July 25 ,2021
Several observers have noted that the account in the Federal Reserve Bank of New York does not constitute the National Resource Fund (NRF). The account in the Federal Reserve is merely holding the oil revenues – at almost zero percent yield – until the Guyana government operationalises the NRF (hereafter “the Fund”). Operationalisation of the Fund means, among other things, at minimum, the government hires qualified individuals to manage the monies and release funds consistent with its budget priorities subject to parliamentary approval. It also involves employing and housing at the Bank of Guyana (BoG) a skilled fund manager, macroeconomist and international corporate lawyer. Of course, there will also have to be a supporting team of individuals.
For its part, the BoG has started to produce monthly statements and quarterly reports on the Fund. The central bank notes that by producing the reports it is fulfilling section 38 (2) of the Natural Resource Fund Act of 2019. Furthermore, the Bank notes that the reports are on the Natural Resource Fund even though the government is yet to formally establish it.
Vice President Jagdeo and President Ali do not like the Natural Resource Fund Act of 2019. In a recent news report (see SN: 23/05/2021), the Vice President notes that it would “be unconscionable to have children in the present day unable to attend school while the country saves for the future”. Both President Ali and Vice President Jagdeo noted that they prefer a model of sovereign wealth fund similar to the one used by Kazakhstan.
The Kazakh model allows for greater discretion in drawing down monies for the national budget. The discretion is completely within the remit of a powerful President and Prime Minister, and not the technocrats employed to manage the Kazakh fund. On the other hand, the model used by Norway is more rule-based. The rule essentially draws from a theoretical model that was published in 1957 and authored by the celebrated economist, Milton Friedman.
In the same news article mentioned above, Mr. Jagdeo assures the public that whatever model the PPP/C government settles on, it will involve transparency and “input from local sectors”. It is not so clear what “input from local sectors” means. However, mentioning the term transparency has to be supported by a credible commitment to transparency. It has to be backed up by supplying information and data to the society. Up to this date, the PPP/C government has not made any credible commitment regarding the operationalisation of the Fund.
On top of that, I believe the biggest hidden piece of information that shows no credible commitment is the lack of production data. I find this shocking given how much the supposed GDP growth rate is thrown around by the government, the IMF and IDB. Are they just making up the numbers? How do they know that GDP grew by 26% in 2020 if oil production data are not reported to the Bureau of Statistics?
The law requires that the Bureau – not the IMF, IDB or BoG – calculate Guyana’s GDP. This means that ExxonMobil, by law, must report the production data to the Bureau of Statistics. Several observers have reported great frustration when trying to obtain the production numbers. Mr. Alfred Bhulai of the Transparency International Guyana Institute (TIGI) and the folks from the Oil and Gas Governance Network (OGGN) have been asking for said numbers for some time. They have been stonewalled by various government officials, with the head of Environmental Protection Agency being most skilful at evading. We all know that there is a strong mathematical relationship between GDP and carbon as well as other emissions.
Surprisingly, the BoG reports – as useful as they currently are – are completely silent on oil production. The reports document, among other variables, the inflows and the closing balance of the account, which stands at US$344.16 million at the end of June 2021. It also presents a chart of the price of oil, but no production number. It should not be difficult for the Bureau of Statistics and the BoG to upload monthly production data on their websites.
Any first-year undergraduate or high school student studying economics will tell you that revenue is equal to the price of the item multiplied by the amount sold (or in this case produced). The central bank reports the revenues and the price, but not the quantity. Why? If the public does not know the quantity produced then why should they trust the final value in the people’s account?
With interest income very small and no withdrawals at the moment, the final balance is the summation of royalty and profit oil – all requiring accurate production quantity. When the NRF is up and running, the economist will obviously have to figure out whether the right amount of money is getting to the government. There is no way of accurately knowing the right amount without the production quantity and the prevailing market price. Another factor is the price at which the oil is sold to India. Is it at the spot market price or at a premium over market price? Secrecy on these key variables means there is much room for mischief.
In August 2019, I wrote a Business Review column summarizing my thoughts on the amount of revenues the Guyana government is likely to receive. In that column, I noted that two scenarios matter. First, the expected revenues under the full cost recovery cap of 75%. Second, expected revenues when cost recovery ends. As noted recently after the Business Review column (SN: 16/05/2021) examining the gas-to-shore project, the upfront cost will most likely be financed by ExxonMobil. While adding some more clarity, it means that the 75% cost recovery cap will be pushed out into the future. It means that the US$900 million is not the true amount. Interest will be deducted first and then much later the US$900 million – both forming part of the 75% cost recovery cap.
Therefore, it is safe to assume that for the foreseeable future, the formula showing how much revenues government will receive for one barrel of oil is 0.02P + 0.5(0.98P – 0.75P) = 0.135P, where P is price for a barrel. Obviously, the price varies from period to period, making it necessary to use some average price. We still need to multiply 0.135P times the total number of barrels produced to get the government’s take at a given point. Without accurate production data, therefore, we are flying blind.
For its part, the Bureau of Statistics is woefully understaffed. One person told me that young people are not interested in working at the Bureau of Statistics. It just does not have the razzle dazzle of the oil companies. And one has to learn things like programming, calculus and statistical theories to be very effective in that line of career. For its part, the government appears not too interested given that there is no immediate political return for strengthening data collection, which ultimately leads to greater transparency.
Under these circumstances a model allowing wide discretion like the Kazakh one is a recipe for much trickery and mischief. To be fair, I am sympathetic to Mr. Jagdeo’s idea that there should be a bigger upfront drawdown of funds given the grave infrastructure deficit at the moment. However, there is no reason for sacrificing transparency. Both can coexist. In closing, by the way, is there a credible political opposition?
In the next column, I will calculate the amount of interest income Guyana has sacrificed by not activating the NRF.
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