New law needed to protect Sovereign Wealth Fund – IMF

Jan 05, 2018 News

---

The International Monetary Fund (IMF) is urging Guyana to put systems in place to ensure that when the country finally establishes its Sovereign Wealth Fund (SWF), the fund is not abused. In fact, the IMF thinks that legislation should be instituted to guide the government’s spending.

This recommendation was made in IMF’s most recent report on Guyana’s developing oil sector. In that report, the IMF pointed to several things that Guyana needs to do to secure better prospects for its oil industry.

SWFs are quite common around the world for a variety of reasons. In Guyana’s case, a SWF is being established for the first time, and will be used solely to hold revenues from the newly discovered oil reserves. ExxonMobil is poised to become Guyana’s first commercial oil producer in 2020, hence, the importance of the SWF.
There are expressed views that the establishment of the fund is taking too long, especially given the newest revelation that Exxon provided Government with a US$18 million signing bonus which was never acknowledged by Government, although many questions were asked by the media.

In its recent report, the IMF noted that the government’s plans for establishing a natural resource fund are well-advanced. The international body said that the Ministry of Finance is preparing a policy paper and accompanying legislation that is expected to be presented to Cabinet shortly. This has been supported by technical support from the Commonwealth Secretariat.

The objective is to have a resource fund that is integrated into the budget framework with no parallel spending authority.

IMF stated, “Appropriately, it is envisaged that the Ministry of Finance will designate the Bank of Guyana as an agent for managing the natural resource fund. There is merit in considering whether to explicitly separate the short to medium run stabilisation objective versus the long run saving objective by having separate investment portfolios with different investment policies.

It is important that the bill seeks to ensure that there is consistency between the fund deposit/withdrawal rules and a potential fiscal rule.”

Further, the IMF stated that that mechanism should be reinforced by an overarching fiscal responsibility legislation to ensure proper use and spending.

Last December, Minister of Finance, Winston Jordan, said that the fund will be in place before the first barrel of oil is drawn from commercial oil exploration in 2020.
Jordan said this was at the conclusion of a four-day workshop spearheaded by Dr. Daniel Wilde, the Commonwealth’s Economic Advisor for Natural Resources, Oceans and Natural Resources Division.
“There is a lot of talk in the press about Sovereign Wealth Fund. A lot of it is good, some of it misguided, and some of it intended more to scare than to educate people. In fact, you get the impression as if the absence of a Sovereign Wealth Fund, even today, means something crooked is going on, or something is being cooked up, so to speak,” the Minister stated.
He added, “You can’t open an account and keep zero balance and effectively you haven’t earned a cent yet from the oil revenue. So trying to put a wealth fund in place today, where nothing is going into it, wouldn’t hold in any commercial bank.”
Government has looked closely at Uganda’s legislative framework and crafted preliminary legislation which has been reviewed by the Inter-American Development Bank (IDB), the International Monetary Fund (IMF), the Commonwealth, the United States and United Kingdom.
Over the past four days, Wilde has been consulting with local state agencies on the preliminary legislation.
According to Jordan, he has received Cabinet’s approval for the fund to be used for three specific purposes – intergenerational saving, stabilisation of the fund (given the fickle nature of oil prices) and infrastructural development.
The Finance Minister shared the vision of utilising funds from oil to push the Government’s green economy agenda.
Minister of Natural Resources, Raphael Trotman, also spoke at the closing of the workshop and pointed out that Government will have public consultations on the sovereign wealth fund, similar to what was undertaken with the Petroleum Commission legislation.

“Both will be well in place before the first barrel of oil is poured, and I think that will be a signal achievement for this Government, so we wouldn’t be struggling to put things in place after oil is produced or just before,” Trotman stated.

Sovereign Wealth Funds have proven quite beneficial to countries around the world.

Last September, it was announced that the world’s biggest Sovereign Wealth Fund passed a major milestone. Norway’s Sovereign Wealth Fund surpassed the US$1 trillion mark for the first time, driven by climbing stock markets and currency shifts.

Just to put that into perspective: $1 trillion is about the same size as Mexico’s economy and it equates to over US$190,000 for each of Norway’s 5.2 million citizens. The country is a major oil producer and it transferred its first revenue to the fund, officially the Government Pension Fund of Norway, in May 1996.

Since then, the fund has grown to become one of the world’s biggest investors in stocks, owning $667 billion of shares in more than 9,000 companies around the world including Apple, Nestle and Microsoft.

---

---