Macrofiscal implications of a SIF

MACROFISCAL IMPLICATIONS OF A SIF

This book does not delve deeply into the macroeconomic and fiscal implications of a SIF. Those issues are amply discussed in publicly available literature by both academic scholars and practitioners.28 note, however, that consistency of the SIF’s investment activities with the sovereign’s macroeconomic policies is particularly relevant for public capital SIFs, or mixed capital SIFs anchored by one government. Links between SIFs and the macroeconomy are a two-way street; that is, causality can potentially run from the macroeconomy to the SIF and vice versa. On the one hand, the SIF’s rate of return on investments is likely to be strongly procyclical, rising when the domestic economy’s business cycle is in a boom phase and falling when there is a contraction. On the other hand, SIFs can also create macroeconomic balance issues, particularly if the fund is large compared to the size of the economy in which it operates.29 Because SIF investment activities inject funds into the domestic economy and risk fragmenting government spending and budget procedures, the government must ensure overall macroeconomic consistency between the SIF and the sovereign’s budgetary process. Such macroeconomic management seeks to mitigate the risk that the economy lacks absorptive capacity to accommodate SIF investments and seeks to counteract inflationary pressure caused by SIF investments (see box 2.4 on the Santiago Principles’ guidance relating to the macroeconomic implications of SWFs). coordination with macroeconomic policy is particularly relevant for SIFs capitalized with natural resource exports in hard currency (Halland 2019). unlike public capital SIFs, mixed capital SIFs are typically insulated from macrofiscal interdependence, especially when their anchor is a quasi-sovereign entity, because they are not considered part of the sovereign balance sheet and are usually not directly responsible for economic policy.

Governments considering SIFs employ multiple mechanisms to maintain overall macroeconomic coherence. By crafting the SIF mandate to ensure that these funds undertake only commercial investments and that spending with only a policy purpose is kept on budget, governments can ensure from the outset that SIFs do not fragment the government’s budgetary process or operate outside of budget scrutiny. From a macroeconomic perspective, governments considering setting up SIFs should base allocations to the SIF on a macroeconomic modeling exercise that helps determine the optimal size and relative allocations by sector (for example, Halland, Awiti, and Lim, forthcoming). Governments of resource-rich countries may also seek to insulate the domestic economy from commodity price fluctuations and ensuing fiscal volatility by setting up stabilization funds that complement SIF activities and moderate budget volatility. For instance, nSIA-nIF is a subfund under the larger umbrella nigerian SWF, which also includes a stabilization subfund focused on macroeconomic stability during economic distress.30 coherence with macroeconomic policies can also be maintained through governance arrangements and representation on oversight bodies. For instance, Ireland’s respective secretary generals for the departments of Finance and Public Expenditure & reform serve as ex officio members on the national Treasury management Agency Board, which sets ISIF strategy.31 Likewise, Khazanah’s board of directors includes a representative from malaysia’s ministry of Economic Affairs to ensure that the fund’s investment activities are consistent with national economic policies.32 Similarly, nSIA’s governing council includes