more normal long term equilibrium level. given our economy ’ s heavy dependence on oil and gas, a sharp fall in prices will affect government revenue and could require a drastic cutback in government spending. by putting aside some resources for stabilization, the government would have the ability to cushion the impact on its spending and consequently on the level of economic activity. the rationale for setting up a savings fund is a bit more complex and incorporates both economic and ethical considerations. it says that natural resources are an exhaustible sovereign asset, the benefits of which should be spread over generations. and therefore what a savings fund does is to transform the assets under the ground ( in our case oil and gas ) into a diversified portfolio of financial assets, which are managed so as to yield a high rate of return, which will flow back into the budget as revenue – not now — but when the oil resources have dwindled or have run out. thus, future generations will be benefiting from the oil resources ( not in cash transfers ), but by not having to face expenditure cutbacks because the oil and gas resources would have been depleted. future generations will thus be enjoying the benefits of oil and gas resources even when the oil and gas resources are gone. the flow of investment income from a commodity fund can go on for a very long time after the oil resources are gone, if you have built up sufficient assets and if the country ’ s fiscal position is sustainable over the long term. a recent study done by the imf suggests that, given the expected trend in oil prices over the next two decades, the hsf could possibly build up assets of up to us $ 40 billion by 2020, if we could move to a non - energy fiscal deficit of 10 per cent of gdp ( we are currently at 15 per cent of gdp ). and this is a fairly conservative scenario since it assumes a rate of return on investment of 4 percent in real terms – which is considered average for sovereign funds. the hsf act approved by parliament in march of this year, is very much consistent with best practice legislation for sovereign wealth funds. the legislation provides for clear deposit and withdrawal rules ; a governance structure that incorporates checks and balances and a number of provisions to ensure adequate transparency and accountability. in terms of the basic deposit and withdrawal rules, the act provides : • that on the deposit side, a minimum of 60 per cent of the excess between actual and budgeted revenues must be credited to the fund ( where actual revenues are based on

. real rates decreased from 3. 0 to 1. 7 in the same period. this in turn helped to accelerate credit growth and fuelled asset bubbles. the amount of loans granted to households increased 3. 5 times since 2004 and almost 10 times since 2000. low deposit rates and economic upturn in cee after eu accession encouraged both financial institutions and individuals to move toward more risky forms of investment. as a result, real estate prices soared after 2004 and equities listed on stock exchanges reached historical highs. since 2003 major stock exchange indexes in cee increased on average by almost 300 percent. while part of this asset price and credit growth may be explained by structural factors often referred to as “ convergence ”, the observed rates of growth are clearly unsustainable and they contribute to economic imbalances. with the benefit of the hindsight one could argue that monetary policy in the last few years did not properly take into account the possibility that prolonged period of historically low interest rates may contribute to asset bubbles and hence contribute to greater inflation see imf czech republic, estonia, latvia, lithuania, hungary, poland, slovenia, slovakia. volatility in the future. as argued by rogoff ( 2006 ) when faced with a tail wind monetary authorities in both developed and developing world should have temporarily lowered the inflation target rather that reduce interest rates too much for too long. but there is another issue. it seems that globalisation tail wind is reversing these days and that in the coming few years central banks can face “ globalisation headwind ” amid rising food and energy prices. 1. agflation is the rise of inflation due to increase of food prices. in recent months we have witnessed a significant increase of food prices, grain and oilseeds being the leaders. prices of food products on international markets has risen by almost 40 per cent within last two years and prices of grain and oil seeds has almost doubled within this period. many forecasters suggest that this trend will not end in the nearest future. there are several explanations of such situation. firstly, rising oil prices increase demand for alternative sources of energy, biofuels being high on the agenda in many regions. in effect industrial demand for food commodities will further rise. by the way, it is worth to mention what may be the ecological consequences of growing biofuels production. spiegel online on 26th september 2007 described a research led by the nobel - price winning chemist paul crutzen which had found that biofu