Single Natural Resource Fund suited to meet country’s petroleum sector needs – ‘Green’ paper

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DPI, Guyana, Monday, August 13, 2018

Government will be establishing a Natural Resource Fund (NRF). This operation is outlined in a ‘Green’ paper laid in the National Assembly on August 8. The ‘Green’ paper outlines key issues for consideration and includes mechanisms to ensure sustainable use of petroleum resources.

The government believes the establishment of a single fund – the NRF- will be the most effective, efficient and transparent mechanism for achieving multiple objectives of intergenerational savings, stabilisation and investment in development priorities.

The rationale behind this decision is outlined in the Government’s ‘Green’ paper titled “Managing Future Petroleum Revenues and Establishment of a Fiscal Rule and A Sovereign Wealth Fund” which was tabled in the National Assembly on August 8 by Minister of Finance, Winston Jordan.

In his presentation, he said stabilisation is particularly important for resource-rich countries, dependent on natural resources, for two simple reasons, “commodity prices are volatile and production levels can be difficult to predict.”

These two factors, the minister noted, can result in unstable revenue and government spending which can impact the stability and scale of social programmes and intervention.

“The second key function of our SWF is savings to ensure the equitable distribution of assets from the extraction of non-renewable resources across current and future generations this will allow for the transformation of a depleting asset base, that is oil to a permanent asset base,” Minister Jordan explained.

Historically, in recognising the need to both save and spend incoming oil revenues, while ensuring future generations benefit, the establishment of a Sovereign Wealth Fund (SWF) was proposed as a solution.

However, the government, after careful examination of several factors, including the additional administrative costs of establishing two funds and examples of countries that established multiple SWFs, but have not managed their natural resource revenues effectively, concluded that a single NRF will be able to meet the country’s needs.

According to the ‘Green’ paper, “A single fund can achieve multiple objectives with a robust fiscal rule…establishing an SWF is relatively complex and there can be substantial administrative costs.”

Government reasons that if two separate funds are established, it will require two governance structures, two investment policies/investment mandates, two sets of accounts and two external audits.

Two funds would also need detailed rules for transferring money between the funds and the National Budget. “In addition, it would be unwise to spread the limited expertise and experience in fund management in Guyana across two separate funds,” the paper stated.

Importantly, economic modelling also demonstrates that with Guyana’s proposed fiscal rule, known as the “Economically and Fiscally Sustainable Amount Rule”, a single fund will lead to economic stabilisation and substantial long-term savings, while avoiding increased administrative costs that establishing multiple funds would entail.

The government said case studies of Botswana, Norway and Nigeria show that having multiple funds is no guarantee of achieving the savings and stabilisation objectives.

By: Stacy Carmichael

Image: Department of Public Information