Samson: Is it time to establish an Iraqi sovereign fund?
27th April, 2019 by Dr Jawad Kazem al-Bakri
The Sovereign Fund is a collection of public financial surpluses and their investment in interest in foreign financial assets.
Most of the sovereign wealth funds were originally created to diversify the sources of income in oil-producing countries with surplus funds. These funds existed in developed countries with surplus sources of income Need in the state budget.
The need for these funds to invest in them has been underscored to alleviate the crises experienced by countries to preserve the future of future generations that have the right to live in dignity. For example, Saudi Arabia and its Strategic Plan 2030 will depend on 30% of the sovereign fund's revenues without oil.
So we know what kind of funds we want to grow up we should know the purpose of the establishment of the fund, the objectives of sovereign funds are:
1. Protection of the national economy and the general budget of the State from the risk of external crises that result from fluctuations resulting from export earnings.
2. The principle of justice, which is achieved through the distribution of wealth between generations through the maximization of savings that goes to future generations.
3. Diversify the country's income and thus reduce dependency on non-renewable audio exports.
4. Increase the returns of reserves for foreign exchange
5. Help the monetary authority to withdraw unwanted liquidity.
6. Provide a tool to finance economic development programs.
7. Achieve sustainable long-term growth in the countries that own the Fund.
8. Achieve political, economic and strategic goals
9. The treatment of negative effects due to financial flows resulting from natural wealth, which is known as (Dutch disease) The Dutch disease, which causes undesirable effects in the productive sectors, especially the industrial result of oil discoveries that created a state of laziness and laxity in the job that hit the people The Netherlands from 1900-1950 after the discovery of oil and gas in the north as they went to luxury and comfort, until they reached the stage of depletion of the natural resource from the wells, which depleted by the consumption of unfair and unproductive.
The majority of public institutions take the form of a commercial company and are subject to commercial law. This is different for sovereign wealth funds, which are investment funds. The main function of the company is to produce goods and services. This is different for sovereign wealth funds.
• Types of sovereign wealth funds based on the purpose of:
1. Stability funds: The first objective is to protect the budget and the economy from the fluctuations in the prices of the most necessary commodities.
2. Provident funds: the transfer of non-renewable assets into portfolios of diversified assets and the basis for the operation of these funds is to increase the return of reserves.
3. Investment institutions: their assets are calculated as reserves and the reason for the construction is to increase the return of reserves.
4. Development funds: to encourage the financing of economic and social projects and to strengthen industrial policies to increase the supposed production of the state.
5. Emergency funds: are pension reserves that are not associated with pension obligations and are in the state's general budget.
• Types of sovereign wealth funds based on income source:
1. Reserves of raw materials: Oil is one of the main sources of the countries that depend on it, but keeping oil reserves in the wells as a kind of generations rights, but created the idea of sovereign funds as a good opinion to preserve the rights of future generations.
2. Surplus funds of current payments: Many countries, especially in South America, have achieved non-oil financial surpluses as a result of export competitiveness at the level of international markets, which exceeds the need for domestic investment, which drives these countries to turn this surplus into a sovereign fund.
3. Special funds for the proceeds of privatization: Many countries privatized the government sector and received large financial returns. These countries differed in the use of these revenues. Some direct them to finance the general budget, while others financed programs to restructure the economy and repay debts. But the high returns from privatization have scared these countries to expand government spending and the economy is out of absorptive capacity and eventually inflation out of control, and as the institutions allocated to the public domain for all generations will turn the proceeds allocated to sovereign wealth funds.
4. Funds from the surplus budget: Some countries go to a surplus in the state budget to convert excess investment in financial assets to achieve positive returns and to guide economic data for the long run, which these surpluses and high level will lead to the establishment of a sovereign fund.
• Types of sovereign wealth funds on the basis of the work of the Fund:
1. Local sovereign funds: Funds whose investment and savings activities are concentrated in the country.
2. International sovereign funds: Funds whose investment and savings activities are concentrated outside the country.
3. Mutual sovereign funds: Funds whose investment and savings activities are concentrated both outside the country and within the country.
• Types of sovereign wealth funds based on the degree of independence:
1. Non-independent sovereign funds: These funds are directly managed by the government and do not enjoy the independence of decision. Most of these funds are not subject to independent monitoring, accountability and disclosure.
2. Sovereign sovereign funds: They are directly managed by government. Others, like central banks and independent bodies, are involved in their management. What distinguishes them is that they have a relatively independent decision-making and are subject to independent oversight, accountability and disclosure.
• The difference between the sovereign fund and the central bank reserve:
The picture is clear in this comparison between the sovereign fund and the reserves of the central bank when considering how to finance and build each.
1. Reserves of the Central Bank (SAMA), these reserves accumulate and fall from one year to another through the differences between oil income and government spending.
2. The funds or reserves directed to the sovereign fund come from a government decision to save for the future and to find another source of income. A national savings program for the future that is parallel and complementary to oil income.
3. It is applicable in this area when establishing sovereign funds in the world to issue a government decision:
Firstly. To transfer part of the reserves available to the Central Bank for the establishment and financing of the sovereign fund.
Second. A savings mechanism that includes the transfer of a portion of the state's income to the sovereign fund. For example, the sovereign fund in Kuwait is financed by transferring 25% of the oil income directly to the sovereign fund.
Third. It is also necessary to establish a mechanism to control government spending, so that the state budget (government spending annually) is consistent with the long-term potential of the state.
• Santiago Principles
Following the annual meeting of the World Bank and the World Bank in Washington in 2008 and at the Santiago meeting in Chile, a group of countries reached an agreement on customary practices and principles called GAPP (Generally Accepted Principles and Practices)
• Details of the principles of Santiago: It is divided into three axes:
First: It includes the objectives, the legal framework and the quantitative economic policies. This pillar is the cornerstone of a strong institutional framework and a stable governance structure. The process of formulating appropriate investment strategies is coordinated with declared political objectives.
Second: It includes the structure of governance and the institutional framework that separates the functions of the owner, the governing body and the management team, leading to autonomy in managing the sovereign wealth fund to ensure investment decisions are taken without political interference. The investment policy shows the commitment of the Fund to a disciplined investment plan and investment practices.
Third: It includes risk management and the investment framework, which is a core of principles aimed at promoting the integrity of the investment process of sovereign wealth funds.
• The negative effects of sovereign wealth funds on the sovereign countries:
1. Lost employment opportunities: which can be created for young citizens of the countries that own these funds instead of investing them abroad, providing job opportunities for foreigners (the host countries of those investments).
2. Lost Domestic Product: Any lost opportunities in the form of lost GDP, especially the petroleum product, which could be generated if these funds were invested locally in real productive assets.
3. Risks of the opportunity to invest real assets in favor of financial assets: any risk of low returns achieved by these investments, which are limited to a fixed rate of interest, there is a difference between the investment of funds in financial assets in real assets.
• Some facts about global sovereign funds:
1. The largest sovereign fund in the world is the State Pension Fund in Norway, with assets of up to $ 825 billion. It was established in 1990 to support the Norwegian economy after the oil period. The Fund's investments (50%) in the United States, In Europe, the assets in which the Fund invests are distributed as follows: 60% in shares, 35% on fixed debt, 5% on real estate. The Norwegian government pension fund has shares in Apple, Microsoft and Google.
2. The world's second-largest sovereign fund is the Abu Dhabi Investment Authority (ADIA) with assets of US $ 773 billion, the fund's investments (35% -50%) in the US and the rest in Europe and emerging markets.
3. The third largest sovereign fund is China Investment Corporation with assets of US $ 747 billion, 5% of which are in the United States and the rest in developed markets.
4. The fourth largest sovereign fund is the Kuwait Investment Authority (KIA) with assets of $ 592 billion, which includes two funds, the General Reserve Fund and the Future Generations Fund.
5. According to Vision 2030, Saudi Arabia intends to establish a sovereign fund with assets of $ 2 trillion, half of which is for domestic investments and half for foreign investments.
• The reasons for establishing an Iraqi sovereign fund:
The Iraqi economy today desperately need a sovereign fund for development to encourage the financing of economic and social projects and strengthen industrial policies to increase real production within the Iraqi economy.
This type of funds will bring a number of positive effects of the Iraqi economy, the most important of which are the reduction of unemployment rates and the development of productive sectors, Industrial and agricultural, and improving services.
1. Internal causes:
A) Oil is a depleted and unreliable resource, whether it is long-term or near-term in terms of depletion.
B - Oil is a financial asset after it is converted from in-kind assets.
Reducing reliance on oil makes Iraq prepare for the post-oil period, as Saudi Arabia does in its Strategic Plan 2030, which is to rely on 30% of fund revenues for the budget without oil.
2. External causes:
A - Unstable oil prices globally: the instability of oil prices globally and fluctuating randomly and as a result of a range of political and economic factors and it is natural for Iraq to rely on a fund coming from oil surpluses if they exist.
B - Withdrawal of surpluses: This fund withdraws surplus funds derived from the export of oil to overcome the volatile world oil prices and can take advantage of the negative oil shocks and the process of any collapse may occur at world oil prices.
• Foundations for establishing an Iraqi sovereign fund:
A - The legislative and legal system: This element is the basis for the establishment of a sovereign wealth fund for Iraq through the legislation of the Iraqi parliament and is the element is the first element in terms of importance and without this legislation no project already proposed.
B- Fund financing: The Iraqi Ministry of Finance initially finances this fund and is responsible for this fund for a few years.
C - Management of the Fund: The Central Bank of Iraq direct management of the Fund and provide cadre of experienced management and specialized in the field of investment (direct and portfolio) in particular can benefit from the experiences in foreign financial institutions and therefore the lack of experts in this area as the Iraqi stock market narrow market and lack Private financial institution as insurance funds and investment funds.
We believe that creating such a fund reflects the current generation's recognition and recognition of the right of future generations to the equal distribution of wealth from the oil resource that belongs to all Iraqis, To achieve justice in its distribution between the present generation and future generations. LINK
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