…says legislation should have clause to protect against drawdowns
The establishment of the prospective Sovereign Wealth Fund (SWF), a state owned investment fund primarily for the proceeds of the impending oil and gas sector, should not be used on recurring expenditure which brings no returns.
This is the contention expressed by former Prime Minister of Trinidad and Tobago, Kamla Persaud-Bissesar who- was the main speaker at the awards ceremony held in Guyana by the Guyana Manufacturing and Services Association (GMSA)- warned that this accumulation of money once in place should not be used as a “cash cow” for whenever there is a deficit in financial budgeting.
Funding for the SWF comes from Central Bank reserves that are set aside as a result of budget and trade surpluses and from revenue generated from the exports of natural resources.
In Trinidad, a similar fund exists and is termed as the Heritage and Stabilisation Fund (HSF) but Government has been burrowing into the reserve to support any financial imbalance. This she says brings no development and Guyana should put legislation in place to protect against unnecessary withdrawals.
“I do not recommend that the SWF be used to supplement recurring expenditure as has been happening recently in Trinidad and Tobago. Recurrent expenditure brings no return. It beings no development and therefore whatever legislation you make, I suggest you put within it, a prohibition for drawdowns not to be utilized for recurrent expenditure.”
“Your SWF is an insurance policy, it is not nor should it be seen as a cash cow that anytime you have a financing deficit that you will dip into it. It doesn’t work like that. It is only to be used in specific circumstances,” she added.
When looking at ways in which excess resources can be channeled into the SWF, the former Prime Minister asserted that the emerging oil and gas industry is positively identified as a source. It can also cushion the sector when prices are low.
Persaud-Bissesar said “SWFs are often linked to oil prices or can be a legal clause in a petroleum license or petroleum production contract. In fact, there are many economic tools which can used to channel resources into such a fund. These funds act as buffers given the volatile pricing and political issues involved in the hydrocarbon industry.”
She further stated, “Other supplemental tools such as petroleum production taxes, supplemental petroleum taxes, a petroleum impost and clauses for increased scales of taxation for supernormal finds may be worthy of consideration as adjunct strategies to enable equity in profit sharing across the board and sustainability during low price periods.”
The Green Paper for the establishment of the SWF was laid in early August of this year. At that time, Finance Minister, Winston Jordan told the National Assembly that this sets out preliminary proposals to stimulate discussion and also points to possible courses of action open to the SWF legislation.
Given that the establishment of the SWF is relatively complex and there can be substantial administrative costs, the paper noted that if two completely separate funds are established, then this infers that there are two investment policies, two governance structures and two external audits. The Government is hyping the Natural Resources Fund, which is focused on the management of the oil resources.
For the management of the Fund, the Green Paper has recommended that Parliament be responsible for passing the Natural Resource Fund Act, reviewing the Annual Report and approving the Annual Budget, which would include the annual withdrawal from the Natural Resource Fund.
Guyana’s reserves have been depleted significantly over the past three years and the Opposition Leader, Dr Bharrat Jagdeo also announced recently that the proceeds of the SWF may very well go towards replenishing Guyana’s reserves.
According to him, State reserves have be “run down” by the present coalition Administration and he maintained that once the resources are paid into the revenue stream of the Government, it must go through the required parliamentary procedure.