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IMF says… Rigid Natural Resource Fund rules could cause more external borrowing
By Kemol King
The strict borrowing rules of Guyana’s Natural Resource Fund Act – the law engendering a framework for Guyana’s offshore sovereign wealth fund – 
could cause Guyana to increase external borrowing in order to handle increased spending pressures. Public debt may get to a point where it grows unsustainably while the Natural Resource Fund accumulates, if a medium-term anchor that is consistent with withdrawal rules is not facilitated.
This was suggested by the International Monetary Fund (IMF) in a report on its 2019 Article IV Consultation in Guyana. In that document, Guyana’s development partner commended the passage of the Act, noting that it is a critical step forward for the effective management of Guyana’s oil wealth. However, it urges Government to enhance the fiscal framework the Act sets out.
The IMF stated that the fiscal transfer rule of the NRF Act shares similarities with that of other small Petroleum-producing countries like Timor Leste and Ghana. In the case of Ghana, the Petroleum Revenue Management Act 2011 (PRMA) – the equivalent to Guyana’s NRF Act – sets out a legal framework that was so rigid that it did not allow the Ghanaian Government to use the Petroleum funds to accommodate unexpected, large financial shocks. That forced the African country to continuously finance large deficits with debt, even as the oil revenues which could help absorb those shocks, accumulated in the country’s petroleum fund.
In some cases, small countries tend to be able to take care of large deficits with external grants and concessional financing. But the position Ghana found itself in, reduced its opportunity to access those, and the rapidly rising public debt had also resulted in higher interest payments.
“In addition, the rapid increase in public wage bill and other current spending more than offset the increase in oil revenue.” the report states.
Ghana, in 2015, seeing that it was affected by the large drop in world oil prices, and by the increase in input costs caused by exchange rate depreciation, resorted to seeking out the IMF for a program in 2015.
That position is one that Guyana has already set up to follow in, if the NRF act is not enhanced.
At the onset of oil production in Ghana, the African oil producer’s status had improved to a low middle income country. That is what diminished its opportunities to access grants and concessional financing. Guyana is in a similar position, as in 2016, the World Bank, in assessing the discovered Petroleum reserves at the time, categorized Guyana as an upper middle income economy. That means Guyana’s ability to access grants and concessional financing has also been vastly diminished.
The IMF, noting Guyana’s fiscal rule for transfers from the NRF to the budget, states that past key Fund recommendations were to include a moderation in fiscal deficit to reduce financing needs and to preserve external buffers before oil revenues materialize. This would allow Government to refrain from non-concessional external financing, improving the efficiency of public investment management, the report states. It would also, according to the IMF, allow exchange rate flexibility to play a larger role in facilitating the adjustment to external shocks.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. They then summarise the views of the Executive Directors into a report, and transmit same to the country’s authorities to aid in proper governance.
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