Today is Budget Day. The year 2019 would mark the fourth year for which the national budget is presented to and approved by the National Assembly before the year begins. Prior to 2016, the budget was presented around the deadline set by Article 218 (1) the Constitution, except for the year 1976. That deadline is not later than 90 days of the commencement of the year. An early budget avoids the Minister of Finance authorizing withdrawals from the Consolidated Fund in the first four months of the year pending the approval of the budget, but more importantly, it allows heads of budget agencies to plan their expenditures in greater detail before the year commences, especially in the area of procurement. However, considering that the majority of government expenditure relates to public procurement, significant progress is yet to be achieved to ensure that budgetary allocations are fully supported by detailed procurement plans.

The Assembly has recently approved the budgetary allocations of constitutional agencies. The political Opposition had insisted that the proposed reductions recommended by the Minister and approved by the Assembly should be restored on the ground that such adjustments were not in conformity with the Constitution. Article 222A states that in order to assure the independence of these agencies, their expenditures are to be financed as a direct charge on the Consolidated Fund, determined as a lump sum by way of an annual subvention approved by the National Assembly after review and approval of the entity’s annual budget as part of the process of determination of the national budget. (emphasis mine)

The national budget is compiled having regard to, among others, the current state of the economy; the priorities of the Government within a strategic budgetary framework; the balance on the Consolidated Fund (which it must be noted was in overdraft by $155.796 billion at the end of 2017); the status of the Public Debt, in particular the debt to GDP ratio; anticipated inflows by way of loans and grants; how much revenue the Guyana Revenue Authority and other State agencies are able to garner; and the extent to which deficit budgeting can be entertained.

From the above review and analysis, the resource envelope, that is, the amount of funds available to meet the expenditure of government services, is determined. Invariably, the sum total of the budgetary proposals of Ministries/ Departments/Regions and other agencies exceeds the resource envelope. The Minister then has the unpleasant task of deciding on the extent of downward adjustments to the individual budgetary proposals. However, in the case of constitutional agencies, he cannot do so. Instead, he makes a recommendation to the Assembly, and it is for that body to decide on any adjustment to the budgetary proposals for these agencies.

The former Attorney General, in a letter to the print media in early 2017, had contended that the provisions of the FMA (Amendment) Act 2015 contravene Article 222A of the Constitution. In response, the Minister had the following to say:

… it would be foolhardy to think that any agency seeking funding from the Treasury, could just submit a budget to the Minister of Finance and expect it to be approved in the National Assembly unaltered. If that were possible, then we would not go through the painstaking exercise that attends the annual national budget.

In reality, as is the global norm, the recommended budget by any government, is circumscribed by the available fiscal space guided by the national deficit and debt sustainability targets.

What obtains now, therefore, is a more transparent system where both the request made and the proposed recommendation are shared with the National Assembly, and it is the National Assembly not the Minister of Finance which approves the final allocation to Constitutional Agencies, and has the power to vary these proposals up or down before approval.

Since 1992 and perhaps earlier, the Assembly has been approving the national budget reflecting expenditure that exceeds revenue, which explains the progressive increase in the overdraft on the Consolidated Fund. In several of our columns, we had suggested that we are living beyond our financial means and had advocated, so far unsuccessfully, that we move towards a balanced budget. Imagine what would have happened if we were not the recipient of the generosity of the international community in terms of debt rescheduling and write-offs, and other forms of financial assistance. One recalls a former Minister in his budget speech in a moment of misplaced elation exclaiming  ‘the biggest budget ever’!

Last week, the Natural Resource Fund Bill 2018 was presented to the National Assembly based on the Green Paper entitled “Managing Future Petroleum Revenues and Establishment of Fiscal Rule and a Sovereign Wealth Fund”. This article outlines the key provisions of the Bill.

Purpose of the Bill

The Bill provides for the establishment of the Natural Resource Fund (NRF) to manage the natural resource wealth of the country in an efficient and effective manner for the present and future benefit of its citizens by ensuring that:

(a) Volatility in natural resource revenues does not lead to volatile public spending;

(b)   Natural resource revenues do not lead to a loss in economic competitiveness;

(c)  There is a fair transfer of natural resource wealth across generations; and

(d)  Natural resource wealth is used to finance development priorities, including initiative for an inclusive green economy.

The Fund is to be managed in accordance with the principles of good governance, including transparency and accountability, international best practices and the Santiago Principles. The Santiago Principles contains 21 statements of principles aimed at ensuring proper management and accountability for natural resource revenues, as endorsed by the International Forum of Sovereign Wealth Funds.

Public Oversight and Accountability Committee

Part III of the Bill provides for the establishment of a Public Oversight and Accountability Committee (POAC) comprising 22 members with responsibility for:

(a)   Monitoring and evaluating compliance with the Act, especially as regards the principles of good governance, including transparency and accountability, international best practices and the Santiago Principles;

(b)   Providing independent assessment of the management of the NRF and the utilization of withdrawals; and

(c)   Facilitating public consultations on the management of the NRF and the utilization of withdrawals.

The members of the POAC are appointed by the President based on nominations by the bodies representing: civil society; women; youths; the Guyana Bar Association; Consumer Association; Guyana Extractive Industries Transparency Initiative; Transparency Institute Guyana Inc; the media; trade unions; Institute of Chartered Accountants of Guyana; private sector; the ten Regional Democratic Councils (RDCs); and the University of Guyana. The tenure of appointment is for two years renewable in the case of nominees of the RDCs, and three years non-renewable for other appointees.

The culmination of the work of the POAC is the preparation and publication of a half-yearly report on its website or Parliament’s website within 60 days of the end of the half-year. Copies of this report are provided to the President and the National Assembly. The Committee is also required to hold annual public consultations to report on the discharge of its functions.

By way of comment, given the size of the POAC, it may be appropriate for its work to be undertaken by sub-committees. In addition, considering its mandate, it would appear necessary for a full-time Secretariat to be in place, staffed with at least three persons, including an experienced accountant. The chairman could also be employed on a full-time basis. Otherwise, the Committee could end up being viewed as a loose gathering, meeting once every month or every quarter, and going through the motions with no meaningful outcome.

Management of the Fund

With the assistance of a Senior Investment Advisor and Analyst, the Minister of Finance is responsible for the overall management of the NRF and for preparing an Investment Mandate on the advice of an Investment Committee. This Committee is to  comprise six members appointed by the Minister for a four-year renewable term. The members must have experience and expertise in financial investments and portfolio management.

The Committee is required to submit written annual reports to the Minister based on its mandate and taking into account, among others: overall objectives of the NRF; current conditions, opportunities and constraints regarding the financial markets; and the need to ensure sufficient funds are available for withdrawals as well as a return on investment of at least three percent per annum in the long term while minimizing risk. The Minister may request specific advice from the Committee, which advice must be tendered within 28 working days.

The Bank of Guyana is responsible for the operational management of the NRF in accordance with the Investment Mandate. The Fund is to be maintained in U.S. dollars.

A Macroeconomic Committee, comprising five members with expertise and experience in macroeconomics, is to be appointed by the Minister for a term of four years, renewable for one more term. The Committee is responsible for advising the Minister on the Economically Sustainable Amount, defined by Section 25 (1) as the maximum amount that, in the opinion of the Minister and taking into account the recommendations of the Committee, can be withdrawn from the NRF for the next ensuing fiscal year without diminishing the competitiveness of the economy. Factors that are taken into account include: (i) the impact of past spending financed by withdrawals from the Fund; and (ii) potential impact of future spending financed from the Fund taking into account, among others, inflation, exchange rate, balance of payment, economic growth and the public debt. The Committee is required to submit an annual report to the Minister recommending the Economically Sustainable Amount for the next ensuing year and each of the next following three fiscal years.

Section 26 also introduces the term ‘Fiscally Sustainable Amount’ which is the maximum amount that can be withdrawn from the NRF in a fiscal year while ensuring the long-term financial sustainability of the Fund, a fair inter-generational distribution of natural resource wealth, and maintaining stability in the annual withdrawals from the Fund. The Minister is responsible for calculating the Fiscally Sustainable Amount by the 1 June of each year for the next ensuing fiscal year. The method to be used in the calculation is outlined in the First Schedule of the Act. Essentially, the Fiscally Sustainable Amount ceiling in a fiscal year is the greater of: 25 percent of the five-year average of non-petroleum revenues, using the preceding two years, the current year and the two succeeding fiscal years; and three percent of the projected balance of the NRF for the fiscal year in question.

The Economically and Fiscally Sustainable Amount, which is the lesser of the Economically Sustainable Amount and the Fiscally Sustainable Amount, is the amount that is withdrawn from the NRF and placed into the Consolidated Fund after the necessary approval is given by the National Assembly. The withdrawn amount is to be used to finance national development priorities including any initiative aimed at realizing an inclusive green economy; and essential projects directly related to ameliorating the effect of a major natural disaster.

Accounting, Reporting and Auditing

The Bank of Guyana is responsible for maintaining proper books of account of the NRF in accordance with the International Financial Reporting Standards (IFRS) and for preparing monthly and quarterly reports for submission to the Minister. Its Internal Audit Department is the appointed Internal Auditor of the Fund while the external audit is to be performed by the Auditor General who may engage an international auditing firm for this purpose. The audited accounts of the Fund are to be finalized not later than 30 April in the following fiscal year.

The Minister is required to prepare an annual report to be laid in the Assembly not later than 30 days of the receipt of the audited accounts from the Bank. The report is to be published on the Ministry website within three working days of its presentation to the Assembly.

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