Managing Commodity Risk : Can Sovereign Funds Help ?

A number of countries have recently responded to high and volatile commodity prices by setting up commodity funds. In several cases, these funds have proved effective in stabilising government spending and boosting savings, but on the whole they have unfortunately not achieved the hoped-for results. In many cases, resources initially allocated to sovereign funds were later commandeered by the government and ultimately squandered. In this paper we review past experiences with commodity funds and discuss incentives that can be used to ensure that commodity risk is managed with greater efficiency and that funds are more autonomous, a vital prerequisite to meeting their original aims.