Summary of the Green Paper on Managing Future Petroleum Revenues and Establishment of a Fiscal Rule and a Sovereign Wealth Fund laid in Parliament on August 08, 2018, by the Hon. Minister of Finance
*Emphasis on economic stability, savings and spending
*Transparency and accountability issues prioritised
As part of its commitment to effectively and efficiently manage and account for anticipated petroleum revenues, the Government undertook to create a public financial management tool – a sovereign wealth fund (SWF) and an accompanying fiscal rule – that would allow the country to accelerate its development responsibly. As part of the process towards the establishment of an SWF – referred to as the Natural Resource Fund in Guyana’s case – in an inclusive, transparent and thoughtful manner, the Government has laid a Green Paper in the National Assembly to elicit discussion on the related legislation, which is intended to be laid in the Assembly later this year.
Extensive advice on the NRF was received from the Commonwealth Secretariat, the International Monetary Fund, the World Bank, and the Inter-American Development Bank, among others. The proposed legislation promises to make Guyana’s SWF one of the most robust funds in the world, able to achieve multiple objectives with a single fund structure while maintaining direct adherenceto nearly all of the Santiago Principles and indirectly achieving the remainder when the Act is operationalised. The three principle objectives of the Fund are: 1) stabilisation 2) inter-generational savings, and 3) domestic investment in keeping with the vision of the national development plan.
The Green Paper outlines many key issues and concerns related to the realisation of natural resource revenue of magnitude, particularly the resource curse with specific focus on Dutch Disease and the presource curse. In addition, historically, oil production is associated with unstable revenue streams due to price volatility which can make government spending erratic. The Natural Resource Fund would address this challenge by employing a well thought out fiscal rule which is to be enshrined in law. As it relates to presource curse, governments can be pressured by voters to embark on risky borrowing on the back of overly optimistic revenue projections – a factor of which the Government is keenly aware.
Once oil related revenues start flowing, increased government and private investment can create excess domestic demand resulting in increased inflation and currency appreciation that leads to a loss of economic competitiveness. The mechanisms set out in the NRF would ensure earnings from petroleum only enter the economy at a rate at which the economy can absorb these additional resources. Additionally the Green Paper stresses that petroleum revenues must not be used to create parallel budgets; rather spending must happen via the National Budget and preferably under the auspices of a national development plan as per good public financial management practice. The Green State Development Strategy, Guyana’s next plan,will serve to outline the developmental vision for Guyana for the next 15-20 years. All government programmes in the future should align with the goals and targets set out in this Strategy. It is important to note that the SWF is not a tool for use for specific investments but, rather, a tool to manage the intake and pace of expending of resource revenues. What these revenues are spent on are to be guided by the priorities to be outlined in the Green State Development Strategy.
Spend Now and Save for Later.
The NRF will ensure stability in economic spending, savings for future generations and the financing of critical development projects All revenues from petroleum will be deposited into the NRF – a US dollar bank account held by the Bank of Guyana from which a withdrawal will be made into the Consolidated Fund to form part of the income streams for the annual National Budget. Withdrawals, which will be based on a fiscal rule, cannot exceed the amount approved by Parliament as part of the annual budget proposal.
Green Paper – Managing Future Petroleum Revenues and Establishment Of A Fiscal Rule and Sovereign Wealth Fund
- This Green Paper is being issued by Government to present preliminary proposals to stimulate discussion. It details specific issues, and then points out possible courses of action in terms of policy and legislation.
- This Green Paper on petroleum revenue management and establishment of a fiscal rule and a sovereign wealth fund (SWF) is prepared at the request of His Excellency President David Granger. It is intended to capture key issues for consideration, including the mechanisms to ensure sustainable use of petroleum revenues to achieve a diversified and green economy, with a specific predisposition to avoid mismanagement of the national patrimony (i.e. “natural resource curse”). Cabinet has offered its comments and related amendments, and authorised the laying of the Green Paper in the National Assembly. Feedback will inform the next stage of the process, which is the presentation of the sovereign wealth fund legislation to the National Assembly, before end 2018.
- Section I is structured to provide a background relating to petroleum exploration activities in Guyana and the genesis of the SWF, with specific mention of the technical support received from international experts. It then goes on to discuss further key considerations which elaborate the necessity and benefits of establishing a SWF. Special attention is placed on discussing the Dutch Disease, the presource curse and the resource curse as key risks associated with natural resource revenues of this magnitude. Section II will discuss the mechanics of the proposed SWF for Guyana, including the fiscal rule, and will be followed by Section III – concluding remarks – which includes issues for consideration.