Sovereign Wealth Fund within the context of a Developing Economy (Part 7)

– Guyana’s economy is largely underdeveloped, is an SWF necessary at the onset of oil production?

Last week’s edition introduced a new dimension to the thematic discussions with respect to SWFs – in the context of a developing economy. Having thus, in the previous six articles, outlined the governance frameworks, legal models, and macroeconomic perspectives among other key elements, the final two articles seek to contextualize the notion on whether an SWF is absolutely necessary at the onset of commercial oil production in 2020. Readers would recall that last week’s article concluded by illustrating Nigeria as an example – wherein it was posited that though Nigeria had set up an SWF, it has contributed insignificantly to the economic growth of that country.
In a developing economy, the merit of maximizing current spending from resource revenues is that it provides an opportunity to increase the consumption of a poor population. It also relaxes potential borrowing constraints, and thereby enables increasing investment in domestic capital, with high rates of return. Therefore, constraining spending, inter alia SWF, with restrictive spending rule may involve welfare loss; such a situation existed in Uganda (Hassler et.al, 2015).
To further put things into perspective, this columnist is of the view that some commentators, along with other sections of the media, are taking things a little bit overboard with respect to the badly negotiated Production Sharing Agreement (PSA) between the multinational oil company operating in Guyana and the Government of Guyana. Though one would agree that the contract could have been better, it is, after all, not an entirely bad deal, and therefore it would be in the spirit of national interest that we collectively move on and now shift focus on other critical aspects.
To this end, particular reference is made on how we are going to spend the oil revenue to develop this country; and by doing so, this also addresses the question raised herein: whether an SWF is necessary. And it is also the intent of this article to stimulate further public debates and/or discussion on this aspect of the subject matter.
Essentially, a Sovereign Wealth Fund is a savings fund for a country that has large surplus funds, and it is used to invest in various financial instruments in the global capital markets. In other words: if Guyana earns $100 billion in oil revenues, and it is then locked away for investment in an SWF in which those investments are going to earn, say, 5 or 10 % return on investment, would this model be of any direct economic benefit to the people of Guyana? The answer is no. Fortunately, this may practically not happen.
Another point of interest is that countries that have created SWFs were not at all as underdeveloped as Guyana currently is. For example, Norway’s oil industry is about four decades old, and the Norwegians had created their SWF (Government Pension Fund – Global) in 1990. That is about twenty-eight years ago, which means Norway’s SWF was created just over the first decade when its petroleum industry started to develop. More interesting to note is that even before Norway’s oil era began, Norway was a very advanced country before oil came. In fact, according to a report published by PETRAD (a Norwegian Government foundation established in 1989 to transfer knowledge and experience on petroleum resource management and technology), before Norway’s oil era, Norway had a sound economy; well-developed welfare; high employment; stable and homogenous population; moderate-high technology; efficient government; political consensus; extensive trade; was a friendly nation; had pietism and was caring for nature; and politicians were trusted. Another good example is China. China has the second largest SWF in terms of asset size — US$900 billion — after Norway; and its SWF was only created in 2007. Bearing in mind that China is one of the leading emerging economies on the global stage, and has enormous amounts of surplus funds, to the extent that China virtually funds trillions of dollars in the U.S Government’s spending and in other parts of the world, as is universally known.
Guyana, on the other hand, has a Consolidated Fund that is almost always in deficit, and so is the national budget, which is almost always a deficit budget; which means the country borrows heavily to fund budget spending. This is coupled with the fact that the country is a Third World country, and therefore needs massive investments in infrastructure, health care, education, information and communication technology etc.
In the final analysis, Guyana does not need a SWF at the onset of oil production. Instead, a Stabilization Fund would be more appropriate – such that a greater portion of the oil revenues could or should be utilised to advance massive infrastructural developments among other crucial aspects of national development, which the country badly needs.
*The Author is the holder of an MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.