Thursday, March 31, 2011

Sovereign wealth fund to offset ‘Dutch Disease’


The creation of a sovereign wealth fund (SWF) can offset the negative impacts of ‘Dutch Disease’, according to deputy treasury secretary Anthony Yauieb.
He said this today at a workshop focusing on the impact of LNG on the PNG economy, with particular reference to agriculture.
“Can ‘Dutch Disease’ be avoided?” Yauieb said in his presentation.
“Cause of ‘Dutch Disease’ is an inflow of foreign currency into PNG
“It can be reduced by not bringing all of the foreign currency into PNG
“Policy option to minimise the effects of ‘Dutch’ Disease is through creation of an offshore SWF.”
Yauieb said the size of LNG revenues have substantial macroeconomic implications that need to be carefully managed, including:

• Exchange rate appreciation / Dutch Disease;

• Cost and operation of monetary policy;

• Risk of overheating the domestic economy; and

• Adverse effects in non-mineral sectors of the economy.

He said offshore arrangements for the SWF included: state retaining full ownership and control; promoting macroeconomic stability; underpinning long- term development and socio-economic objectives; helping protect non-mineral sector industries; and were robust, transparent and effective.
Yauieb said the plan was to establish a consolidated pool of offshore funds with three coordinated and integrated funds for infrastructure; stabilisation; and future (savings) fund
He said other plans for the PNG SWF were:

• Fully integrating SWF with the budget and fiscal framework;

• Governance, transparency, disclosure, accountability and asset management rules would be based on international best practice;

• Drawdown rules would be developed to ensure prudent macroeconomic management while supporting development objectives;

• SWF would be overseen by an independent board; and

• Investment would be undertaken by offshore investment manager.

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