– Chilean economist urges gov’t to get SWF up and running ahead of 2020

CHILEAN Sovereign Wealth Specialist Eric Parrado is advising that Guyana put in place key legislation governing the managment of its oil resources ahead of 2020.
He also feels that the government would do well to put a little something aside for the proverbial rainy day, preferably into a Sovereign Wealth Fund, in the event the country experiences a fiscal shock.

One of the frameworks of which he speaks is legislation governing the establishment of a Sovereign Wealth Fund, Parrado told a corps of journalists here during an open forum on the subject at the Theatre Guild on Friday. Though Guyana, with the expert advice of the Oceans and Natural Resources Division of the Commonwealth Secretariat, has a draft legislation to govern the establishment and operation of a Sovereign Wealth Fund (SWF), Parrado, who is an authority on the subject, is emphatic that such a legislation ought to be in place ahead of 2020.

He gave as his reason for so advising is that in 2020, Guyana will not only start pumping oil, but is also slated to hold General and Regional Elections.
In his detailed presentation, Parrado, who has a PhD in Economics from New York University, and was at one time International Financial Coordinator and Adviser to the Minister of Finance in his native Chile, noted that every government should have a sound economic framework in place.

And that framework, he said, should include a counter-cyclical fiscal policy, a counter-cyclical monetary policy, a flexible exchange rate, and a strong financial system.
Zeroing in on the importance of having a fiscal policy, Parrado, using Chile as an example, said there were times when the price for copper increased significantly resulting in major shocks, while there were also times when prices collapsed.
It is during those periods of major shocks, he said, that a country would do well to save the most.

“One of the fiscal rules is that when you have a temporary shock that would last one year, two years or a couple of years, you would save that money, because the rainy days are coming; you don’t know when, but they are coming,” he hinted darkly. “And it would be better for you get prepared.”

He, however, warned that a country should only inject monies into a Sovereign Wealth Fund if it experiences a surplus.
Said he: “If you are having a surplus, then you could put money aside in the Sovereign Wealth Fund, and that is simple.

“But you could only have a sovereign wealth fund if you run surpluses; if you don’t run surpluses, you cannot have a sovereign wealth fund, because you are cheating yourself. You are putting aside money that you don’t have.”
In the case of Guyana, he said, it is more than likely to experience a fiscal shock of some sort come 2020, given that oil will be a relatively new commodity that will be generating revenues for the country.

He again warned that while he would advise investing in the country’s development in the areas of health, education and infrastructure among other sectors, an expenditure ceiling should be in place to guide government spending at the level of ministries.
He also warned against deficit bias; the increasing of deficit and public debt levels.
Whatever legislative framework or policy is instituted, Dr Parrado said, they should be flexible enough to respond to shocks, whether positive or negative.
Asked by former government minister Maniram Prashad whether civil society should be given the opportunity to assist in the management of the proposed Sovereign Wealth Fund, Parrado, who from time to time advises governments the world over on fiscal policy and the implementation of sovereign wealth funds, responded in the negative saying that it should be managed by a small team of experts.

And the reason it is not advisable, he said, is that if a range of organisations form part of a management body, they would be pushing their own agendas, when the aim should be maximising wealth.