Public Information Notice: IMF Executive Board Discusses a Work Agenda on Sovereign Wealth Funds

April 1, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 08/41
April 1, 2008

On March 21, 2008 the Executive Board of the International Monetary Fund (IMF) discussed the issues surrounding Sovereign Wealth Funds and a proposed work agenda.


The Board discussion provided an opportunity for Directors to discuss Sovereign Wealth Funds (SWFs) and ways to facilitate and coordinate the development of a set of voluntary best practices for SWFs.

The staff paper highlighted the economic and financial benefits of SWFs. In their home countries, they facilitate the saving and intergenerational transfer of proceeds from nonrenewable resources exports and help reduce boom and bust cycles driven by changes in commodity prices. They also allow for a greater portfolio diversification and focus on return than traditionally is the case for central bank managed reserve assets. 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.

The paper also considered issues raised by the growth of SWFs. Official and private commentators have expressed concerns about the transparency of SWFs, including with respect to their size and their investment strategies, and that SWF investments may be affected by political objectives. Other issues related to the expanded role of governments in international markets and industries, how growing SWFs fit into the domestic policy formulation of countries with SWFs, and how their investments might affect asset prices in recipient countries with shallow markets. At the same time, countries with SWFs are apprehensive about possible protectionist restrictions on their investments, which could hamper cross-border investments the international flow of capital. Some SWFs have argued that they are vulnerable to changes in the regulatory climate, and thus have to operate cautiously as change can be costly.

A better understanding of the role and practices of SWFs could help economies with SWFs to strengthen their domestic policy frameworks and also alleviate concerns and reduce protectionist pressures. The paper set out ways to improve the Fund's surveillance over the operations of SWFs, given their importance for domestic economic policy and their effects on international financial markets. And it looked at the issues surrounding the development of best practices which would provide guidance on how to improve institutional arrangements, organizational structures and risk management, and information dissemination practices.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss issues surrounding Sovereign Wealth Funds (SWFs) and the Fund's proposed work program in this area, including work by the Fund to facilitate and coordinate the development of best practices for SWFs. They stressed that this work should go hand in hand with work being undertaken elsewhere on best practices for countries receiving SWF investments. Directors observed that SWFs are becoming increasingly important players in the international monetary and financial system, offering various economic and financial benefits but also posing several challenges for policymakers.

For the home countries, Directors observed that SWFs facilitate the inter-generational transfer of wealth, help avoid boom-bust cycles, and allow for a better portfolio diversification of excess reserves. At the same time, most Directors considered that SWF operations have implications for macroeconomic policies and domestic policy coordination, and should be well-integrated into countries' macroeconomic policy frameworks. SWFs also need to be well governed and prudently managed.

With respect to the role of SWFs in global financial markets, Directors observed that SWFs can enhance liquidity, particularly at times of global financial stress, as recently evidenced by substantial injections of capital into several large banks by SWFs. More broadly, Directors considered that SWFs have demonstrated their stabilizing influence on markets given their size, long-term investment horizon, and anticipated growth. A number of Directors, however, cautioned that SWFs could potentially cause market volatility in certain circumstances, although it was recognized that SWFs alone should not be singled out. It was also noted that the shift from reserve assets to SWFs can affect the flow of funds between countries. At the same time, some Directors pointed out that the growth of SWFs is also a reflection of global imbalances, which should continue to be addressed in the broader policy context.

Most Directors noted that growing concerns related to SWF objectives and operations could fuel protectionism and hamper cross-border investment, if not properly addressed. In particular, many Directors considered that the limited transparency of SWFs, including regarding their size and investment strategies, or concerns about possible political motivations of SWF investments could erode support for free capital movements. It was recognized, however, that these concerns are not supported by evidence, and other Directors saw the available information as providing evidence that SWFs are driven by risk and return objectives. Many Directors highlighted the importance for SWFs and country authorities to provide sufficient information on SWFs, and to ensure that SWF activities are captured in the relevant macroeconomic datasets. They highlighted the usefulness of technical assistance in supporting such efforts.

Turning to the role of the Fund, most Directors observed that SWFs, including decisions by country authorities on establishing SWFs, have implications for monetary and financial stability. Dealing with these implications falls within the Fund's mandate for surveillance and ensuring the effective functioning of the international monetary system. While SWF issues are already covered in the Fund's bilateral and multilateral surveillance work, most Directors felt that a more systematic approach is desirable given the increasing importance of SWFs in the international financial system. Directors acknowledged that some aspects of SWF operations, including national security issues, are outside the purview of the Fund and are thus more appropriately addressed by others. Some Directors cautioned that the Fund should not act as a de facto regulator of SWFs.

Most Directors agreed that a better understanding of the role and practices of SWFs could help alleviate concerns and reduce protectionist pressures. They supported the initiative to identify a set of best practices, properly tailored to the different objectives and institutional settings of SWFs, on which there would be agreement among SWFs. In their view, such best practices would improve the functioning of both existing and prospective SWFs, and—equally important—would contribute to an open global financial system and help preserve open markets for foreign investment.

Most Directors considered that the Fund is well placed to facilitate and coordinate work on a set of best practices for SWFs, which would complement comparable guidance to members in the areas of fiscal, monetary and financial transparency, and reserve management. Some Directors pointed to a recent joint announcement, from a few well-established SWFs and a major investment recipient, as an indication that such best practices can be developed—with the Fund as facilitator and coordinator—on a collaborative and voluntary basis. Some Directors, however, questioned whether work on best practices for SWFs is in the Fund's core areas of expertise. These Directors noted that the Fund's focus should be on strengthened and evenhanded financial market surveillance, which should adequately cover hedge fund and private equity fund activities. Some Directors cautioned against undertaking work on best practices at the present juncture and, in this context, stressed the hypothetical character of the concerns about SWFs.

Directors acknowledged that the elaboration of a set of best practices will be challenging. Best practices would be expected to focus on governance, institutional and risk management arrangements, investment policies, and transparency. Of particular importance would be to safeguard the operational independence of SWFs, although it was recognized that any guidance should acknowledge the responsibility of the owners of SWFs in making decisions on investment risks and investment principles at the strategic level. Directors supported an inclusive, collaborative approach with SWFs, which would involve relevant members and stakeholders, including recipient countries of SWF investments. They agreed that best practices would be adopted on a voluntary basis, which they saw as key to creating and ensuring broad ownership by SWFs. Directors considered that an important part of the work will be to decide what types of transparency are desirable, with a proper balance to be found between the market sensitivity of data and the minimum required to reflect SWFs' stated objectives.

Most Directors supported the staff's proposal to start work with members, SWFs, and other interested stakeholders, including the establishment of an international Working Group of SWFs to begin technical discussions and the drafting work from April 2008 onwards. They broadly concurred with the proposed working definition of the institutions to be covered by the best practices, while making a number of valuable suggestions for refinements on which staff will reflect further. They also supported the planned coordination with the OECD and other stakeholders. Directors stressed that the resource costs of the work on SWFs would need to be considered carefully in the current tight budgetary environment of the Fund. Directors will receive periodic reports on the progress in drafting the best practices. It is planned that the draft document will be ready for discussion by the Executive Board before the 2008 Annual Meetings.


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