During the debate on the “Petroleum Commission of Guyana Bill 2017”, Opposition Leader Bharrat Jagdeo suggested that on the proposed Sovereign Wealth Fund (SWF) the Government had proposed for the petroleum revenues that are expected to start flowing from 2020, they should follow the example of Norway rather than our neighbour Trinidad and Tobago. During the last election campaign, the People’s Progressive Party has already suggested a SWF.
The suggestion seems to have struck a raw nerve in Natural Resources Minister Raphael Trotman, who burst out: ““How dare you lecture us? …we will not be lectured by the Leader of the Opposition on good governance!!” This intemperate outburst was rather unfortunate, to say the least, since it touches on what will perhaps be the most important decision to be made in the country in this century: what to do with our oil revenues.
While there is no one definition of a SWF – and that in itself tells a story) – it is generally accepted they are dedicated Government-owned investment vehicles (“sovereign) funded by identified foreign exchange inflows which manage those assets separately from official reserves and invest them with a “buy-and-hold” perspective. Both Trinidad’s and Norway’s SWF’s (respectively “Heritage and Stabilisation Fund” (HSF) and Pension Fund Global (PFG) are based on oil revenues unlike those of China – the largest, based on revenues from “non-commodities”. While both countries belong to the “International Forum of Sovereign Wealth Funds” (IFSWF), which follows the non-mandatory “Generally Agreed Practices and Principles (the GAPP) known as “the Santiago Principles”, these focus on the investment principles to be followed rather than what revenues flow into the funds and how they are expended. These, however, are the crucial variables that the Opposition leader would have been emphasising.
From a utilisation perspective, SWF’s can be broadly classified as “savings” or “stabilisation” funds – or a mixture of both. In Trinidad, the Government is required by law to deposit 60 per cent of the surplus of actual oil revenue over projected oil revenue. In this way, the Government can “game” its HSF by ensuring the projections are either negative or very minimal. In 2009, for instance, the projections were negative and no funds went into the HSF, yet when in 2013, oil spiked to over US$100/barrel, the 60 per cent surplus was not deposited without any repercussions.
While Trinidad’s HSF purports to be a mixture, in reality, based on its history the emphasis has been used for “stabilisation” due to profligate current spending that ensures budget deficits. After 50 years of oil production, the HSF had just US$5 billion in 2015 and US$2 billion has already been used for “stabilising/spending” since.
The Government has announced it will now split the Fund into two components – Heritage and Stabilisation, but it is almost certain not much will be left for future generations in an economy where Government expenditure is still over 33 per cent of the Gross Domestic Product. Very little of the Fund was used for diversification and TT’s economy is an example of “Dutch Disease”. From the utterances of Trotman and the Finance Ministry, Jagdeo has good reason to fear Guyana is going down the road of Trinidad.
In Norway, on the other hand, explicitly seeking to avoid Dutch Disease, ALL petroleum revenues go into its SWF and only a maximum of four per cent can be used for interventions in budgetary current spending. As a result of this discipline, their PFG has grown to US$930 billion in assets even while the country has over two billion Euros in debt. While in the last two years Norway has had to make emergency withdrawals from the funds because of low oil prices, these have scarcely made a dent in their PFG because of the size of the latter.
One report from the IFSWF recommends: “small population, resource-dependent, non-diversified economies must use SWFs to convert resource windfalls into permanent financial assets through tightly controlled savings.”
Appropriating these resources, to do otherwise would be to doom us into poverty in perpetuity.
