Set up Sovereign Wealth Fund for hard times- CDB official

Last Updated on Saturday, 26 December 2015, 21:00 by GxMedia

CDB’s Director of Economics, Dr. Justin Ram

A top official of the Caribbean Development Bank (CDB) has recommended that Guyana set up a Sovereign Wealth Fund to save and invest some of its earnings from extractive industries ahead of any economic downturn.

“It allows a government to save money in the good times so that when the bad times come around the government does not necessarily have to borrow to upkeep its expenditure patterns during the bad times,” CDB’s Director of Economics, Dr. Justin Ram told Demerara Waves Online News (www.demwaves.com).

Ram first floated the idea in an address to the Georgetown Chamber of Commerce and Industry’s (GCCI) annual awards ceremony held earlier this week at the Guyana Pegasus Hotel.

The CDB official added that some of the earnings could be saved for future generations in foreign currency to cushion the impact of massive currency depreciation. “That will ensure that the fund’s value is maintained over time,” he said.

The Sovereign Wealth Fund would require its own managerial system to invest the funds in equities and government bonds overseas. “This will ensure that the fund maintains its value over time but even more importantly it could start earning the country a rate of return whereby the country may be able to also use those returns for current expenditure as well,” said Ram.

He noted that Trinidad and Tobago, Botswana and Norway have all established Sovereign Wealth Funds. Cash from that fund, in the case of Guyana, could be spent on investment reforms and economic diversification away from natural resource-based products and into higher value-added goods and services.

The CDB official said Guyana needed to do more to improve its international competitiveness rankings by continued improvements in infrastructure, the provision of higher education, improving the technological readiness of the economy and developing its financial markets.

That approach, he said, would result in Guyana depending less on extractive industries such as agriculture, forestry, fishing, mining and quarrying “which focus on low value-added natural resource-based products and leaves the economy vulnerable to what we economists term the Dutch disease effects.”

Dutch Diseaseis is the deindustrialization of a nation’s economy that occurs when the discovery of a natural resource raises the value of that nation’s currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas.