THE recently finalised Natural Resources Fund (NRF) is a crucial tool for development that will establish the framework for how Guyana will spend its oil revenues for decades to come. The legislation that was passed in December to finalise the structure of the Fund has already attracted scrutiny, since many provisions would allow the government to “front-load” investments by withdrawing a large percentage of the revenue in the first few years. But the thinking behind this is strategic and in line with the approach that many other countries have taken.

As reported earlier this month by the Chronicle, the NRF allows the government to spend 100 percent of the first US$500 million, 75 percent of the second US$500 million, 50 percent of the third US$500 million, 25 percent of the fourth US$500 million, five percent of the fifth US$500 million, and three percent of all funds above the first US$2.5 billion.

While countries like Norway are often held up as a model for how to save revenues, it’s important to recognise that Norway was already highly developed with strong infrastructure, healthcare and education systems when it found oil.

The strategy adopted by Guyana’s government is more similar to that of Kazakhstan, which invests a large portion of revenues immediately into critical infrastructure needs in order to create a strong foundation to support economic growth. This is a common tactic in countries that are less developed and have higher initial needs.

Upfront spending of revenues in this way can support economic stabilisation and intergenerational equity by ensuring the management of natural resource revenues is done in a manner that contributes to both near-term and long-term national development. Opportunities for domestic investments that could have an outsized impact are many and could include roads, bridges, education, better sea defences and renewable energy.

In addition to addressing the immediate needs of the country, heavier spending of the funds early on could have multiplier effects far beyond the initial investments by opening up new opportunities for businesses in the longer term. Investments like a more reliable electrical grid or improved schools could provide businesses with the resources they need to be competitive, build their talent pool, expand their reach, and more. Moreover, investment in education would help create a healthier and more educated workforce that could allow Guyana to compete in more industries.

Although individual analysts and organisations agree that this strategy is likely a good option for Guyana, there are some potential pitfalls, particularly the potential for economic overheating and resource shortages if spending is done too quickly and without proper checks and balances.

For example, if funds cannot be absorbed fast enough, the currency could overinflate or overwhelm local capacity, causing harm. Investments, especially those funding large projects like roads, dams or sea defences must be made carefully with an eye towards long-term benefits and spreading spending out over several years.

If done too quickly, they can outpace local businesses’ ability to meet demand, causing prices to increase and stripping resources like skilled labour away from important sectors. A fast investment pace also means that open and honest procurement processes for public works is vitally important.

The examples of other countries in similar situations have also made it clear that a transparent and honest process for the management of the Fund itself – from allocation to investment – is critical to success. A proper system for checks and balances, as mentioned above, can help ensure that strategic and high-stakes decisions about the Fund are made in good faith.

Currently, Guyana’s Fund design does not place many restrictions on withdrawal beyond the approval of a large Board of Directors, which creates flexibility within the plan.

While this kind agility in spending can be important for developing countries, it is also important for newly resource-rich countries like Guyana not to make mistakes like borrowing on the back of future resource revenues. This over-optimism, known as the ‘presource curse,’ can lead to the accumulation of unsustainable debt and, ultimately, an economic crisis.

Deploying a sovereign wealth fund like the NRF carries some risk, but it can also be an excellent tool for countries to generate long-term prosperity using their natural resources when managed properly.

The International Monetary Fund has laid out six conditions for success with respect to sovereign wealth funds, including appropriate budget and monetary policies; transparency and external reporting; well-designed funding and withdrawal rules consistent with their stated goals; well-framed corporate governance arrangements; clear accountability procedures among the different levels of fund governance; and responsible investment policies that are consistent with the policy purpose of the fund.

Although there are some potential pitfalls for countries like Guyana to avoid, there is no dispute that the establishment of the NRF to manage Guyana’s new wealth is a major step towards strong economic development and a more authoritative position within the oil and gas industry, propelling Guyana towards long-term prosperity.