Dr. Terrence Richard Blackman
Excerpted from, Oil Dorado? Guyana’s Black Gold by John Mair.
Guyana’s Natural Resource Fund: An Idea for Ensuring Generational Equity
The off-shore oil fields are predicted to produce great wealth – some of it for Guyana. But will we equitably transfer natural resource wealth to ensure that future generations benefit from natural resource wealth? Norway sets an example. Dr Terrence Richard Blackman, of Medgar Evers College in the USA, has some advice.
In May 2015, ExxonMobil announced Guyana’s first commercial petroleum discovery. Shortly after that, the company began preparations for production with a “first oil” target of 2020. A July 2022 Rystad Energy country benchmarking update asserts: “Deepwater oil and gas in Guyana represents material and long-lasting value to oil companies, the Guyanese government, and the country of Guyana.” Rystad Energy’s most recent report finds that 2022 is a landmark year for Guyana – with government revenues from oil production forecasted to reach as high as US$1.5 billion potentially and an average of $3.6 billion per annum through to 2030 (and $12.4 billion annually between 2031 and 2040). Rystad forecasts the government’s take to peak at $16 billion per year in 2036. Cumulatively, this amounts to roughly $157 billion in government take for Guyana by 2040.
Setting up the NRF
In recognition of the need to manage the economy effectively in anticipation of the expected revenue windfall, the Guyanese government, after a series of consultations with various stakeholders, established the Natural Resource Fund (NRF) by way of the Natural Resource Fund Act 2019 to manage the natural resource wealth of Guyana for the present and future benefit of the people and the sustainable development of the country. However, 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 more straightforward and less rigid. The Natural Resources Fund Bill, No. 21 of 2021, was passed in the National Assembly of Guyana on 29 December 2021. A new piece of legislation aims to strengthen the 2019 Act and ensure the security, transparency and accountability that Guyanese need to benefit from the oil and gas revenues. The Bill refines the governance structure and how these monies will be used.
The unchanged objectives of the NRF in the new Act are:
- Ensure that natural resource revenues do not lead to volatile public spending.
- Ensure that natural resource revenues do not lead to a loss of economic competitiveness.
- Equitably transfer natural resource wealth across generations to ensure that future generations benefit from natural resource wealth.
- Use natural resource wealth to finance national development priorities, including any initiative to realise an inclusive green economy.
The Natural Resource Governance Institute recommends that governments establishing or maintaining natural resource funds consider six steps that promote good natural resource fund governance:
1. Set clear fund objective(s) (e.g., saving for future generations; stabilising the budget; earmarking natural resource revenue for development priorities).
2. Establish fiscal rules – for deposit and withdrawal – that align with the objective(s).
3. Establish investment rules (e.g., a maximum of 20% can be invested in equities)
that align with the purpose (s).
- Clarify a division of responsibilities between the ultimate authority over the fund, the fund manager, the day-to-day operational management, and the different offices within the active manager and set and enforce ethical and conflict of interest standards.
- Require regular and extensive disclosures of crucial information (e.g., a list of specific
investments; names of fund managers) and audits.
- Establish robust and independent oversight bodies to monitor fund behavior and enforce the rules.
The current structure of the Guyana NRF adheres to the guidelines above. Broadly, the Ministry of Finance is responsible for the overall management of the NRF, and the central bank – the Bank of Guyana – is accountable for the operational management of the NRF.
We’re in the money!
On 10 May 2022, Senior Finance Minister Dr. Ashni Singh announced that the government had made its first drawdown from the Natural Resource Fund (NRF) following the Natural Resource Fund (NRF) Act 2021. The minister indicated that US$200 million, equivalent to G$41.7 billion, had been transferred from the Natural Resource Fund to the Consolidated Fund to finance national development priorities. On 13 July 2022, the minister indicated that a further US$200 million had been transferred from the Natural Resource Fund to the Consolidated Fund to finance national development priorities. This brings the accumulated withdrawals from the NRF to US$400 million. As part of the budget 2022 process, parliamentary approval was granted for a total of US$607.6 million to be transferred during the fiscal year 2022.
Guyana has won the proverbial lottery. Former Minister of Finance Winston Jordan said in a 2017 interview: “This is the best thing that has ever happened to Guyana; I can say that not since perhaps when sugar was introduced in the colonies have there been such opportunities for a massive transformation of the economy. We’ve always dreamed of such a transformation, but we’ve never had the resources to convert our dreams to reality.” Guyana’s oil windfall can convert the country’s dreams into reality, but there is also a good chance of leaving Guyana with greater inequality, corruption and internal strife. Many fear that this is precisely what will happen. The “resource curse” is not inevitable. With their rule of law, diversified economies, and strong institutions, Norway and Canada are frequently cited exemplars of stellar resource management.
How much cake, how many people?
One of the key objectives of the NRF is to equitably transfer natural resource wealth across generations to ensure that future generations benefit from natural resource wealth. How do we ensure that this objective is met? Guyana is a very young country – the median age is 26.2 years,and its resources derived from oil, Rystad Energy predicts, will be significantly diminished by 2050. Guyana’s population has experienced relatively unstable growth and decline over the last fifty years. It is currently growing very slowly, a trend that, it is expected, will last for some time. However, now, Guyana’s small population, slow growth and demographic distribution skew heavily towards youth. Some 67.50% of the Guyanese population is between 15-64; this counterintuitively positions Guyana perfectly for the proposed one-generation NRF strategy to sustain fiscal and economic stability. Today’s young people will be alive to reap the benefits of the one-generation strategy, thereby addressing the question of generational equity in the distribution of patrimony. Guyana has been given a once-in-a-life-cycle-of-a-country opportunity to jump the gap from a developing to a developed nation in a sustained manner. It can achieve this objective by holding as close to the Norwegian Wealth fund model as possible.
The lessons from Norway
Norway has set aside most of its oil earnings from taxes on the petroleum industry and lease sales to private companies in its Sovereign Wealth Fund, officially known as the Government Pension Fund Global (GPFG). The fund is mandated to preserve and increase Norway’s oil profits for future generations. As a result, the Norwegian government does not spend its oil revenues. Instead, the entire income from petroleum activities is invested in the fund. As a result, the government only disposes of the expected yearly return on the fund, which was limited to 4% by its 2001 fiscal policy and reduced to 3% in 2017. Mindful of the challenges associated with an abundance of non-renewable resources, the Norwegian government chose this approach to prevent the country from falling victim to the “resource curse” while extending the benefits these resources confer beyond short-term gains. This mindset – along with concerns about currency appreciation and cash inflows becoming too tightly intertwined with the Government – has prevented public officials’ wealth concentration, currency appreciation, and mismanagement and corruption. Norway transferred its first revenue to its fund in May 1996. The growth of its SWF has occurred in one generation. Today, the current value of Norway’s Government Pension Fund Global (GPFG) is approximately US$1.4 trillion.
From the North Sea to the Caribbean Sea: The one generation challenge?
To put the Norwegian Model into a Guyanese context, suppose Guyana decides to deposit, starting on 1 January 2023, US$500,000,000 per annum derived from its petroleum sector and not touch the investment for the next twenty-five years, one generation, in an investment vehicle that, conservatively, offers a return of 11% per annum. Assuming yearly deposits of just half a billion dollars, $500,000,000, the final balance at the end of the 25 years will be US$ 77,387,581,874.51! Guyana’s total GDP today is about US$7 billion. Our conservative investment will yield a Guyanese nest egg about eleven times the size of Guyana’s current economy! It is a floor beneath which Guyanese can never again fall. This is the opportunity that stands before us.
Can Guyana’s political leadership summon the will, the wisdom and the cohesion to emulate Norway’s model and set aside $500,000,000 of its oil earnings in its Natural Resource Fund for twenty-five years?
Education: The second pillar for sustained growth and development
Most Guyanese workers possess only primary education. It is self-evident that the quality of Guyana’s human capital and workforce is the cornerstone of the country’s ability to advance sustainably, both socially and economically. Accordingly, this must be the primary task to which we initially deploy our oil and gas windfall. Investing in a Guyanese workforce to cultivate necessary knowledge, skills and attitudes is the essential precursor to increased productivity and long-term Guyanese economic stability while simultaneously building and sustaining a national “nest egg” is Guyana’s most viable strategy to jump the development gap. Responsible stewardship of the Guyanese patrimony requires that our fiscal approach be deliberate and prudent if we transfer natural resource wealth across generations and ensure that future generations benefit from natural resource wealth.
How might it work?
Over the next twenty-five years, Guyana should make catalytic investments in education, particularly workforce development and training, health, transportation, crime reduction and a resilient climate. Our socio-economic and political leadership must commit the nation to inter-generational equity and socio-economic development. Our best strategy is to build up a substantial “nest egg” in the wealth fund over the next twenty-five years while investing in the areas above. Saving is essential to the economic progress of a country because of its relation to investment. If there is to be an increase in productive wealth, we must be willing to abstain from consuming our entire income. The correlation between savings and economic growth has been the subject of research by many well-known economists – a rise in aggregate savings yields more significant investments associated with higher GDP growth. As a result, the high savings rates increase the amount of capital and lead to higher economic growth in the country.
About the Contributor
Dr Terrence Richard Blackman, Associate Professor of Mathematics and a founding member of the Undergraduate Program in Mathematics at Medgar Evers College, is a member of the Guyanese diaspora. He is a former Dr Martin Luther King Jr. Visiting Professor at MIT and a Visitor to the School of Mathematics at the Institute for Advanced Study. Dr Blackman has previously served as Chair of the Mathematics Department and Dean of the School of Science Health and Technology at Medgar Evers College.