IMF To Israel: Start Planning New SWF

Ashby Monk

Israel may soon be a rather significant purveyor of natural gas, as two gas fields recently discovered off the port of Haifa are thought to be capable (albeit not certain) of generating billions of dollars for the state in taxes and royalties. So — the question on everybody’s minds is — what will Israel do if the gas leads to a sudden influx of cash? And, since you’re reading about this here, you can probably guess what kind of advice they’re getting…

According to the IMF, Israel should, in the medium term, set up a new SWF. The advice appeared in the IMF’s 2010 Article IV Consultation, which was made public yesterday:

“In the medium-term, recent natural gas discoveries could have a positive impact on fiscal sustainability. While the likely impact of the natural gas is highly uncertain, reforms to adopt international best practice in taxation of natural resources, including appropriate pricing arrangements in the tax and in securing appropriate intergenerational distribution of the proceeds can help in ensuring a positive impact on fiscal sustainability. Accordingly, the first use of such tax receipts should be to reduce public debt, given that overall revenues will be modest on current estimates of the volume of gas. However, if the gas wealth proves to be much larger than anticipated, additional revenues could be placed in a sovereign wealth fund to ensure intergenerational equity and to safeguard against possible Dutch disease effects.”

Sensible! First, pay down external debt with the proceeds. Next, if the resource rents keep flowing, use a SWF to facilitate stabilization and inter-generational distributions. That’s the same advice I’d give to any lucky prospector!

As a side note, Lebanon, which has its eyes on the very same gas fields as Israel, is one a step ahead: The country set up a new SWF “just in case” back in August 2010.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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