– Central Bank Governor
By Kiana Wilburg
When Guyana’s Natural Resource Fund is established, Central Bank is expected to be appointed as its Operational Manager. This was outlined in the Government’s Green Paper on the Fund.
While many acknowledge that it is common for Central Banks to have a role in monitoring the Fund, fears have been expressed about the Bank’s insulation from political interference.
In light of such concerns, Central’s Bank Governor, Dr. Gobind Ganga recently noted that the Bank would be guided by the laws governing the management of the Fund. In an interview with Kaieteur News, Dr. Ganga firmly stated, “We will not allow any abuse of the Natural Resource Fund. The withdrawal rules will be upheld.”
The Bank of Guyana Governor noted that there will be quarterly and yearly reports about the operations of the Fund. He said that there will be auditors coming in to do separate audits of the Bank’s work and these will be laid in Parliament. He said that the selection of these External Auditors will be determined by the law and they will be individuals who are certified to audit in Guyana.
Further to this, Dr. Ganga said that Central Bank has commenced a review of the skills that would be needed for the management of the Natural Resource Fund (NRF).
He added, “Our role is not anything difficult. The role of central bank will be to operationalise the Fund. When the money is coming in and it is placed into the Fund, our role will include where would we put the money in terms of investments and this would be guided by law. So the law will say you can only put your investments in Triple A securities which are very safe securities. We know what is needed and it is similar to what we have already being doing. It is similar to managing our own reserves.”
Dr. Ganga was also asked to state if the Bank has asked the International Monetary Fund (IMF) to help in conducting an assessment of whether it is capable of managing such a Fund. He answered in the negative but noted that it was a topic of discussion.
NO GUARANTEE OF PROSPERITY
Governments are often open to creating Natural Resource Funds with the intention of squirreling away excess moneys made on their natural resources. These moneys can be used for various purposes. They can help to support budget shortfalls, used for international investments or simply serve as a savings for future generations.
But SWFs by themselves cannot guarantee future prosperity. This point was made recently by economic analyst Andrew Bauer. He is attached to the prestigious Natural Resource Governance Institute (NRGI).
The consultant pointed out that the Alberta Heritage Savings Trust Fund in Canada for instance, was designed in part to save oil revenues for future generations. Yet, it failed to save anything in all but two years between 1987 and 2012.
As for Trinidad and Tobago, Bauer said that this country’s Heritage and Stabilization Fund’s mandate to mitigate the negative effects of oil revenue volatility on the country’s budget, actually led to worse public investment decisions. He said that it even led to slower growth.
Elsewhere, as in Kuwait and Libya, the NRGI official highlighted that SWFs became channels for corruption and patronage, diverting billions of dollars away from social service and infrastructure spending.
In short, Bauer emphasized that SWFs by themselves do not guarantee sound macroeconomic management. In fact, the economic analyst said that these Funds may complicate budget processes and make public spending less accountable.
Bauer said, “SWFs can be useful, but only if they help fulfill at least one macroeconomic objective, such as mitigating the impact of oil or mineral revenue volatility on government spending, or ‘parking’ oil windfalls until they can be spent more efficiently.”
The economic analyst said that a global study of natural resource funds by the NRGI and Columbia Center for Sustainable Investment (CCSI) found that there are two pre-conditions for funds to function as planned: Appropriate rules must be enacted, and there must be adequate oversight and enough broad-based consensus to ensure compliance with those rules.
While there is no one-size-fits-all solution, Bauer said that the joint study of the two institutions offers guidance.
With regard to deposit and withdrawal rules, the analyst said that these determine the timing, amount and conditions for the sovereign wealth fund’s inflows and outflows, either to or from the government’s main bank account.
Bauer said that withdrawal and deposit rules must be tight enough to constrain government spending but loose and flexible enough to withstand political pressures to spend more.
“For instance, Timor-Leste enacted a rule that only allowed its government to spend three percent of petroleum wealth in any given year. This rule was too restrictive given the country’s capital scarcity, high poverty levels and the high social rate of return on domestic investment. As a result, the rule has consistently been broken. Further guidance on deposit and withdrawal rules can be found here.”
Bauer then turned his attention to investment risk limitations. In this regard, he pointed out that SWFs hold public assets to improve macroeconomic management or for safekeeping. As such, he noted that governments should not be allowed to gamble with these funds and their asset portfolios should reflect their purpose.
“For example, a petroleum fund designed for stabilizing budget expenditures would require more liquid assets than a savings fund designed to benefit future generations since the government might need to draw on these assets if oil revenues collapse unexpectedly. Regardless of the asset allocation used, SWFs should be explicitly prohibited from investing in certain high risk assets, such as junk bonds.”
Bauer said that Governments must also monitor conflicts of interest and set clear investment guidelines. Where there is inadequate oversight and rules are unclear, he said that it is often too easy for investment managers to invest with political allies, family or friends.
“Equally, following the precedents set by Abu Dhabi (UAE), Botswana, Chile, Kazakhstan and Norway, among others, legislation should strictly prohibit SWFs from investing domestically. Spending directly out of the SWF could bypass the normal budget process, including parliamentary, auditor, media or citizen oversight.”
Bauer said that this could result in inconsistencies with the budget and circumvention of controls and safeguards such as project appraisal, public tendering and project monitoring. In Angola, Azerbaijan, Iran and Russia, Bauer said that SWFs have been used as secondary budgets, becoming easy sources of patronage or financing for investments that support the political goals of fund managers.
As for institutional structure, Bauer made the point that there should be a clear division of responsibilities between the legislature, president or prime minister, the fund manager, the operational manager and external managers to help funds meet their objectives and prevent corruption. Again, he noted that there is no standard solution, but guidance from those who have studied the area, is always recommended for consideration.
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