Countries rich in oil and minerals commonly use sovereign wealth funds (SWFs) to store a share of their natural resource wealth. Governments in Chile, Kuwait, Norway, Texas (U.S.), Timor-Leste and more than 50 other countries have chosen to set aside a portion of resource revenues to decrease budget volatility, save for future generations or earmark financial earnings for education or infrastructure spending. But over the last decade we have seen a new trend: governments creating funds when resource revenues are small, distant or uncertain. This is just another manifestation of the “presource curse,” where the discovery of oil, gas or minerals leads to rosy expectations by politicians and citizens, and over-optimism from governments and international institutions.
International advisors—especially some economists at international institutions, investment bankers and lawyers—have promoted the creation of what we call “premature funds.” Yet there are considerable costs and risks associated with their establishment. This briefing explores those risks.