Column 40 noted that in practice, any Sovereign Wealth Fund for Guyana has to take a whole host of factors into account, including the country’s recurring deficits which are financed by loans; the deficit in its infrastructure; future revenue gains and losses; commodity prices including that of oil; and citizens’ rising expectations. In this Column attention moves away from the 2016 Petroleum Agreement to something into the future, something that considers how Guyana will use the oil revenues which will start flowing in 2020.
There are of course so many variables about the petroleum industry that indulging in projections is something of a fool’s game. One of the biggest uncertainties of course is the price of oil into the short, medium and long terms, which cannot be separated from the even bigger question of fossil fuel versus renewables; the cost of production by the monopoly producer; the effect of transfer pricing if any; the economic policies of the government of the day which will themselves be driven by popular expectations and political imperatives; the attitude of future governments into the next several decades to the crippling stability clause which Minister Raphael Trotman has embedded into the 2016 Agreement and the consequences of any attempt by a new Government to force a better deal; the effect of the Dutch Disease which is already rearing its ugly head with the loss of hundreds of jobs in the lower East Bank, Demerara; and of course a less likely unfavourable outcome of the border controversy with Venezuela.
It is unlikely that the framers of the 2003 constitutional amendments were thinking of a petroleum driven state when it imposed on the state a duty “to protect the environment, for the benefit of present and future generations, through reasonable legislative and other measures designed to ….. secure sustainable development and use of natural resources while promoting justifiable economic and social development.” At best, this was probably designed with the environment in mind rather than resource exploitation since the then (and now) prevailing wisdom has been to make Guyana an attractive destination for mining and forestry companies.
The new mantra has shifted to petroleum and the attendant sovereign wealth fund as more than just a fad but rather a sound economic and social proposition that is embraced by almost all resource extraction countries. Indeed, one wonders why Guyana never thought of such a fund to secure some of the revenues from bauxite, gold and timber for future generations for which Chile is an excellent example. The only response is better late than never.
No single model
The first point to note in any discussion on such funds is that, a 2013 IMF Paper pointed out, the objectives of SWFs depend on country-specific circumstances, which inevitably change over time. Many funds in resource-rich economies have multiple objectives, such as stabilisation/savings (Azerbaijan, Botswana, Trinidad & Tobago, and Norway), saving/pension reserve (Australia), or stabilization/saving/development (Kazakhstan). Those objectives in turn influence how the funds thus garnered are allocated and invested in terms of time horizon, maturity profile and risk profile.
Because of the huge sums which are usually involved, the Ministry of Finance has perhaps the most important role among government ministries since SWF’s play an important role in macroeconomic management, affecting as they do public finances, monetary conditions, external accounts and balance sheet linkages with the rest of the world. Clearly then any decision on the establishment of a SWF, or as in the case of Singapore, more than one such fund, has to be taken with extreme care although it is unlikely that any decision is irreversible or inflexible. With those caveats, let us delve a bit deeper into the topic.
SWFs have been defined as special purpose investment funds owned by the state and holding, managing or administering assets to achieve financial objectives while employing investment strategies, tools and instruments including foreign financial assets. While Norway is considered the gold standard of Sovereign Wealth Funds, the first country to have established such a fund was Kuwait some sixty-five years ago, and some thirty-seven years before Norway which of course only discovered oil in the late seventies. The literature indicates however that the majority of SWF’s are of more recent vintage with many having been around for less than fifteen years.
Funding the Funds
Another interesting if not entirely important characteristic is how such funds are named, in many cases reflecting their objectives, and the source of their funds. Here are a few examples. China’s is called the China Investment Corporation and its source of funds is foreign exchange reserves while that of Hong Kong is called the Exchange Fund and its source of funds is foreign exchange reserves and fiscal surpluses. In the case of Singapore, the body is called the Government of Singapore Investment Corporation which is funded by foreign exchange reserves, fiscal surpluses and employee contributions.
Australia simply calls theirs the Future Fund financed not from natural resources but from fiscal surpluses while Iran calls theirs the Iran Oil Stabilization Fund funded from natural resources, the source of financing in about three-quarters of the countries with some form of SWF’s. A unique name and funding source occurred in the pre-oil Uganda called the Poverty Action Fund financed from Savings from Heavily Indebted Poor Countries (HIPC) debt relief initiative, donor contributions, and fiscal surpluses while Gabon’s fund is called Fund for Future Generations.
Of course the objectives are of far greater relevance that the name and often determine the governance arrangements regulating the Fund. I will look at the range of those arrangements in Column 49.