The Natural Resource Fund Act of December 2021 is a clear and concise document outlining the purpose of the Fund, as well as the sources of oil revenue deposit and method of withdrawal. The Act is quite clear on the kinds of assets in which the people’s oil monies are to be invested. It was admirable in outlining clearly some parameters surrounding a very passive investment strategy. For example, if the Fund has less than US$500 million, then only safe assets such as eligible treasury bills and bank deposits can be held. Beyond the said US dollar threshold, the managers of the Fund are expected to switch to a passive investment strategy of a well-diversified investment portfolio. The Act makes it clear that the government cannot borrow against the Fund or lend from the Fund.
There are however some serious doubts, at least from where I stand. The first one pertains to the issue of independence of the Board. The degree of perceived independence from or control by a politician is not significantly different from the APNU+AFC’s version of the Act. The latter gave substantial power to the Minister of Finance, while the PPP/C’s version hands significant power to the President and subsidiary power to the Minister of Finance. While the President gets to determine the majority of members who will serve on the Board, the Minister of Finance has significant authority over the Investment Committee.
I find the desire of careered politicians to exercise complete control to be curious since the Board, the Investment Committee, and the proposed Public Accountability and Oversight Committee (PAOC) cannot dictate fiscal policy (annual budgets). The task of spending and taxing rests solely in the power of the elected administration. An astute government will always yield something to the parliamentary opposition, but that’s another discussion for another day (Mr. Ramotar would have been elected President in 2015 had he offered AFC some wins in Parliament). We can debate whether various proposed budgets express optimal project choice or timing – they often don’t – but career professionals cannot take away that power from elected politicians. In any case, most professionals will be hard-pressed to be independent in a place like Guyana. Most will likely be in some form of transactional relationship – explicitly or implicitly – with the government, or its proxies, as it assumes an ever-greater role – for better or worse – in the Guyanese economy. Therefore, why are politicians so insecure that their first-order instinct is to stamp out all checks and balances on good governance?
Perhaps nothing so expresses this insecurity as the abandonment of the macroeconomic committee, which could have played a crucial role in not only suggesting the best amount of annual withdrawal, but also providing detailed insight into the potential risks of drawing down large amounts of US dollars and depositing them into the Consolidated Fund. The Act (see 20.1) also requires that the Minister of Finance provides three-year projections of oil revenues as he prepares budget proposals. The committee could have helped in this regard and prevented the need for ad hoc number plucking.
Moreover, the macro committee was meant for providing a data-driven approach for the management of the Fund. Investment management of large funds, whether active or passive, often rely on this kind of approach to decision making. We cannot invest without data and information. Converting data into useful information would have been a very helpful input for not only the government, but also the Board, the PAOC and civil society.
However, I concede that the macroeconomic committee could only be as effective as the competence of its members. If these individuals are selected because of their political servility, then we have another ineffective body – a situation that would have likely occurred under APNU+AFC. Nevertheless, a macroeconomic committee similar in spirit to the independent economists of the Congressional Budget Office could be a very good institution as Guyana considers spending its oil rents in the best possible manner.
Before the Bill was passed with only PPP/C votes, Mr. Jagdeo criticised the previous government’s NRF Act as reading like an academic paper. I find this to be curious because as I read their version, I am seeing all kinds of academic theories underpinning the investment mandate of the Act. Take for example the idea of index fund investing, which the Act rightly demands as the method of investment for the people’s oil monies. Well, it turns out that when Messrs McQuown and Bogle created the first index funds in the 1970s, they were well aware of the emerging academic research into random walks and efficient markets.
In addition, the new NRF Act spells out nicely the one condition when the investment manager of the Fund could purchase derivatives – a form of risky security whose price is derived from some underlying asset. But guess what? It was the academics who invented back in 1973 the formula for objectively pricing the kind of derivatives implied by the PPP/C’s NRF Act. I am therefore reminded of Mr. J. M. Keynes’ dictum relating to “practical men” and the “academic scribblers” that come to bear on their actions.
I also find another troubling aspect of the Act as it relates to opening the door for procuring unnecessary financial advisory services. First, the Board, which will have up to five members, is empowered to acquire investment advice from financial advisory companies (12.1). My distrust stems from the fact that the Act already demands that there be a seven-person Investment Committee (IC). I do not see why the people’s monies must be used for paying consultancy fees when there are a five-member Board and a seven-member IC. This implies to me that the members of the Board and IC, who will be selected and appointed by politicians, will not be competent in the area of finance and investment. We also should bear in mind that the oil funds will be invested in eligible risk-free treasuries, bank deposits (which are not 100% risk-free), and various diversified index funds that are typically of lower risk. I would see the need for the Board to acquire financial consulting services if the Fund was involved in active management, which is forbidden by the NRF Act of 2021. Eventually this opportunity for procuring financial advice will result in rent seeking by the politically loyal boys and girls.
Second, I find it interesting that the Bank of Guyana is also empowered to procure the financial advice of private firms (13.1). Now, there is much confusion here. The Act says that the oil funds must be managed separately from the foreign reserves of the BoG (5). Therefore, I do not understand why the BoG should be procuring investment consultancy services when the Board – which is directly tied to the Fund – also is given that unnecessary mandate. Again, my concern stems from the fact that the Act only stipulates passive investments. The BoG, furthermore, already has decades of in-house experience in passive investment management as it is required to safely invest its foreign reserves. That the BoG is the custodian of the Fund does not and must not give it the right to manage the investment decisions.
If anything, a nation’s central bank ought to be the centre of financial and macroeconomic intelligence, given the jettisoning of the macroeconomic committee, instead of only writing quarterly and annual reports describing upward and downward percentage movements – as important as those are, too. Instead of paying fees to private consultancies, the central bank ought to be a source of free in-house intelligence for the NRF Board, the IC, the PAOC and the Ministry of Finance.
In the next column, I will discuss the large upfront draw-down rule enshrined in the new Act and its potential macroeconomic implications, as well as the risk of mixing of the oil funds with the BoG’s international reserves.
Comments: tkhemraj@ncf.edu
