Guyana must decide what percentage of oil money to spend, save … absence of direction, rules can lead to chaos - Chatham House

Guyana must decide what percentage of oil money to spend, save … absence of direction, rules can lead to chaos – Chatham House

May 16, 2018 News

Billions of dollars in oil money will soon be flowing Guyana’s way. But if the local authorities do not decide soon, what percentage of it should be saved and what should be invested, then chaos would surely be the end result.
This salient piece of advice was passed on to Guyana by Chatham House. The London-based body has been assisting Guyana in getting fundamental systems and policies in order for the proper management of its looming oil resources.
In its meeting last year, Chatham House met with several of Guyana’s officials.
The London-based body observed from those discussions that there was great uncertainty on the correct balance between consuming and saving petroleum revenues.
It said, “Some participants argued that most of it should be saved for future generations.
Others argued that significant amounts should also be used to increase public spending on priority areas like infrastructure and education.
This debate illustrates the need to be clear about fiscal rules and savings frameworks, as well as to explain the reasons for these rules regularly to the public.”
Chatham House stated too that in Timor-Leste and Nigeria, the respective Ministries of Finance chose to save a significant portion of its oil money.
It noted, however, that those agencies also explained every month to stakeholders, the importance of that fiscal rule and why they were not spending more.
Additionally, Chatham House delivered a presentation to local officials, that examined profits made from a large oilfield and the impact of spending those “volatile” revenues on a small economy.
Chatham House said that the negative impacts demonstrated the necessity to de-link these revenues from public spending.
The organization outlined that there are numerous fiscal rules that can be used to this end.
One of these rules it said, is to spend based on structural income rather than on the volatile actual income. Chatham House noted that structural income or permanent fiscal revenues can be determined by using the long-term average price for the commodity and save any revenues over that price.
It said that Governments can spend their savings when revenue flows fall below the long-term price.
There are different ways to estimate the long-term price and none is perfect, but they do give a structure to the savings decision.
Chatham House said, too, that Governments should also identify windfalls as transitory or permanent price surges, and remain conservative in making this assessment.

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