Bank of Guyana needs help managing Natural Resource Fund

Bank of Guyana needs help managing Natural Resource Fund – NRGI Experts

Nov 04, 2018 News

By Kiana Wilburg

With Guyana being new to all aspects of the oil and gas industry, it would be wise for the Government to hire a custodian bank to help Bank of Guyana in the day-to-day managerial operations of the Natural Resource Fund (NRF).
This was recently noted by oil and gas experts Andrew Bauer, David Mihalyi and Fernando Patzy of the Natural Resource Governance Institute (NRGI).
The experts said that Governments can establish NRFs as special accounts within the Central Bank or Treasury or even as separate institutions. They said that custodian banks however are usually employed to help inexperienced Central Banks with accounting, tax issues and reporting on NRFs.
“What matters more than the physical location of the money is the fund’s institutional structure. However, many funds have chosen to use external custodians in countries with stable banking systems in order to safeguard the money and provide administrative support. For example, the Libyan Investment Authority uses the ABC Bank in Bahrain. Chile’s Fund uses JP Morgan Chase Bank in the U.S. Azerbaijan’s Fund uses Bank of New York Mellon as a custodian,” the experts stated.
With the aforementioned in mind, the experts said that Guyana’s fund could employ the services of a custodian bank which would support the day-to-day operational management of Bank of Guyana.
TRIPLE CHALLENGE
The Inter-American Development Bank (IDB) has also said that Guyana faces these and other issues as it prepares to establish a NRF. In fact, the IDB said that Guyana faces a triple challenge in attempting to establish its fund since it has to decipher how to rapidly build stronger institutions; how to save for future generations and smooth consumption; and how to assure that the oil revenue spent in the short term, is planned and spent well to boost productivity and improve living standards.
Given the nation’s weak institutions and poor capacity to execute projects well, the IDB said it would be recommended that Guyana saves as much as possible until the quality and capacity of institutions improve.
Further to this, the IDB sought to highlight that simply establishing a NRF is not a guarantee for fiscal stability.
The Bank said, “In the first instance, the appropriate mechanisms to manage the fund, clear and simple rules for withdrawals and deposits, and issues related to governance and transparency, will be important to ensure that the fund achieves its objectives.”
In this regard, the IDB said that the Santiago Principles, a list of 24 generally accepted principles and practices voluntarily endorsed by the International Forum of Sovereign Wealth Funds provides some general guidance for countries. More substantially, the fund needs to be supported by a strong fiscal framework.
SET STRICT STANDARDS
The IDB is not the only international body which has cautioned Guyana officials on the importance of having a robust NRF.
The NRGI for example, believes that there are several key factors emerging that oil producers like Guyana must consider as it moves to establish a NRF.
Accordingly, the Government of Guyana must set clear fund objectives. These include saving for future generations; stabilizing the budget; and earmarking natural resource revenue for development priorities.
It is said that the government must establish fiscal rules—for deposit and withdrawal—that align with the objective; establish investment rules (e.g., a maximum of 20 percent can be invested in equities) that align with the objective(s); clarify a division of responsibilities between the ultimate authority over the fund, the fund manager, the day-to-day operational manager, and the different offices within the operational manager, and set and enforce strict ethical and conflict of interest standards.

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