The draft bill relating to the creation and operation of a National Investment Fund, administering future revenues from natural gas sales, expressly prohibits investments inside Cyprus, to avoid creating a bubble.
Once gas revenues start flowing in – not for years to come – the fund is expected to aggregate hundreds of millions. But investing those amounts into the Cypriot real estate market, for example, would wreak havoc with property prices given the relatively small size of the local economy.
Rather, the fund’s reserves will all be invested abroad, be it in property or in triple A-rated government bonds.
Discussion of the National Investment Fund bill continued on Monday at the House finance committee, with input from the Audit Office, the Cyprus Securities and Exchange Commission and the Fiscal Council.
Due to a number of tweaks being suggested, the finance ministry – which drew up the initial bill – agreed to come back in two weeks with the final draft.
As it stands, the bill stipulates that as long as the public debt is above 80 per cent of GDP, half the hydrocarbons revenue would go towards reducing this debt. When it is below 80 per cent but above the limit of 60 per cent – set by the Maastricht criteria – only 25 per cent of revenue would go towards the public debt and the rest would be used for the creation of reserves.
Also, during the transition period until the fund amasses funds equal to three per cent of GDP, the cash will be invested in third country bonds; during this time, the fledgling fund is to be administered by the Central Bank of Cyprus, to avoid creating a new organisation which would entail extra costs.
Once the reserves amount to three per cent of GDP (currently around €18 billion), the government will set up the National Investment Fund – a state-owned entity governed by public law. However, the organisation’s employees as well as its board of directors will be hired on a contract basis and will not have the status of civil servants.
The Fiscal Council, it’s understood, has a different take. It feels that none of the investment fund’s proceeds should go toward slashing the public debt, since this might lead to a loosening of fiscal discipline.
The Fiscal Council is also suggesting that at times of economic growth, the fund should be left untouched and allowed to aggregate reserves for leaner times.
Under the bill, the fund’s proceeds will initially be diverted to the Cyprus Hydrocarbons Company (EYK). Within two months of a cash inflow, EYK will transfer the proceeds to the National Investment Fund, minus any expenses that EYK has undertaken.
Such expenses by EYK will relate exclusively to hydrocarbons activities, such as natural-gas related infrastructure.
The legislation and the accompanying regulations also cover issues like conflict of interest and the liability of the board directors.
Responding to MPs’ questions, a finance ministry official left open the possibility that other government revenues – such as from the mooted casinos – could be channelled into the investment fund along with hydrocarbons revenues.
Under the most optimistic scenario, 2020 is the earliest Cyprus can expect to start exporting gas from the Aphrodite field, and any revenues would come beyond that date.
Some commentators have therefore suggested that the legal framework governing the investment fund is a bit too premature.
But one source, who attended Monday’s parliamentary discussion, opined: “The sooner the better.”
“Better to regulate these matters now, before the honey starts flowing, now that the temptation doesn’t yet exist and everyone can think more rationally,” the source, who requested anonymity, told the Cyprus Mail.
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