Modify proposed fiscal rule to better promote fiscal sustainability – NRGI

Natural Resources Fund

…recommends reduced responsibilities for Macroeconomic Committee

The worldwide-based Natural Resource Governance Institute (NRGI), in reviewing the green paper on Guyana’s Natural Resources Fund (NRF), has recommended that the proposed fiscal rule be modified to promote better fiscal sustainability, effect smooth overall fiscal expenditures, allow for escape in times of crisis and reduce complexity.
The report, published in November, explained that the NRGI’s analysis of the green paper establishes a commendable framework for addressing some of the most severe risks, including a system of multi-layered internal accountability aligned with international good practice; listing eligible asset classes consistent with a low-to-medium-risk investment strategy; limiting investments exclusively to foreign assets; requirements to publish quarterly and annual reports; parliamentary review of annual reports and approval of withdrawals; and fiscal rules whose objectives are to prevent over-spending.
The NRGI has a wealth of experience in the field of natural resources and Sovereign Wealth Fund governance issues. The institute indicated that it played no part in crafting Guyana’s NRF and has no commitment to the Government. In the report, it commended the framework but cited there is a tremendous risk that the NRF will not function as intended without several key improvements, particularly in the area of the fiscal rule.
The recommendations for changes, includes managing citizen’s expectations transparently, professionalising the management of the fund, utilising a custodian bank, and reducing the responsibilities of the Macroeconomic Committee among several others.
In the green paper, Government says the fiscal rules under consideration recognises the development gaps, both in terms of human capital and physical infrastructure, that exist and the need to accommodate development spending via the National Budget. It added that “it envisages an initial frontloading of spending to address critical development gaps, in the earlier years, and subsequent progression to higher savings ratios in later years. The proposed rule would acknowledge that, notwithstanding the above, Government is determined to avoid the pitfalls that other countries have encountered that led to paths of poor economic management.”
The green paper also speaks to the establishment of a Macroeconomic Committee which would determine the Economically Sustainable Amount and would consist of the following five members appointed by the Finance Minister. The Committee would comprise of a representative of the Finance Minister, who shall also be the Chairman, a Private Sector representative nominated by the Institute of Chartered Accountants of Guyana, Bank of Guyana representative nominated by BoG’s Governor, a Private Sector representative nominated by Leader of the Opposition, and a leading expert in macroeconomics appointed by the Minister with the approval of Cabinet.
Among the responsibilities of the committee is the considerations of inflation; the real effective exchange rate; the balance of payments; economic growth, particularly in the agriculture and manufacturing sectors; the composition of public spending; and external debt.
NRGI, in its report, said it advises that Government to reduce excessive discretion of the Macroeconomic Committee on economically sustainable amount.
“We have reservations as to the Committee’s ability and authority to determine the “economically sustainable amount” as well as the necessity of an economically sustainable amount in addition to other elements of a fiscal rule. We recommend eliminating the economically sustainable amount element and having the Macroeconomic Committee be tasked with providing independent revenue forecasts for benchmark calculations, approving the temporary suspension of the fiscal rule in the eventuality of force majeure, and monitoring the functioning of the rule,” it writes.
In providing options for the Government to explore, NRGI said the fiscal rule is complex in its current form, which could cause comprehension issues and added that a well-defined escape clause and procedural guidance on how the Government may revise rule targets in a transparent and open manner in the case of major shocks.
NRGI said that consensus building is critical to the success of any sovereign wealth fund or fiscal rules, as politicians and oversight bodies are unlikely to enforce the rules unless they have a feeling of ownership over them.
“There are many models of consensus building, from parliamentary debates to public surveys to political ententes. In Ghana and the Northwest Territories (Canada), the Ministries of finance toured the country before the establishment of their funds to request citizen views on the management of natural resource revenues. In Norway, the political parties negotiated the fiscal rules so that each would abide by the rules once they entered Government. We would encourage the Government of Guyana to follow suit and engage in a cross-country consensus-building exercise before establishment of the fund,” it said.
Guyana is on the verge of becoming an oil-rich country. In absolute terms, Guyana’s petroleum wealth is modest, representing approximately 0.2 per cent of global reserves, which places the country 26th globally. However, it possesses the world’s seventh-largest oil reserves per capita, second-largest in Latin America behind Venezuela.
If revenue estimates from the Liza field prove to be accurate, Guyana could become one of the world’s largest per capita oil producers over the course of several years in the mid-2020s. According to independent projections, fiscal revenues from the petroleum sector could range between US$7 and 27 billion over the next 30 years. Between 2025 and 2028, revenues could peak at between US$800 million and $2.5 billion in a given year, at least doubling Guyana’s National Budget in some years.