With the eyes of Lebanese politicians affixed on a future for the country as a gas-producing nation, two sovereign wealth fund draft laws for revenues from yet-to-be-discovered hydrocarbons have found their way to Parliament, and a third is on the way.
While there is no one-size-fits-all definition, a sovereign wealth fund is generally defined as belonging to a government, serves macroeconomic purposes, and invests partially in foreign assets.
Funds can be used to save natural resource revenues for the future, preserving revenues in good times to be spent in bad times, and to earmark funds for specific expenditures, such as education or healthcare.
A sovereign wealth fund, then, presents itself as a useful avenue to isolate and sustainably invest revenues from the oil and gas sector for Lebanon, a country struggling with low-economic growth and high corruption, and constantly in the crossfire of regional crises.
But a number of complicating factors must be taken into consideration when officials look to create such a fund, experts told LOGI.
First off, it will be eight to 10 years before any revenue from gas production begins making its way into state coffers. So assuming a significant gas discovery early next year, Lebanon won’t see the money until at least 2027, and the chance of hitting a commercial find on the first round of drilling is around 25 percent, meaning the actual date is likely to be later.
“It makes no sense at the moment to set up a sovereign wealth fund for oil and gas revenues,” Nasser Saidi, a former Economy Minister and Dubai-based economist told LOGI. “What is the point of setting up a costly institution for highly uncertain revenues?”
Similarly, Andrew Bauer, a sovereign wealth fund expert, said Lebanon should wait before launching such an institution. “There is no reason to create a fund today. What some countries have done is set rules and regulations for a fund so that they are prepared for when oil revenue rise to above a certain level.”
“But in Lebanon there is little justification for creating such a fund. We don’t even know how big oil and gas revenues will be,” he said.
Many experts have raised concerns that Lebanon may be falling into what is known as the “pre-source curse” whereby high expectations on a sector that may not yet be proven leads to suboptimal behavior, such as overspending.
The other major point raised by experts is that, while sovereign wealth funds can to a certain extent isolate revenues from the volatility of year-on-year fiscal cycles, they are not immune to political decisions and corruption.
In order to be effective, sovereign wealth funds must be accompanied by sound fiscal policies, political consensus, and a vision for the future, Bauer said.
“A fund has to be part of a grander equation. If you give a gambler extra chips but put them in a separate account, that’s not going to fix the gambling problem” he noted.
For example, in the case that Lebanon’s financial malaise deteriorates to the point of a collapse, Saidi and Bauer both said that little could prevent politicians from raiding the sovereign wealth fund.
“We need to get our house in order before setting up a fund, and that means fiscal discipline,” Saidi said. Given current levels of government overspending and the inefficiency of state projects, a fund could prove to be a “a honey-pot for politicians.”
But Talal Salman, project director for fiscal reform in Lebanon at the United Nations Development Program, said that Lebanon’s political realities should not dissuade policymakers from attempting to create sound regulations.
Salman participated in the drafting of one of the sovereign wealth fund laws, which was submitted by MP Yassine Jaber, a member of the Amal Movement’s Development and Liberation parliamentary bloc. The other law was submitted by the Free Patriotic Movement, and the Progressive Socialist Party is working on a third.
“We have corruption, but we also have money coming in, so what do we do?” Salman said. “One side of the problem is the politicians, which can only be changed through elections. But we are called upon to formulate policies that aim to be good enough to control what happens in this sector.”
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