With Papua New Guinea’s Sovereign Wealth Fund (SWF) due to receive its first revenues next year, the Governor of the country’s central bank has given his approval. Meanwhile, the International Monetary Fund has sounded a note of caution.

Bank of PNG Governor, Loi M Bakani

Loi Bakani, Governor of the Bank of Papua New Guinea, says he is happy with laws setting up PNG’s proposed Sovereign Wealth Fund, which will receive the state’s expected income from resources ventures, most notable the ExxonMobil-led PNG LNG project.

Legislation to establish the fund was passed in February 2012, while the precise administration of the fund, which will be managed in PNG but invested offshore, is still being finalised. A revised version of the Organic Law is due to be tabled in Parliament soon.

Preventing ‘Dutch Disease’

‘I am very comfortable with the new Organic Law because it meets the internationally recommended Santiago Principles of governance and maintenance’, Governor Bakani told the 2013 Papua New Guinea Advantage investment summit earlier this month.

‘My assessment is that, after several iterations, we have reached a state in which it will be of great value in stabilising the economy and preventing the “Dutch Disease” phenomena from occurring and, if it does, to counteract it.’

Previous government estimates expect the fund to receive be about US$30 billion (K75 billion) over the life of the PNG LNG project. These funds would make PNG’s SWF the 26th largest such fund in the world, based on today’s values.

IMF concerns

While the International Monetary Fund shares Bakani’s view of the SWF legislation and approves of its integration with the national budget (all withdrawals from the fund must flow into the budget), it is more concerned about the details of the fund’s administration. In a statement issued earlier this month, the IMF’s Yongzheng Yang noted that the fund ‘now needs to be adequately resourced and operated.’

The conclusions of the IMF’s recent mission to PNG go into more detail. They argue that the integrity of the fund needs to be ‘safeguarded’, noting that some revenues could potentially bypass the fund:

‘Any significant diversion of mineral resources from the SWF and hence potential bypass from the budget process could lead to spending that may not be consistent with the government’s development priorities, countercyclical fiscal policy, or Parliamentary scrutiny associated with the budget process.

‘Moreover, the mission encourages the government to revisit the withdrawal rules early on to ensure that sufficient resources are accumulated in the SWF for stabilization and development purposes.’

Sub-funds

The fund will contain four ‘sub-funds’, according to Loi Bakani. They are the Sovereign Wealth Futures Fund; the Sovereign Wealth Development Fund; the Sovereign Wealth Stablisation Fund and the Sovereign Wealth Management Fund. While most income will be invested offshore for the longer term, some will be made available for national development projects.

According to the Government’s recently-released 2014 Budget Strategy Paper, the Organic Law on the SWF will be ‘re-introduced in the Parliament as soon as possible during the remaining 2013 Parliament sessions to meet some constitutional requirements.’

Assuming constitutional requirements surrounding organic laws are met and PNG’s parliament approves the revised law, it should be become operational in 2014—in a nick of time.