being done here in Norway, oh it’s being done here in Chile. But this is Guyana. We only got three-quarter million people; the bulk on the coast and pockets scattered over this vast country but still everybody got to get the ‘good life’ so I have to build a whole road from here to a community that got a thousand people. Which other country you know has this kind of story so we have to go in the cracks, the crevices, the riverain and everything to get them and make they get the good life,” the Finance Minister said.
At a Conservation International-organised public forum on Guyana’s proposed Sovereign Wealth Fund held earlier this month, former manager of Chile’s Sovereign Wealth Fund Eric Parrado called for credible and simple fiscal rules. “It cannot be cumbersome. One of the main features of a good fiscal rule is it has to be simple and flexible for shocks,” Parrado said.
Asked by Demerara Waves Online News to specifically comment on Guyana’s proposed fiscal rule, he said “right now the rule could be seen as more complex so I prefer to have simple rules…because it is important to gain credibility and legitimacy of the process” so that everyone can easily understand how it operates.
He further advised that the Sovereign Wealth Fund legislation must contain escape clauses to allow for increased expenditures during emergencies.
Parrado added that the Central Bank is used an asset manager and the government “doesn’t administer a penny” of the deposits into the Fund.