By Kiana Wilburg
Governments often use Natural Resource Funds as accounts to hold the bulk of the country’s revenues from the extractive sector. But without robust withdrawal rules, these Funds can become victims of overspending by a misguided and money hungry government.
It is in this vein that the International Monetary Fund (IMF) implored the Government of Guyana to ensure that the fiscal rules that will be drafted to administer the country’s Natural Resource Fund must include a clause that guards against reckless spending.
Specifically, the International Monetary Fund said that a provision must be in place, which says that the withdrawal from the NRF cannot exceed the government petroleum revenue collected in a year, plus the value of the NRF in the immediately preceding year. The IMF said that this “escape” clause is intended to avoid excessiveness.
The Fund made this point since May when it was given the opportunity to peruse as well as provide its take on the shortcomings of Guyana’s fiscal rules. But when the Government presented its Green paper on August 8, last, to the National Assembly, it did not speak to this. What the Green Paper does say is that, withdrawals from the Fund will not exceed the amount “approved” by the legislature. The Government currently holds the majority in the National Assembly.
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 NRFs 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 NRFs became channels for corruption and patronage, diverting billions of dollars away from social service and infrastructure spending.
In short, Bauer emphasized that NRFs 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, “NRFs 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 Natural Resource 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 NRFs 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, NRFs 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 NRFs from investing domestically. Spending directly out of the NRF 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 NRFs 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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