January 23 ,2022

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Last week’s column (‘Macroeconomic issues relating to the NRF’) made the point that there are many similarities between the Act of 2019 and 2021, but it is the withdrawal rule which separates the two Acts in a major way. The withdrawal rule is very important and it needs to be transparent so that Guyanese can understand how much money will be drawn down each year for budget support. Equally important is how money enters the account. This is done from oil royalties, profit share, and interest and capital gains once the monies are invested in index funds or bonds.

I implied in the last column that the 2019 Act was not clear in terms of the amount to be withdrawn, mainly because there was no commitment to an amount that should be saved. However, the APNU+AFC Act does mention that the Minister could have only withdrawn “an economically sustainable amount” (ESA) in a given budget period.  For macroeconomists, the ESA is straightforward once an agreed amount is established as savings. However, that was not the case. Therefore, it could only have meant that the annual withdrawal cannot exceed the annual deposits from profit share, royalty and earned interest. Having withdrawals exceeding deposits plus interest would have violated the ESA and therefore would have been unlawful. The trouble is, we do not have many macroeconomists around.

This ESA rule, however, was too open ended. Let me provide some numerical examples. Assume an average price of US$70 per barrel and 200, 000 barrels per day produced in 2022; and assume full cost recovery, Guyana would receive approximately US$661.5 million for this year. Let us repeat the exercise for 2023 and assume US$60 per barrel, and production of 300,000 barrels per day, then Guyana could be expected to receive profit + royalty amounting to US$850.5 million – again under the assumption of full cost recovery.

Therefore, following the ESA, the Minister could have withdrawn an amount of US$600 million for budgetary purposes in 2022 and another US$700 million in 2023 and still satisfy the ESA condition given that there is no provision in the 2019 Act for an amount that must be saved before drawing down.

The PPP/C’s version of the Act has a relatively straightforward withdrawal rule that is known as the first schedule. The first schedule stipulates that the present balance of US$607.5 million can be withdrawn for supporting the 2022 budget – hence, 100% of the existing balance. The next withdrawal is 75% of the second US$500 million in the account, 50% of the third US$500 million, 25% of the fourth US$500 million, 5% of the fifth US$500 million, and 3% on any amount in excess of US$2.5 billion. Therefore, the 2021 Act sets up a minimum aggregate saving of US$2.5 billion.

One of the uncertainties embedded in the 2021 Act is the time dimension of withdrawals, which is largely dependent on the quantity of oil pumped and the market price. For example, given the above per cent thresholds and the conservative price of US$60 in 2023, the expected revenue going to the government will be approximately US$850.5 million, as noted previously. The implication here is in 2023, the maximum projected amount the government can draw down is US$375 million. It therefore means that the 75% rule on the second US$500 million is aligned perfectly with the anticipated 2023 budget.

However, if the price jumps to a sustained average of US$90 per barrel in 2023 – a low probability event – then the government can exercise both the 75% and 50% thresholds in the same 2023 budget. I am not a lawyer, but my reading of Act says that there is nothing that prevents the government from doing so in the same budget cycle.

The 3% rule implies that if there is a balance of US$4 billion in the account, for example, then the government can withdraw 3% of US$1.5 billion, a number that amounts to US$45 million. The latter is a quite small amount and I want to know if the minds behind the 2021 Act really intended to withdraw such a modest amount when most likely there will be bigger demands on the government. If that were the intention, then kudos to the government. It would represent a first step towards intergenerational saving. Conversely, the government might not be sure of winning the next election and wants to apply the brakes on the next administration? However, it will depend on whether any new government wins with a minority.

By the end of the decade it is not implausible to have at least US$10 billion in excess of the US$2.5 billion saving in the NRF. This would imply an annual budget support of at least US$300 million.  These are not extraordinary numbers given the demand for physical infrastructure. For example, almost 90% of the Guyanese population lives below sea level at high tide. There will need to be rethinking of development and a complete rethink of how housing schemes are done. Billions will need to be expended in revitalizing Georgetown. Government will probably have to start with the city’s sewerage and drainage systems. Boxy buildings that contravene aesthetics and heritage will likely have to be purchased and knocked down to enable enough of a drainage buffer; and, of course, to really fix the old sewerage system.

A new capital city will likely need to be planned. We have not yet even talked about the national university, which has been producing remarkably bright students (I interact mainly with the economics graduates). Until now, the government’s GOAL scholarships seem to be intended to circumvent the hard question of what it means to have an indigenous human-capital driven development programme.

Another important matter is non-oil revenues, namely taxation. Tax revenues will rise as the size of the economy expands by the end of the decade and perhaps after. In particular, the amount of VAT collected will rise substantially if consumption can become more broad based. Income taxes will also increase as the average Guyanese income rises and the economy expands. If the wealth is dispersed widely – implying inequality does not worsen – then tax revenues will increase even more. Tackling the inequality problem under the present constitutional and electoral systems will be difficult, however.

The percentage of the annual budget that is funded by non-oil revenues will indicate how shrewd the government’s policy is. The more that can be funded by internal taxation, the better in the long run. Moreover, oil revenues are volatile. If the economy becomes overly dependent on the oil and gas sectors, then taxation and oil revenues will become procyclical instead of the more ideal outcome of being countercyclical.

The economy, however, is expected to become overly dependent on oil and gas. This means that it is even more important to have a large amount of savings in the NRF. Therefore, it is encouraging to see the 3% rule on the accumulated balance after US$2.5 billion. Even before thinking about intergenerational transfers, the more immediate need will become one of stabilisation as taxation and oil revenues become highly positively correlated.

Comments: tkhemraj@ncf.du