Dr. Abbas Kadhim Jassim Al-Da’ami, University of Karbala
Alia Thaer Mardan, University of Karbala
Iraq, a country endowed with abundant natural resources, particularly oil, faces significant challenges in managing its wealth effectively to benefit both current and future generations. Establishing a sovereign wealth fund (SWF) presents an opportunity to harness Iraq’s resource wealth while safeguarding the rights of future generations and promoting sustainable development. Although sovereign wealth funds have gained prominence as a financial strategy in the 21st century, the concept has historical roots. The first modern SWF, in line with the definition provided by the International Monetary Fund (IMF), was established in 1953 by Kuwait, which set up the Public Investment Authority to invest its surplus oil revenues and preserve the rights of future generations to this finite resource.
Since then, the establishment of sovereign wealth funds has proliferated globally across countries with various resources and assets. These funds have become significant sources of foreign investment across economic sectors, acquiring substantial stakes in international and multinational companies. The term “sovereign wealth fund” was first coined in 2005 by Andrew Rozanov, an employee at State Street Bank of America. Rozanov emphasized that, through macroeconomic improvements, favorable trade conditions, financial stability, and policies aimed at reducing government spending, budget surpluses, and trade surpluses tend to accumulate. Consequently, institutions were established to manage these surpluses, which are now known as sovereign wealth funds.
Sovereign wealth funds are characterized by three key features :
- They are subject to state control.
- Their primary investments are made abroad.
- They are established with long-term objectives and aim primarily at achieving macroeconomic goals.
This makes SWFs fundamentally different from central banks, which are responsible for formulating and managing a country’s monetary policy. Central banks focus on preserving national currency stability, encouraging economic growth, and improving macroeconomic indicators. In contrast, SWFs aim to maximize profits and achieve high returns from their investments, positioning them as part of the microeconomy. However, sovereign wealth funds may engage in macroeconomic activities under specific exceptional circumstances :
- In emergencies where the state needs financial transfers from the SWF to the general budget.
- Providing financial support to the central bank to address exceptional cases, such as balance of payments crises.
- Ensuring the survival and rescue of local institutions or companies that play a vital and strategic role in the national economy.
