Two Fridays ago, Natural Resource Fund (NRF) Investment Committee member, Terrence Campbell, stated that the NRF Board is a “rubber stamp” and that his efforts to be provided with the necessary justifications for withdrawals from the Fund have been stymied. He asserted that the lack of transparency in the spending is not in keeping with the provisions of the NRF Act because there is no information on how the funds withdrawn are being expended. Mr. Campbell cited Section 16 of the Act which specifies that withdrawals are to be used only for national development priorities and/or essential projects aimed at ameliorating the effects of a major natural disaster. Considering the Investment Committee’s involvement in assisting the Board in preparing the Investment Mandate for the Fund, Mr. Campbell’s concern is not without merit. We raised this matter in several of our articles during our review of the Estimates of Revenues and Expenditures for the fiscal years 2022 and 2023, but to no avail.
In today’s article, we revisit the provisions of the NRF Act 2021, especially in the light of the Government’s argument that it would be difficult to separate out in the National Budget any proposed expenditure from NRF withdrawals, except in the case of a major national emergency.
Some background information
On 29 December 2021, the National Assembly passed the Natural Resource Fund (NRF) Bill without debate, after a chaotic scene erupted in the Assembly as Opposition Members of Parliament (MPs) vehemently opposed the related Bill being considered. This was indeed a most unfortunate occurrence, considering the importance of this legislation relating to the overall management of as well as transparency and accountability for Guyana’s oil revenues. The following day, the President assented to the Bill while the Minister of Finance signed the commencement Order the next day to bring the Act into operation.
The speed of enactment of this important legislation is unprecedented and clearly suggests that the Government was determined to access the oil revenues at all costs in order to prepare the 2022 Estimates of Revenue and Expenditure. The main issue of contention was the repealing of the predecessor legislation of 2019 and replacing it with what those MPs believed to be a lesser form of legislation that removes several safeguards against the abuse over the oil revenues accruing to the nation. Several civil society organisations and individuals expressed similar concerns.
Most of the contents of the NRF Act were extracted from the 2019 legislation, with the following notable changes:
Establishment of a Board of Directors to replace the role of the Minister as regards the overall management of the Fund and the corresponding restriction on the responsibilities of the Public Accountability and Oversight Committee.
Removal of the requirement to have a Macroeconomic Committee whose responsibility was to advise on the maximum amount that could be withdrawn from the Fund in a fiscal year, taking into account a number of factors.
Replacing the First Schedule that outlined the maximum amount that can be withdrawn annually from the Fund, with a new Schedule. The new Schedule was revised in February 2024 to increase the ceiling for withdrawals, despite the requirement for the Minister to conduct not less than every five years, a review of its implementation and to submit a report to the Assembly.
Under the predecessor legislation, the Macroeconomic Committee was required to advise on the maximum Economically Sustainable Amount (ESA) that could be withdrawn from the Fund without diminishing the competitiveness of the economy. Factors that were to be taken into account include: (i) the impact of past spending financed by withdrawals from the Fund; and (ii) potential impact of future spending financed from the Fund taking into account, among others, inflation, exchange rate, balance of payments, economic growth and the public debt.
The Minister was then required to calculate the Fiscally Sustainable Amount (FSA) which is the maximum amount that can be withdrawn from the Fund in a fiscal year while ensuring the long-term financial sustainability of the Fund, a fair inter-generational distribution of natural resource wealth, and maintaining stability in the annual withdrawals from the Fund. (Emphasis added.) The FSA ceiling for a fiscal year must be equal to the greater of: (i) 25 percent of the five-year average of non-petroleum revenues for the preceding two fiscal years, the current fiscal year, and the succeeding two fiscal years; and (ii) three percent of the projected balance of the NRF for that fiscal year.
The Economically and Fiscally Sustainable Amount (EFSA) is the lesser of the ESA and FSA. It is the EFSA that the Assembly was required to approve for a fiscal year plus any amount required for emergency financing.
Purpose of the Fund
The purpose of the Fund is to manage the natural resource wealth of Guyana for the present and future benefit of the people in an effective and efficient manner by:
Ensuring that volatility in natural resource revenues does not lead to volatile public spending and/or loss of economic competitiveness.
Fairly transferring natural resource wealth across generations for the benefit of future generations.
Using natural resource wealth to finance national development priorities, including any initiative aimed at realising an inclusive green economy.
The Fund is to be managed in accordance with ‘the principles of good governance including transparency and accountability, and international best practices including the Santiago Principles’. These Principles, which number 24, are the generally accepted principles and practices for Sovereign Wealth Funds voluntarily endorsed by the International Forum of Sovereign Wealth Fund members.
Deposits into the Fund
All petroleum revenues are to be deposited into the NRF Account denominated in United States dollars under the control of the Bank of Guyana. The Act defines such revenues to include:
Royalties, whether laid in cash or in kind, due and payable by the holder of a petroleum licence.
The Government’s share of profit oil and profit gas received under the terms of a production sharing agreement.
Any petroleum income tax, additional profit tax or any other future tax levied on profits of companies or individuals undertaking production operations.
Any signature bonus, discovery bonus, production bonus or other bonus related to production operations or the award of a petroleum licence.
Any other current or future fiscal instrument levied solely or mainly on companies or individuals involved in production operations.
Withdrawals from the Fund
The maximum that may be withdrawn from the Fund in any fiscal year is not to exceed the total withdrawal from the Fund approved by the Assembly and must be in accordance with the ceiling set in the First Schedule plus any amount required for emergency financing. The ceiling for withdrawal in any fiscal year has been increased in respect of deposits into the Fund in the immediately preceding fiscal year, as follows:
From 100 percent of the first US$500 million to 100 percent of the first US$ billion.
From 75 percent of the second US$500 million to 95 percent of the second US$ billion.
From 50 percent of the third US$500 million to 90 percent of the third US$ billion.
From 25 percent of the fourth US$500 million to 85 percent of the fourth US$ billion.
From five percent of the fifth US$500 million to 50 percent of the fifth US$ billion.
From three percent of any amount in excess of US$2.5 billion to 10 percent of any amount in excess of US$5 billion.
All withdrawals are to be deposited in the Consolidated Fund to be used to finance the National Budget, or any Supplementary Estimate in the event of a major national disaster.
Utilisation of withdrawals from the Fund
By Section 20, the annual budget proposal must include: (i) an estimate of petroleum revenues, deposits, withdrawals and rate of return on investments for each of the next four fiscal years; and (ii) a comparison of actual withdrawals approved by the Assembly for the last three fiscal years. For emergency financing, the Budget is to include two detailed reports describing: (i) the major natural disaster and its impact on the environment and the population of Guyana; and (ii) why the withdrawal is needed, the projects it will be used to finance and how those projects will ameliorate the effects of the disaster. The same applies to emergency financing via Supplementary Estimates, with the inclusion of a table showing for the current fiscal year the withdrawal request and the withdrawal from the Fund in the annual budget.
Section 16(2) of the Act specifically states that the NRF withdrawals should only be used for (i) national development priorities, including any initiative aimed at realizing an inclusive green economy; and (ii) essential projects that are directly related to ameliorating the effects of a major natural disaster. (Emphasis added.) The use of the word “only” suggests that the proposed expenditure on national development priorities need to be clearly identified. How else will legislators and the public at large be able to ascertain whether the withdrawals and related expenditure are compliance with Section 16(2) as regards the projects to be financed that are in the nature of national development priorities?
That apart, Section 16(2) implies that the withdrawals from the NRF should not be used to meet current expenditure which relates to operational costs, such as wages and salaries, procurement of materials and supplies, fuel and lubricants, repairs and maintenance, and subsidies to State-owned/controlled entities to meet their operational expenses. These cannot be regarded as national development priorities. Notwithstanding this, since 2022 NRF withdrawals have been treated as current revenue in the Estimates. This practice has the effect of showing a much more favourable position as regards the Government’s operating surplus/deficit and gives the Government complete laxity as to how the NRF withdrawals are to be expended and a disregard for the provisions of Section 16(2). For example, for 2022, the budgeted operating surplus was $96.918 billion. However, if one were to exclude the NRF withdrawal of $126.694 billion, there would have been a budgeted operating deficit of $29.776 billion. The same applies to the fiscal years 2023 and 2024 where the budgeted surpluses were $84.447 billion and $238.123 billion, respectively; whereas there would have been operating deficits of $24.497 billion and $52.821 billion, if account is taken of the NRF withdrawals of $208.944 billion and $240.944 billion, respectively. When capital expenditure is taken into account, the overall budgeted fiscal deficits for 2022, 2023 and 2024 amounted to $64.689 billion, $167.031 billion and $198.737, respectively.
In its 2022 Article IV Consultation Report, the International Monetary Fund (IMF) had advised that the overall fiscal deficit should not exceed the amount withdrawn from the NRF. And in its 2023 report, the Fund made two key recommendations. The first was that given the sheer size of the expected oil transfers and fiscal spending, the policy priorities should be to avoid overheating and `Dutch disease’. Additionally, there was need to closely monitor macroeconomic and financial indicators and further tighten monetary policy stance. Second, it is highly desirable for a comprehensive fiscal policy framework to be developed to guide spending decisions based on a Medium-Term Fiscal Framework (MTFF), along with further enhancements of the public financial management framework, including public investment. The Fund noted that transitioning to a zero overall fiscal balance over the medium term will allow the Government to meet its ambitious investment goals, while ensuring fiscal sustainability and intergenerational equity without creating macroeconomic imbalances.
The solution to the problem relating to the treatment of NRF withdrawals is to consider such withdrawals as capital revenue to be matched with corresponding capital expenditure. Volume III of the Estimates, known as Capital Profile, lists all capital expenditure projects showing, among others: (i) name and description of the project as well as its location; (ii) responsible executing agency; (iii) benefits to be derived; (iv) total estimated project cost (v) expenditure to date; (vi) proposed amount to be spent in the fiscal year; and (vii) sources of financing. If this course were to be adopted, it would satisfy the requirements of Section 16(2) and would enhance transparency and proper accountability for the use of oil revenues.
Investment of the Fund
The NRF Board is responsible for preparing the Investment Mandate after seeking the written advice of the Investment Committee. In rendering that advice, the Committee is required to take into account, among others:
The overall objectives of the Fund.
The need to ensure that sufficient funds are available for withdrawals.
The need for the Fund, in the long term, to achieve an average over a number of years a real rate of return of at least three percent per annum while minimizing risk.
The need for the Fund to follow a strategic asset allocation strategy whereby over time as the balance on the Fund increases the percentage of the Fund invested in low-risk eligible asset classes decreases, with a corresponding increase in investments in higher risk eligible asset classes.
The need for the Fund to avoid tactical asset allocation.
Annual report on the Fund
By Section 32, the NRF Board is required to the submit to the Minister an annual report within 30 days of the receipt of the audited accounts of the Fund from the Auditor General. The report is to contain, among others, (i) the audited accounts and report of the Auditor General; (ii) details of deposits and withdrawals; and (iii) comparison of the amounts approved for withdrawal with the actual amounts withdrawn. The Minister must then present the report to the National Assembly as soon as possible but not later than 30 days after its receipt from the Board. Section 33 requires the report to be laid in the Assembly and published on the Ministry’s website.
