Wealth fund requires consensus on fiscal, legal framework – expert

As Guyana prepares for a Sovereign Wealth Fund (SWF) ahead of oil production in 2020, the former manager of one of the world’s most successful ones yesterday stressed the importance of full consensus by the society on its fiscal and legislative framework.

“If you pass the law, you can say ‘we are going to ring-fence the resources for the Guyanese people’ and we need that process now. We need to reach the consensus with the full society, then we need to pass the law—hopefully before 2020 because the revenues are coming in 2020, the temptation could be high and because you have an elections,” Eric Parrado said.

The International Finance Coordinator at Chile’s Ministry of Finance, who helped build that country’s SWF, was part of a seven-member group of international researchers and petroleum policy advisors that met with Cabinet ministers this week. The team discussed the emerging oil and gas sector and gave insights into prudent preparations for the revenues that will be generated from the industry.

Yesterday, during aninteractive session he had with members of the local press corps at the Theatre Guild, the current Professor of Economics informed that he told government that having a successful SWF is possible for Guyana but needs stringent management, expert financial advice on investments and legislation to protect monies from being misused.

Eric Parrado

He explained that there was a role for every citizen of Guyana in the process but noted that the SWF’s framework and processes have to “be in the law but it has to be flexible enough.”

While Guyana may not currently have all the financial managers needed to advise government on investment and spending from the fund, he said that they can also tap help from an international pool.

Spending versus saving

And warning against wanton spending and underlining the need to temper expectations of the country’s citizenry getting large salary increases and monetary handouts, Perraro said that government will also have to answer critical questions before the SWF is implemented.

“What is the right balance of spending versus saving? What type of saving? What are the spending priorities? What type of institutional arrangement for managing savings? What capabilities Guyana needs to implement a fiscal stabilisation agenda?” were some of the questions Parrado said he told President David Granger and his Cabinet that they needed to answer as the country prepares for the establishment of an SWF here.

He pointed out that an SWF was needed because of the cyclical nature of the oil and gas industry, and the need for revenues when there are fiscal lows.

“When you have a temporary shot like you are going to have in 2020, it is much better to save the money. Of course, you are going to spend more because you have needs, you have to get infrastructure, you have to invest in energy, you have to invest in health, human capital… but up to a certain point but then you have to save that money. The rainy days are coming. You don’t know when but they are coming. So, it is much better to be prepared for those times,” he said, while also pointing out that he “ran the Chilean SWF from scratch and it is doable. It is not rocket science.”

Underscoring the need for government to keep economic stability intact, he said that policies needed to be implemented to realise that objective. Establishing a countercyclical fiscal policy, having fiscal rules based on permanent income, a countercyclical monetary policy, an autonomous and credible central bank, a flexible exchange rate and a generally strong financial system were some pillars he listed.

Parrado advised that only when this country begins to get surplus money could it start depositing into its SWF but he was quick to note that from what he has analysed, Guyana would begin getting surplus monies from first oil in 2020.

“If you’re having a surplus, then you could put money aside in the Sovereign Wealth Fund, and that is simple…You could only have a Sovereign Wealth Fund if you run surpluses, if you don’t run surpluses, you cannot have a Sovereign Wealth Fund because you are cheating yourself. You are putting aside money that you don’t have. And if you don’t have money, it means that you are issuing debt and that’s problematic,” he said.

Guyana’s citizenry was also advised to not expect immediate handouts and salary increases when first oil comes as seeing investment returns and meeting priority needs of the nation would be the first priorities.

“It is very easy for the populace to say, ‘You know what, we are going to get increased wages like crazy’…That’s not possible because we can enjoy it in the short term but then inflation is going to be up, all the prices are going to be up and then we have to reduce economic activity and this creates unemployment for the people,” he said.

Saudi Arabians

His views are similar to those of British Professor of Economics and Public Policy Sir Paul Collier, who on Wednesday said that persons need to dissuade themselves of views being peddled that as soon as production begins their economic circumstances would drastically change.

“Don’t believe because you discovered oil you will turn yourselves into Saudi Arabians and can live without work. This is temporary money,” Sir Paul told reporters.

Minister of Finance, Winston Jordan, who is responsible for the SWF, has said that the foundation for the establishment of a SWF began one year after the APNU+AFC government took office and is a priority.

Objectives of the fund, he said, are to advance critical development and investment needs within the country (via the national budget); to address issues of stabilisation of the economy, and to ensure savings were made to guarantee inter-generational benefits from the extraction of this finite natural resource.

Those objectives, he said, reflect a comprehensive framework that will guide the prudent management of future oil revenues for the benefit of current and future generations, in keeping with the government’s agenda.

“Therefore, government’s investment expenditure will be driven by the Green State Development Strategy) – our national development plan – and, by the development priorities articulated and implemented through the National Budget, which has an established consultation cycle of its own,” Jordan stated.

Noted also was that in developing the draft SWF legislation, the Ministry of Finance is currently receiving support from the Commonwealth Secretariat.

Jordan said not only will the intended legislation be laid in the Parliament by the end of this year, but that a green paper on the subject will also be published and that consultations will occur subsequently.

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