[stop-imf] IMF and sovereign wealth funds

[robert weissman]

IMF background paper on sovereign wealth funds:
http://www.imf.org/external/np/pp/eng/2008/022908.pdf
--------

http://www.imf.org/external/pubs/ft/survey/so/2008/POL03408A.htm

[this URL also contains useful links, in addition to the story pasted below=
]

State-owned investment funds


    IMF Intensifies Work on Sovereign Wealth Funds

By IMF Survey online

March 4, 2008

    * Sovereign funds may hit $6-10 trillion mark in five years
    * IMF work on SWFs progressing on a variety of fronts
    * IMF collaborating with SWFs to reach agreed view on best practices

With sovereign wealth funds (SWFs) rapidly gaining importance in the
international monetary and financial system, the IMF has stepped up its
work across a broad range of issues related to these state-owned funds,
including their impact on global financial stability and capital flows.

Of course, SWFs have been around for a long time, at least since the
1950s. But their total size worldwide has grown dramatically over the
past 10-15 years, with the IMF now estimating that they will rise from
$2-3 trillion today to about $6-10 trillion within five years. At
present, the United Arab Emirates, Norway, Saudi Arabia, China, Kuwait,
Russia, and Singapore are among the countries that hold the world's
largest SWFs.

The main impetus for the growth of SWFs comes from high oil prices,
financial globalization, and continued imbalances in the global
financial system that have resulted in the rapid accumulation of foreign
assets by some countries.

*Heightened attention*

As a result, SWFs are attracting heightened attention from markets,
policymakers, national legislatures, and the media, in particular
following their recent capital injections=97totaling more than $40 billion
since November 2007=97into European and U.S. banks that suffered big
losses from the subprime mortgage crisis. These capital injections have
been welcomed by the IMF and others because they have helped to
stabilize markets.

"From the viewpoint of international financial markets, SWFs can
facilitate a more efficient allocation of revenues from commodity
surpluses across countries and enhance market liquidity, including at
times of global financial stress," according to the IMF's First Deputy
Managing Director John Lipsky. "They also tend to be long-term investors
with limited withdrawal needs, which enable them to withstand market
pressures in times of crisis and dampen volatility," he adds.

At the same time, says Lipsky, the IMF also acknowledges the concerns of
recipient countries and private commentators about the impact of
SWFs=97reflecting their size and investment strategies=97and of the home
countries that have been worried about the risk of rising protectionist
sentiment.

*Types of SWFs*

SWFs have been created by governments for several reasons. According to
IMF analysis, five types of SWFs can be broadly distinguished based on
their main objective (see the IMF's October 2007 /Global Financial
Stability Report
<http://www.imf.org/external/pubs/ft/gfsr/2007/02/pdf/annex12.pdf>/):

      =95* stabilization funds*, where the primary objective is to
      insulate the budget and the economy against commodity (usually
      oil) price swings;

      =95* savings funds for future generations*, which aim to convert
      nonrenewable assets into a more diversified portfolio of assets;

      =95* reserve investment corporations*, whose assets are often still
      counted as reserve assets, and are established to increase the
      return on reserves;

      =95* development funds*, which typically help fund socioeconomic
      projects or promote industrial polices that might raise a
      country's potential output growth; and

      =95* contingent pension reserve funds*, which provide (from sources
      other than individual pension contributions) for contingent
      unspecified pension liabilities on the government's balance sheet.

*Benefits and concerns*

SWFs offer a variety of economic and financial benefits. They help avoid
boom-bust cycles in their home countries, and facilitate the saving and
transfer across generations of proceeds from fiscal surpluses related to
commodity exports and privatizations. They also allow for a greater
portfolio diversification and focus more on returns than is
traditionally the case for central-bank-managed reserve assets, thereby
reducing the opportunity costs of reserves holdings.

"For economies with plentiful foreign reserve assets, greater and more
prudent diversification reflects sound and responsible asset
management," says Udaibir S. Das, an expert on SWFs in the IMF's
Monetary and Capital Markets Department.

The growth of SWFs has also raised several issues. In addition to
official and private commentators' concerns about the impact of
SWFs=97including their size and their investment strategies=97they also
raise the issue of the expanded role of governments in international
markets and industries. Some observers worry that SWF investments may be
motivated, in certain cases, by political objectives.

Concerns have been raised about how SWFs fit into the domestic policy
formulation of countries with such funds. At the same time, countries
with SWFs are concerned about protectionist restrictions on their
investments, which could hamper the international flow of capital.

*What the IMF is doing*

Recognizing the growing importance of SWFs and the role of the IMF in
monitoring the health of its member countries' economies and the global
financial system, the IMF's ministerial guidance body=97the International
Monetary and Financial Committee (IMFC)=97called on the Fund last October
to engage in a dialogue with countries to arrive at a voluntary set of
best practices in the management of SWFs. In response, the IMF's work on
these funds has progressed on a number of fronts:

      =95*/ Deepening analysis./* In order to enhance the understanding of
      SWFs, the IMF is organizing a survey of SWFs to help identify
      their investment objectives and risk management practices; as well
      as institutional frameworks, such as governance structures and
      accountability arrangements.

      =95*/ Facilitating communication. /*The IMF organized the Roundtable
      of Sovereign Asset and Reserve Managers
      <http://www.imf.org/external/np/sec/pr/2007/pr07267.htm> in
      November 2007, which included a preliminary discussion with key
      SWFs. The Roundtable was attended by high-level delegates from
      central banks, ministries of finance, and SWFs from 28 countries.
      It helped advance the discussion on policy, institutional, and
      operational issues facing SWFs, and learn from their experience
      and views. It was agreed at the Roundtable to continue the
      dialogue with SWFs.

      =95*/ Following-up on dialogue. /*The IMF is following up with
      further contacts with SWFs as part of a collaborative process to
      come up with an agreed view on best practices. "We've been engaged
      in an initial dialogue with sovereign wealth funds to help
      identify their current practices on issues such as governance and
      accountability structures, with a view to helping reach a
      consensus on best practices," said Adnan Mazarei, of the IMF's
      Policy Development and Review Department, who is closely involved
      in the discussions.

      =95*/ Coordinating with other international institutions. /*The IMF
      is coordinating its work on SWFs with the Paris-based Organization
      for Economic Cooperation and Development (OECD) and is also
      liaising closely with the European Commission, the World Bank, and
      others. The OECD is taking the lead on issues related to
      investment policies and regulations in recipient countries.

      =95*/ Outlining key issues./* The IMF's Executive Board will discuss
      a paper in late March that sets out the Fund's work program
      regarding SWFs.

      =95*/ Working toward delivery./* In the Board paper, the IMF staff
      seeks the agreement of the Executive Directors to proceed with
      preparing a set of best practices for managing SWFs. If the Board
      agrees, the IMF will collaborate with SWFs and other stakeholders
      in developing a statement of best practices. The aim is to present
      a draft to its Executive Board by the IMF's Annual Meetings in
      October.

*Best practices as a public good *

The IMF expects its work on SWFs will provide a public good that may be
used by existing and new SWFs to run sound organizations, with good
governance structures, robust risk management frameworks, and
appropriate transparency. These practices should also help allay some of
the prevailing concerns about SWFs, reduce protectionist pressures, and
allow the international financial system to remain open.

In addition, the IMF's efforts would aim to promote a better
understanding of the role and significance of SWFs in their countries'
macroeconomic policy framework, as well as help the international
community better assess the impact of SWF activity on global financial
stability and capital flows.

The IMF has developed similar guidelines in the past, particularly in
the areas of fiscal transparency
<http://www.imf.org/external/np/fad/trans/index.htm> and foreign
exchange reserves management
<http://www.imf.org/external/pubs/ft/ferm/guidelines/2005/index.htm>.

Comments on this article should be sent to /imfsurvey@imf.org
<mailto:imfsurvey@imf.org>/