IFIs Pt. 3: More SWF Bashing, IMF Style

♠ Posted by Emmanuel in at 3/06/2008 01:48:00 AM
Posts on sovereign wealth funds have become something of a stock-in-trade at the IPE Zone. European sovereign wealth fund bashing [1, 2, 3] and American sovereign wealth bashing have been featured here. The granddaddy of all SWF bashers, though, remains the IMF. The United States has been looking to the IMF to stamp its will on SWFs. This involves the usual paeans to the benefits of transparency and disclosure (see the first EU link for more on the regular Western demands on SWFs). Currently, the IMF is preparing guidelines for best SWF practices which these institutions will likely not follow as the IMF has no leverage on them in the form of existing loans. After all, cash-laden SWFs are signs of LDC prosperity in themselves as these countries have avoided becoming reliant on IMF borrowing. There are some wacky plans afoot to use the WTO in SWF-bashing as well (more on this later), though this is not likely come to pass.

In what follows, I will excerpt some of the more interesting parts of an interim IMF feature on SWFs while we await, with bated breath, the surely incredulous IMF code of best SWF practices. The first hints at the IMF's actions in response to the rise of the SWFs, while the second concerns the varieties of SWFs out there:

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—the International Monetary and Financial Committee (IMFC)—called 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:

    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.

    Facilitating communication. The IMF organized the Roundtable of Sovereign Asset and Reserve Managers 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.

    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.

    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.

    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.

    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.

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):

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

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

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

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

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