Guyana’s Natural Resources Fund and its importance for a sustainable future
THE issue of Guyana’s Natural Resources Fund (NRF) has resurfaced, following the final cargo sale of oil for this year– one million barrels through Aramco Trading Limited, a unit of the Saudi Arabian oil company. Like many resource-producing countries, Guyana faces the challenge of managing an influx of foreign currency from the proceeds of oil sales, preventing the Dutch Disease and ensuring that government spending does not distort the local economy.
In 2019, the APNU+AFC-led government enacted the Natural Resources Fund Act 2019, establishing the NRF as Guyana’s primary SWF. The new fund acts as the depository for Guyana’s oil earnings. An SWF allows a country such as Guyana to amass an immense fortune that can then be used to sustain development over some time.
Guyana’s NRF is being held in the New York Federal Reserve Bank, a common practice for large U.S.- dollar accounts. Since its enactment by the previous government, however, the law has drawn criticism for not having sufficient guardrails and concentrating too much power in the hands of the Minister of Finance and for using a withdrawal formula that the Inter-American Development Bank (IDB) has described as “too complicated.”
The current government has already announced a series of reforms and revisions to the Act, with Vice President Bharrat Jagdeo quoted as saying, “We want laymen to understand how much money you collect so that they can go to the Official Gazette once a year, the ministry’s website or Parliament’s website and know how much money there is and then how much comes to the budget.”
The recently introduced Natural Resource Fund Bill 2021 seeks to address some of the concerns of the previous legislation, most notably by simplifying withdrawals from the fund. Under the revised bill, after the first year the government will be allowed to withdraw 100 per cent of the first U.S.$500 million of deposits from the previous fiscal year and then a sliding scale of 75 per cent of the second U.S.$500 million, 50 per cent of the third, 25 per cent of the fourth, five per cent of the fifth, and three per cent of any amount over the first $2.5 billion U.S. of deposits paid into the fund in the preceding fiscal year.
To date, some U.S.$534 million has been deposited into the fund, including proceeds of oil sales from Guyana’s 50 per cent share of profit oil, as well as royalties collected from producers. This sum would be immediately available for spending in the first year of the revised NRF under the current bill.
The legislation, if enacted into law, is also expected to add new safeguards to prevent corruption as the fund amasses substantial amounts of money that will eventually dwarf the national budget. While the bill will simplify the process overall, debate over the specifics of how decisions will be made is likely to continue.
Sovereign Wealth Funds (SWF) have emerged as the method of choice to avoid the negative effects of boom-and-bust cycles, using the proceeds of non-renewable resources such as oil and gas to invest excess capital during times of prosperity, and in so doing transforming these resources into sustainable and stable future income. They provide a cushion for the volatility of oil and gas markets.
There are over 135 sovereign wealth funds globally, dominated by oil and gas producing nations such as Norway, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, and Malaysia. These state-owned funds comprise cash and currency and a wide selection of financial assets, including stocks, bonds, real estate, precious metals, and other financial instruments. The world’s largest SWF as of September 2021 was Norway’s oil fund with total assets reaching around US$1.37 trillion. It also holds real estate and fixed-income investments, owning almost 1.5 per cent of all shares in the world’s listed companies.
A Rystad Energy study estimated that Guyana’s total annual oil revenues could approach U.S.$30 billion within 10 years at a production rate of 1.2 million barrels per day. To illustrate the magnitude of that figure, consider that just this year, the National Assembly passed the largest budget in history at some $383 billion Guyanese dollars (US$1.83 billion). Those earnings could be transformational not only in the short term, but generationally.
It will be up to the government to reassure the public that they remain fully committed to transparency and responsible revenue management. Ensuring proper oversight and governance long term will be critical to Guyana’s reputation on the world stage and no effort should be spared to ensure that Guyanese reap the benefits of its good fortune