Current structure of Guyana’s NRF likely to encourage political meddling and limit independent accountability
…Govt. should steer towards Norway model – Co-Director at Americas Market Intelligence Energy Practice.
By Carlos Gonsalves
Kaieteur News – Guyana, which recently discovered nine billion barrels of proven oil reserves, is following the same path as countries that discovered large amounts of natural resources, such as oil, by creating a Sovereign Wealth Fund to manage their newfound wealth. This is according to Arthur Deakin, Co-Director at Americas Market Intelligence Energy Practice. Mr. Deakin posits that the structure of the Natural Resources Fund (NRF), fundamentally impacts how effectively the country spends and saves its oil monies. At the end of May, at the 2021 Diaspora Conference, President, Irfaan Ali, and Vice President, Bharrat Jagdeo, suggested that Guyana’s NRF would be similar to the Kazakhstan model in the coming years. Due to Guyana’s low development levels, they explained that the famed Norwegian SWF model did not fit the country’s current needs.
That being said, Mr. Deakin’s position is that Guyana’s current government should change direction and should steer towards adopting an NRF that mirrors Norway, not Kazakhstan, because the overlying framework of the Scandinavian model would be ideal to serve as the basis of the fund. With that backbone, Guyana would be in a position to adjust incrementally wherever deemed relevant, such as modifying allowances for a greater percentage of revenues to be transferred to the budget for the facilitation of infrastructural development.
Mr. Deakin further opines that regardless of the political party in power, it is clear that implementing the right fiscal and regulatory framework for its NRF will determine the future trajectory of Guyana’s society. Consequently, he notes that Guyana should also rely to an extent on financing from both the private sector and multi-lateral institutions, such as the IMF and IDB, while interest rates are still low. It is also fundamental for Guyana to prepare for a world in which fossil fuel demand starts declining. Although the International Energy Agency does not expect that to happen before 2030, Guyana’s peak oil production will likely coincide with the beginning of the oil decline. Thus, it should ensure that it implements emission-reducing strategies for its energy production, such as improving leak detection programs, eliminating routine flaring and installing carbon capture technologies. These policies should also be accompanied by a diversification of Guyana’s economy, focused in areas such as infrastructure, mining, manufacturing and agriculture. By capitalising on the near-term influx of private and public investment, Guyana can become an industrial CARICOM hub.
However, Guyana’s government has opted to utilise a model that is more in accordance with the Natural Resource Fund for Kazakhstan. Oil-rich Kazakhstan ranks 94 out of 190 in Transparency International’s corruption index, tied with countries such as Brazil, Ethiopia and Suriname. Following massive oil discoveries in the late 20th century, the country’s U$63 billion Kazakhstan National Fund. Known locally as Samruk-Kazyna, it was created in 2000 to manage oil funds more effectively but was structured in a way that gave key politicians large influence over its spending. Kazakhstan established a Management Council to assist with its spending, that bears a number of similarities with Guyana’s proposed Macroeconomic Committee – responsible for advising the Minister of Finance on the amount that should be spent by the fund. The Kazakhstan fund has been noted to lack the necessary transparency that is required from an NRF. Although Kazakhstan requires fund deposits and withdrawal amounts to be made public, there has been limited public reporting on specific assets. In 2021, a financial analyst was sued by the fund for publishing a report on one of its holding companies and calling it an “ineffective investor.”
Kazakhstan’s Management Council is led by the President, Prime Minister, and other key political allies. This is again similar to Guyana, where the current structure of the fund gives the Minister of Finance significant influence. This consequently has been noted by Mr. Deakin to encourage political meddling and limit independent accountability within the fund. It also pressures fund managers to make decisions based on political affiliations, rather than what is best for the country. Up until 2016, the Kazakhstan fund guaranteed transfers of up to U$8 billion to the State’s budget. This was subsequently reduced to U$6 billion after the adoption of a new framework. In 2000, when the fund was first created, this transfer ceiling amounted to nearly 50% of the country’s U$18 billion GDP. From 2010 to 2020, transfers from Kazakhstan’s fund to the state budget averaged roughly 30%, a significant portion of the country’s revenues. It is pertinent to note that the current Guyanese administration has recognised this dangerous integration and is rewriting the NRF to fix this issue.
In Guyana, the projected transfer amounts are slightly larger than Kazakhstan and will be able to cover any pressing financial needs the country may have. Guyana’s NRF transfers to the budget are expected to start at 33% through 2024, lowering to 30% of non-oil GDP after that. A percentage much larger than that would jeopardise necessary intergenerational savings that accumulate interest over time, limiting the fund’s exponential growth potential. As seen in Norway’s $1 trillion NRF, the ability to keep transfers at a 25% average of the country’s national budget, allowed it to accumulate wealth and grow its balance.