Guyana: IDB says withdrawal rules for Guyana’s wealth fund too complex; departs from good practices

 OilNOW 

Guyana’s development partner, the Inter-American Development Bank (IDB), suggested in a report that the government reform the withdrawal rules in Guyana’s Natural Resource Fund (NRF) to make them simpler and less rigid. The advice is found in the report – ‘Economic Institutions for a Resilient Caribbean’ which was published in February.

The NRF was enacted in 2019 under the previous APNU+AFC administration. At the time, the government had explained that the legal framework for the fund includes provisions for public oversight management, the nature and source of deposits, withdrawals, including Parliamentary approval, and determination of amounts to be withdrawn. However, the PPP/C which was then in opposition, had contended that the framework is complex and places too much authority in the office of the finance minister. After assuming office in 2020, the PPP/C led government began moving towards overhauling the legal framework for the fund and has said it hopes to table the draft legislation before the end of the year.             

Wealth fund legislation for Guyana’s Parliament before year end – Ali

In its report, the IDB explained that up until the time when 3 percent of the size of the fund reaches a specific threshold designated in a formula, the maximum annual withdrawal will be determined by a complex set of formulas. Those formulas involve the calculation of benchmark oil prices based on a moving average of past prices and forecasts of future prices, estimates of oil production, non-oil revenues, and the NRF’s balance.

“If in any past year, 3 percent of the fund’s balance has exceeded the specified threshold, the maximum withdrawal for all future years thereafter will be limited to 3 percent of fund assets,” the IDB said.

The Bank pointed out that the Fund’s objectives are stabilisation, competitiveness, savings, and development. It posited, however, that the Fund’s operations, isolated from the government’s overall fiscal policy, are not enough to achieve these objectives on its own.

It said the rigid withdrawal rules do little to foster stabilisation or saving but may entail fiscal costs. The Bank said, for instance, that the rigid rules could simply force the government to resort to borrowing, in the absence of a similarly minded overall fiscal policy, opening the government to fiscal costs related to borrowing that are higher than the returns on the Fund’s assets.

NRF legislation will allow Guyanese to understand how oil money is being managed – Vice President

The Fund’s design, the IDB states, could play a good role in managing Guyana’s public financial assets, but it cannot be viewed in isolation from the country’s overall fiscal management.

“Since the objectives currently assigned to the NRF are overall fiscal policy goals, it would be straightforward to reformulate them,” the IDB said.

The Bank suggests a different aim for the Fund and added that in the context of a comprehensive fiscal framework, its transfer rules should provide for effective integration of the Fund with the budget.

In making a case for simpler withdrawal rules, the IDB states, “The formula for the maximum permissible withdrawal in the initial period is among the most complex operational rules for a resource fund in the world. Its design departs from good practices.”

It adds that state-of-the-art advice based on international experience and good fiscal management principles emphasize simplicity, flexibility, transparency, and close integration with the budget and public asset-liability management.

“The rule’s complexity may also conspire against fiscal transparency and public understanding,” IDB said.

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Comments

  • wic  On 11/29/2021 at 12:33 pm

    Restrictions are useful to prevent the theft of a country’s resources by the politicians of the day. However, the proposed reduction of restrictions for withdrawals appear to be advisable, so as to eliminate the need to borrow when funds are held on deposit.

    Simply put, why retain funds on deposit that pay interest at say, at 1% while borrowing at a 5% rate? Isn’t that however, what the country is about to do with funding of the construction costs of the new bridge across the Dem. river?

    Be aware that Uganda has just lost control over its airport which China built and financed, as it couldn’t afford to service the loan and Jamaica may soon be in a similar position with a toll highway drivers complain is too expensive to use.

    People, just do your research and think deeply before making commitments that may be regretted later.

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