2.4 Santiago Principles and macroeconomic implications of SWFs

BOX 2.4

Santiago Principles and macroeconomic implications of SWFs

The Santiago Principles include the following generally accepted principles and practices (GAPPs) related to sovereign wealth funds (SWFs):a

GAPP 3. Principle

Where the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies.

GAPP 4. Principle

There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal, and spending operations.

GAPP 4.1. Subprinciple. The source of SWF funding should be publicly disclosed.

GAPP 4.2. Subprinciple. The general approach to withdrawals from the SWF and spending on behalf of the government should be publicly disclosed.

Source: IWG 2008. a. These principles apply also to public capital strategic investment funds.

representatives from domestic fiscal and monetary authorities, who can ensure alignment with nigeria’s macroeconomic policies. If the SIF is part of an economic union and the sovereign does not set monetary policy, the coherence of SIF activities focuses on the fiscal. For instance, Senegal’s FOnSIS is part of the West African Economic and monetary union and does not set monetary policies.33

Fiscal integration of the public capital SIF is important because of the link between contributions into and withdrawals from the SIF and the government’s overall budget surplus and deficit. Public capital SIFs, like SWFs, are part of the overall balance sheet of the government, so their activities must maintain coherence with the overall fiscal policy of the government (Al-Hassan et al. 2018). The fiscal interdependence between a sovereign’s balance sheet and a proposed SIF is the reason why sovereigns with high levels of debt and costly debt repayment must consider the opportunity cost of setting up a SIF versus paying down debt. For instance, under Article 40.2(b) of the nTmA Act 2014, ISIF must “ensure that investments do not have a negative impact on the net borrowing of the general government of the State for any year.” The conditions under which funds can be transferred to the SIF must be made clear ex ante so that all potential co-investors have a clear picture of what funds will be used to capitalize the SIF and under what conditions they can be withdrawn. For instance, the government of Ireland cannot make withdrawals from ISIF until 2025.34 clear-cut and publicly disclosed fiscal rules must ideally allow for contribution into the fund during times of surplus and withdrawal from the fund during times of deficit. The nigeria Sovereign Investment Authority (Establishment, etc.) Act, 2011, or nSIA Act 2011, for instance, clearly specifies that nSIA can be funded only with hydrocarbon revenues that are in excess of nigeria’s budgetary requirements, and that the only form of payout from nSIA is through dividends to stakeholders after five years of consistent profitability in all three nSIA funds (see the nSIAnIF case study in appendix A). Sovereigns also sometimes provide tax exemption to SIFs established by ad hoc law and must carefully consider whether such tax exemption is justified.35