An Introduction to Sovereign Wealth Funds &Macroeconomic Stability:Part 1Guyana’s Proposed NaturalResources FundBy Richard Rambarran(Note by Author: The views expressed in this articledo not reflect those of any organization to which I amaffiliated.)
1. INTRODUCTIONThe year 2020 will be remembered as a watershed momentin the history of Guyana. However, these years in the buildup to 2020 are pivotal in ensuring that the development pathwhich is charted for the country is one which is sustainableas well as allows maximum benefits to be assimilated toGuyanese. At present, the country is expected to, at currentdiscoveries, benefit from in excess of 500,000 barrels perday – a respectable nominal figure which transforms into animpressive per capita production amount, given the smallsize of Guyana’s population. Inevitably, this will provide anew revenue stream for the Government and increase theamount of monies available to do development work of thecountry.The dynamics of the landscape will transform in anunprecedented manner. One action of pivotal importanceis the integration of the oil and gas sector into themacroeconomic framework in a form that does not causedisruption to the stability which prevails. The injection oflarge amounts of money into an economy is dangerousand, if not managed properly, can be the perfect recipe toa disaster.Typically, in these scenarios of resource-richendowments injecting large amounts of revenue intoa country, Governments utilize the Sovereign WealthFund as one of its principal tools in preserving a stablemacroeconomic environment. Therefore, naturally, aSovereign Wealth Fund (SWF) tends to exist in situationswhere there is a fiscal surplus.It is this tool that helps to protect a country against thevolatility of the international price market for oil and therisks encountered when opening a significant component ofa country’s export portfolio to the shocks of an internationalmarket. These risks are, of course, exaggerated in a smallopen economy which is a price-taker on the internationalmarket, as opposed to a large open economy which wieldssignificant geo-political and economic influence, and hasthe ability to manipulate world market prices.2. GENERAL ISSUES WHICH ARISE FROM OIL & GASDEPENDENCEIn a general sense, there are some specific issues whicharise from a dependence on natural resource revenue,particularly in the extractive industries which followinternational prices. In a more concrete sense, thefollowing are issues which may arise from a dependenceon oil and gas:i. The Natural Resource ‘Curse’ or the ‘Dutch Disease’– The infamous macroeconomic situation whereincreased domestic demand stemming from injectionsof large amounts of m3. GUYANA’S SOVEREIGN WEALTH FUND – THE NATURAL RESOURCE FUND3.1 STRUCTURING THE NATURAL RESOURCE FUNDIn August 2018, the Government of Guyanaadvanced a green paper to the National Assemblyentitled ‘Managing Future Petroleum Revenues andEstablishment of a Fiscal Rule and A Sovereign WealthFund’ which outlined the Government’s intention toestablish its version of a Sovereign Wealth Fund tomanage the expected inflow of resources from the oiland gas industry.The Natural Resource Fund paper can be divided intoseven components. These are set out as follows:1. Why establish a single fund to achieve multiple objectives?2. What is the purpose of the Natural Resource Fund?3. How does the Natural Resource Fund integrate withthe National Budget?4. What is the fiscal rule associated with the Fund?5. What are the structures for managing the Fund?6. How are investments to be made by the Fund; and7. How is the Fund to be reported, audited and whattransparency measures are there to safeguard it?In a general sense, the aforementioned sevenquestions constitute the key components of a SovereignWealth Fund. The section below answers theGovernment of Guyana’s position on these questions.Therefore, understanding each of these sectionsprovides a clear understanding of the general directionof the Natural Resource Fund. The following willadvance the government’s position on these questions.3.2 HOW IS THE NATURAL RESOURCE FUNDORGANIZED?1. WHY ESTABLISH A SINGLE FUND TO ACHIEVEMULTIPLE OBJECTIVES?The question of establishing a single fund is answeredstrictly on a cost-basis. The overall cost, whenconsidered, of managing a single fund is lower thanmanaging more than one. The Government highlightsthat establishing an SWF is complex and there can besubstantial administrative costs.If multiple funds are established, this implies thatmultiple administrations must exist. There must bemultiple governance structures, investment policies and mandates, accounting and external auditing. Thiscan prove to be extremely complex and burdensomeon the resources, especially human resources, whichare limited in a country with a small labor market. The government cites Timor-Leste and Norway as examplesof successful single funds, while Nigeria is cited as anunsuccessful case of multiple funds.2. WHAT IS THE PURPOSE OF THE NATURALRESOURCE FUND?The Natural Resource Fund, according to the GreenPaper, has three primary objectives:a. Economic Stabilization: The Fund shouldcontribute to economic stabilization and ensurethat volatility in natural resource revenues doesnot lead to volatile public spending and ensuringthat natural resource revenues do not lead to a lossof economic competitiveness (to guard against theDutch Disease.)b. Inter-generational Wealth Transfer: The Fundshould ensure that there is a fair transfer of naturalresource wealth across generations, to ensure thatfuture generations benefit from these resources andthe benefits of the proceeds of the Fund do notaccrue to a specific generation; andc. Financing Development Gaps: The intent is to usethe natural resource wealth to finance developmentpriorities, via the National Budget, as identifiedin the national development strategy. This, thegovernment says, should go towards the creationof an inclusive, green economy.Figure 1 – Intended Operation of theNatural Resource Fund35th Edition Guyana Inc. 113. HOW DOES THE FUNDINTEGRATE WITH THE NATIONALBUDGET?Natural Resource revenues fromthe extractive industries, specificallypetroleum, mining and forestry will bedeposited into the Natural ResourceFund which will be held as a USdollar bank at the Bank of Guyana. Itis from this account that withdrawalswill be made, based on a rule knownas the ‘fiscal rule.’ These withdrawalsfrom the Fund will be deposited intothe Consolidated Fund to form partof the revenue for the annual budget,along with other traditional streams ofgovernment revenue, including loans,tax and non-tax revenues.Government will then determineits development priorities throughits national plan, known as theGreen State Development Strategy(GSDS), and the available income.The Government has stated thatpriority will be placed on catalyticinvestments to transform Guyanawithin the context of the measureabletargets, identified within the GSDS.Withdrawals from the NaturalResource Fund cannot exceed theamount approved by Parliament.This amount, after Parliamentaryapproval, will be placed into theConsolidated Fund for utilizationaccording to the priorities identifiedin the year’s national budget, whichdraws its inspiration from the GSDS.It is important to note that accordingto the Green Paper, the only furtherdrawdowns that can be made wouldbe for Petroleum Tax Refunds whennecessary. Figure 1 attempts to capturethe Public Financial Managementconstructs associated with the NaturalResource Fund.4. WHAT IS THE ‘FISCAL RULE’ASSOCIATED WITH THE FUND?The ‘Fiscal Rule’ is an importantinstrument as it is this mechanismwhich will determine the amount ofmoney which can be withdrawn fromthe Natural Resource Fund. As Figure1 depicts, it is the Fiscal Rule whichacts as the intermediary between theNatural Resource Fund and spendingon economic development.The Government envisages aninitial frontloading of spending toaddress critical development gapsin the earlier years and subsequentprogression to higher savings ratiosin later years. The Fiscal Rule(Economically & Fiscally SustainableAmount), shall be the least of:i. The economically sustainableamount for that fiscal year whichshall be determined through amacroeconomic committee;ii. The fiscally sustainable amountfor that fiscal year which shall bea mathematically derived amount;andiii. The balance of the NaturalResource Fund which shall also bea mathematically derived amount.CONCLUSIONUnderstanding the fiscal rule andits associated mechanism requiressufficient treatment and, as such,shall be the subject of a separatearticle which will elucidate in greatdetail the peculiarities and specificdetermination of the fiscal rule.The second article in this serieson the Sovereign Wealth Funds &Macroeconomic Stability whichexamines Guyana’s Proposed NaturalResources Fund shall also cover theinvestment of the Sovereign WealthFund as well as its managementstructures and the transparency andaccountability measures associatedwith it. The third article in this seriesshall cover the critical perspectivesof the Natural Resource Fund, with aview of providing recommendationsto improve the proposed Fund.Richard Rambarran is a developmentthinker and finance specialist.He holds a Masters of Arts inEconomics and several certificatesfrom the IMF, CEMLA and theUnited Nations in macroeconomicstability, macroeconometrics,financial programming, sustainabledevelopment and other areas. Heis a lecturer in the Department ofEconomics at the University ofGuyana and is currently the ExecutiveDirector of the Georgetown Chamberof Commerce & Industry (GCCI).Figure 2 – An Example of Frontloaded Development Spending Proposed inthe Natural Resources Fund Green Paper
