By Arthur Deakin
On January 20, 2021, LatinFinance held a roundtable for investors seeking to understand the latest financial developments in Guyana, a country that has discovered nine billion barrels of oil equivalent since 2015. In 2020, after a five-month electoral limbo and voter claims fraud, the Irfaan Ali Administration sworn to power. The transition from the APNU / AFC party to the opposing PPP will change the base on which oil revenues are spent in the coming years.
At the roundtable, Guyana’s Senior Finance Minister Ashni Singh said the Ali Administration will introduce legislation to modify the Natural Resources Fund (NRF) Act. The administration intends to strengthen the transparency of the fund by improving the governance and operation of the fund. Singh also noted that the new law would focus on long-term economic developments given the long-term sustainable growth. Front-load spending to address critical infrastructure needs is in line with the fund’s objective. However, if done in error, excessive spending could lead to hyperinflation and a shortage of resources down the road.
The NRF, passed in early 2019 by the previous Granger Administration, established a sovereign wealth fund to manage the revenue from Guyana’s new oil resources. By using a New York Federal Reserve account based on the US dollar, the NRF protects oil revenues against inflationary and nominal exchange rate pressures caused by fluctuations in the domestic economy. It also sets a limit on the annual amount transferred from the fund to the Government budget. The establishment of the fund was an important development for a country seeking to alleviate Dutch ill-health and promote transparency.
A sovereign wealth fund is a State-owned fund, usually funded with revenue coming from extractive industries. The fund typically invests in real assets, such as property and infrastructure projects, and financial assets, such as stocks and bonds. Sovereign wealth funds are used not only as a guarantee of future funds for the local population, but also as a way to diversify the local economy by investing in sectors outside their extractive industries. These funds also tend to invest globally in an effort to diversify their asset base. If used adequately, and with the right controls, a sovereign wealth fund can be highly effective in generating wealth for the population and boosting economic activity during slow periods.
Despite a positive initiative, the Guyanese Government has failed to implement some of the necessary supervisory measures it has established in the NRF Act. The Act states that the Ministry of Finance, which is responsible for the overall management of the fund, would provide an investment mandate to the Bank of Guyana, which is responsible for the operation of the fund, which relates to the funds. In developing the mandate, the Ministry of Finance would be advised by the Investment Committee, a group of experienced financial experts. At present, the Committee does not exist.
Similarly, the Macroeconomic Committee, which is responsible for analyzing the implications of future public spending on the country’s economic competitiveness, is supposed to advise the maximum amount that should be drawn from the fund each year. This Committee, as well as the Public Oversight and Accountability Committee, are also missing.
The NRF Act also failed to de-criticize the management of the fund. As it stands, the Ministry of Finance has too much control over the governance and spending of resources. Members of such an important Investment Committee are appointed directly by the Ministry. The Finance Minister, in conjunction with Parliament, also has a final say on how the money is spent. Without a more independent oversight structure, the fund will be more susceptible to political gronyism and mismanagement.
Experts have also mentioned that the fund lacks a medium-term spending framework and a clearer financial rule. A medium-term framework would allow for better planning and prioritization of its incoming resources. The financial rule, used to determine how much money is spent each year from the fund, is too complex for laypeople to properly oversee. The current rule also fails to curb debt-funded spending used to address short-term needs. In addition, the Act did not create a broader fiscal framework that defined rules for public debt, balanced budgets and revenue. These public finance laws would ensure more stable and less volatile Government spending.
Angola, with nearly eight billion barrels of proven crude reserves and a top 20 global oil producer, is an example of what not to do with a sovereign wealth fund. Angola is seeking to recover US $ 5 billion in stolen funds and has resorted to a US $ 4.5 billion austere IMF program to rebalance its financial status. The fund suffered from institutional mismanagement and corruption, where the country’s leaders used political patronage to spend unruly and excessively.
In contrast, Norway, which owns the largest sovereign wealth fund with revenues of US $ 1.3 trillion, has shown how to effectively spend and grow its oil-based revenues. Through its annual contributions, the fund now provides Norway with about a quarter of its annual budget. It is also worth three times the country’s annual GDP, preserving wealth for future generations.
The success of the fund is based on its transparency and stable governance, where several different entities and committees check and balance their respective management roles. The fund’s stability, reflected by having only three CEOs in 25 years, allows for continued investment and operational efficiency. Norway’s strong democracy and institutions are also the backbone of the fund’s success.
The fund’s growth, highlighted by US $ 180 billion won in 2019, is also the result of its long-term, diversified investment strategy, which models an index fund. The investment strategy is based on the fund’s objectives and is adapted every third year by Norges Bank, Norway’s central bank. While the Central Bank of Guyana will also be responsible for the operation of its appropriate fund, Guyana’s corrupt corrupt culture makes the central bank more vulnerable to coercion and political interference.
The new NRF Act in Guyana should implement the best transparency practices adopted in Norway, avoiding the political faults attached in Angola. The announcement that the Office of the President will have oversight over the Ministry of Finance and Natural Resources is not an encouraging sign. Independent accountability of the funds is essential – not more political participation. Although the original NRF Act established a decent framework, it needs refinement and proper execution to succeed. Guyana must do everything it can to avoid a situation like Angola.