By Arthur Deakin
Historically, countries that discover large amounts of natural resources, such as oil or gold, tend to create a Sovereign Wealth Fund to manage their newfound wealth. Guyana, which recently discovered nine billion barrels of proven oil reserves, is following that same path. The structure of this new fund, known locally as the Natural Resources Fund (NRF), will fundamentally impact how effectively the country spends and saves its oil monies.
At the end of May, at the 2021 Diaspora Conference, President Irfaan Ali and Vice President Bharrat Jagdeo suggested that Guyana’s NRF would be similar to the Kazakhstan model in the coming years. Due to Guyana’s low development levels, they explained that the famed Norwegian SWF model did not fit the country’s current needs. Oil-rich Kazakhstan ranks 94 out of 190 in Transparency International’s corruption index, tied with countries such as Brazil, Ethiopia and Suriname.
Until 2019, Kazakhstan was ruled for three decades by autocratic strongman Nursultan Nazarbayev, who often won elections with 90% of the popular vote and rarely faced real opposition candidates. Following massive oil discoveries in the late 20th century, Nazarbayev spearheaded the country’s U$63 billion Kazakhstan National Fund. Known locally as Samruk-Kazyna, the fund was created in 2000 to manage oil funds more effectively but was structured in a way that gave key politicians large influence over its spending. Similar to Guyana’s proposed Macroeconomic Committee – responsible for advising the Minister of Finance on the amount that should be spent by the fund – Kazakhstan established a Management Council to assist with its spending.
Like Guyana, where the current structure of the fund gives the Minister of Finance significant influence, Kazakhstan’s Management Council is led by the President, Prime Minister, and other key political allies. This encourages political meddling and limits independent accountability within the fund. It also pressures fund managers to make decisions based on political affiliations, rather than what is best for the country. Although Kazakhstan has remained committed to its fund’s original structure, the current Guyanese administration has thankfully recognized this dangerous integration and is rewriting the NRF to fix this issue.
The Kazakhstan fund also lacks the necessary transparency that is required from an NRF. Although Kazakhstan requires fund deposits and withdrawal amounts to be made public, there has been limited public reporting on specific assets. In 2021, a financial analyst was sued by the fund for publishing a report on one of its holding companies and calling it an “ineffective investor.”
Up until 2016, the Kazakhstan fund guaranteed transfers of up to US$8 billion to the state’s budget, subsequently being reduced to U$6 billion after the adoption of a new framework. In 2000, when the fund was first created, this transfer ceiling amounted to nearly 50% of the country’s US$18 billion GDP. From 2010 to 2020, transfers from Kazakhstan’s fund to the state budget averaged roughly 30%, a significant portion of the country’s revenues.
In Guyana, the projected transfer amounts are slightly larger than Kazakhstan and will be able to cover any pressing financial needs the country may have. Guyana’s NRF transfers to the budget are expected to start at 33% through 2024, lowering to 30% of non-oil GDP after that. A percentage much larger than that would jeopardize necessary intergenerational savings that accumulate interest over time, limiting the fund’s exponential growth potential. As seen in Norway’s $1 trillion NRF, the ability to keep transfers at a 25% average of the country’s national budget, allowed it to accumulate wealth and grow its balance.
It is also fundamental for Guyana to prepare for a world in which fossil fuel demand starts declining. Although the International Energy Agency does not expect that to happen before 2030, Guyana’s peak oil production will likely coincide with the beginning of the oil decline. Thus, it should ensure that it implements emission-reducing strategies for its energy production, such as improving leak detection programs, eliminating routine flaring, and installing carbon capture technologies. These policies should also be accompanied by a diversification of Guyana’s economy, focused in areas such as infrastructure, mining, manufacturing and agriculture. By capitalizing on the near-term influx of private and public investment, Guyana can become an industrial CARICOM hub.
That said, Guyana’s current government should vehemently steer towards adopting a NRF that mirrors Norway, not Kazakhstan. Despite claims by the administration that the Norwegian fund is not suitable for Guyana’s societal needs, the overlying framework of the Scandinavian model should serve as the basis of the fund. With that backbone, Guyana can slightly make changes where it deems necessary, such as initially allowing for a greater percentage of revenues to be transferred to the budget to facilitate the development of necessary infrastructure. Guyana should also lean on financing from both the private sector and multi-lateral institutions, such as the IMF and IDB, while interest rates are still low. Regardless of the political party in power, it is clear that implementing the right fiscal and regulatory framework for its NRF will determine the future trajectory of Guyana’s society.
Arthur Deakin is Co-Director at Americas Market Intelligence Energy Practice July 22, 2021
