IMF to Develop Best Practices with Sovereign Wealth Funds

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Page 61

The IMF's Executive Board gave the green light for further analysis on the role of sovereign wealth funds (SWFs) in the global economy and endorsed a proposal for the IMF to work with SWFs and other relevant parties to prepare a set of best practices for the state investment institutions.

The March 21 board discussion provided an opportunity for Directors to discuss these funds and ways to facilitate the development of a set of voluntary best practices for them. This work would be coordinated with the work of the Organization for Economic Cooperation and Development (OECD) on practices for recipient countries as appropriate.

With 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 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-totaling more than $40 billion since November 2007-into 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...

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