Fundamental Lessons for Guyana’s Sovereign Wealth Fund
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 claims of voter fraud, the Irfaan Ali Administration was sworn in to power. The transition from the APNU/AFC party to the opposing PPP will change the foundation in which oil revenues are spent in the coming years.
At the roundtable, Ashni Singh, the Senior Minister of Finance of Guyana, said that the Ali Administration will introduce legislation to modify the Natural Resource Fund Act (NRF). The administration intends to strengthen the fund’s transparency by improving the governance and operation of the fund. Singh also indicated that the new act would focus on near-term economic developments while being mindful of long-term sustainable growth. Frontload spending to address critical infrastructure needs is in line with the objective of the fund. However, if done erroneously, excess 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 revenues from Guyana’s newfound oil resources. By using a US dollar-based New York Federal Reserve account, the NRF protects the 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’s budget. The establishment of the fund was an important development for a country seeking to mitigate the Dutch disease and promote transparency.
A sovereign wealth fund is a State-owned fund, usually financed with revenues 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 not only used 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 its 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 extremely effective at 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 oversight measures it established in the NRF Act. The Act says that the Ministry of Finance, responsible for the overall management of the fund, would provide the Bank of Guyana, responsible for the operation of the fund, with an investment mandate pertaining to the funds. In developing the mandate, the Ministry of Finance would receive advice from the Investment Committee, a group of experienced financial experts. Currently, the Committee does not exist.
Similarly, the Macroeconomic Committee, responsible for analysing the future implications of public spending on the country’s economic competitiveness, is supposed to advise the maximum amount that should be withdrawn from the fund each year. This Committee, in addition to the Public Oversight and Accountability Committee, are also missing.
The NRF Act also fell short in depoliticising the management of the fund. As it stands, the Ministry of Finance has too much control over the governance and spending of the resources. The members of the ever-so-important Investment Committee are all appointed directly by the Ministry. The Minister of Finance, in conjunction with Parliament, also has a final say on how the monies are spent. Without a more independent oversight structure, the fund will be more susceptible to political cronyism and mismanagement.
Experts have also mentioned that the fund lacks a medium-term expenditure framework and a clearer fiscal rule. A medium-term framework would allow for better planning and prioritisation of its incoming resources. The fiscal rule, used to determine how much money is spent each year from the fund, is too complex for laymen to properly supervise. The current rule also fails to curb debt-financed spending used to address short-term needs. Additionally, the Act did not create a broader fiscal framework that defined rules for public debt, balanced budgets, and revenues. These public finance laws would ensure more stable and less volatile spending by the Government.
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 reclaim US$5 billion in stolen funds and has resorted to an austere US$4.5 billion IMF programme to rebalance its financial standing. The fund suffered from mismanagement and institutional corruption, in which the country’s leaders used political patronage to spend uncontrollably and excessively.
In contrast, Norway, who owns the largest sovereign wealth fund with US$1.3 trillion in revenues, has showcased 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 government budget. It is also worth three times the country’s annual GDP, safeguarding wealth for future generations.
The success of the fund is based on its upstanding transparency and governance, in which several different entities and committees check and balance their respective management roles. The stability of the fund, reflected by having only three CEOs in 25 years, allows for investment continuity and operational efficiencies. Norway’s strong democracy and institutions also serve as a backbone to the fund’s success.
The fund’s growth, highlighted by a record US$180 billion earned in 2019, is also a result of its long-term, diversified, investment strategy that 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. Although Guyana’s Central Bank will also be in charge of operating its respective fund, Guyana’s ingrained culture of corruption makes the central bank more susceptible to political coercion and interference.
The new NRF Act in Guyana should implement the best transparency practices adopted in Norway, while avoiding the politically tied shortfalls experienced 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. It is essential to have independent accountability of the funds – not more political involvement. Although the original NRF Act established a decent framework, it needs fine-tuning and proper implementation to succeed. Guyana must do all it can to avoid an Angola-like situation.