Too Much of a Good Thing? Prudent Management of Inflows under Economic Citizenship Programs

IMF Working Papers, May 1, 2015

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Discusses recent developments and implications of Economic Citizenship Programs (ECPs) for fiscal discipline and the real economy, with a focus on small state economies.
Examines risks to macroeconomic and financial stability arising from large and potentially volatile inflows of investment and fiscal revenues.
Proposes a framework for managing inflows and savings from ECPs to contain macroeconomic risks.
Recommends the establishment of a sovereign wealth fund (SWF) where revenues from ECPs are large and persistent.

ECPs have recently been proliferating, generating large and potentially volatile inflows of investment and fiscal revenues that produce significant benefits for small economies.
These inflows can pose substantial challenges for:
- fiscal discipline
- the real economy
- macroeconomic stability
- financial stability
Particular vulnerabilities are identified for small state economies, including risks analogous to Dutch Disease.

Implement prudent management of ECPs focused on minimizing risks to various sectors of the economy.
Establishment of a sovereign wealth fund (SWF) is recommended where ECP revenues are large and persistent.
Overview of strategies to minimize sectoral risks and to address governance and integrity challenges associated with ECPs.

The paper addresses potential governance and integrity challenges arising from ECPs, including implications for country authorities, central banks, and public investment spending.