JUST as individuals must invest and save for the future, so must countries. A Sovereign Wealth Fund (SWF) is basically a country’s endowment to future generations. It is not a fund to be plundered and used to meet current needs, but a savings account that must accumulate over time and be used to meet future developmental needs.
It is a fact that mining and other resources of any country cannot be replenished and it is, therefore, important to save the income generated from those depleting resources for the future. A SWF can also be used to replenish the resource industry in the future and replace industries. Huge income earned from resources can easily be abused and the SWF can be a mechanism to ring fence or protect that income from immediate abuse, and cushion the country from the risk of sudden large inflows of excess income. This, of course, requires discipline, patience and foresight.
An SWF can only be viable where there is disciplined fiscal management and there is no temptation to use that money for recurrent expenditure. This implies that we must seek to maximise the returns on the savings and invest them prudently so that the investment value of the SWF increases with time before we can start spending. We must also ensure that where we invest SWF income, we achieve real returns. The fund must be managed like a stand-alone investment portfolio that is well diversified and at least, beats inflation.
Critical of course, is that the management of this fund is shielded from unnecessary political interference. Establishing a viable SWF takes time and discipline. Critical are the institutional arrangements around the collection of income, investment strategy, fund management, risk monitoring and evaluation and the investment processes adopted.
What must happen first is the efficient management and maximisation of resource revenues including transparency and accountability within the resources sector. The developmental integrity of any government plays a significant role for a country to have a viable SWF. This means that, the institutional political economy, structure and culture of the government is very important and will determine the success of a SWF. Transparency and accountability in government to ensure that government never acts as a reckless owner of the country’s resources but rather as a responsible custodian of national assets is a critical success factor.
There is no doubt that a the fund can make significant positive impact on the wealth of the country in the future and can also improve the quality of life of all citizens.
High corporate governance standards, especially in government institutions which have the responsibility to manage and allocate investment resources require a professional approach to funds management. Any cadre deployment not based on merit, political favours and lack of accountability in any government compromises the developmental agenda and costs future generations.
Norway has the largest ($1,3 trillion) and most successful SWF in the world and the reasons for its success include;
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Comprehensive forward planning where technocrats, academics and politicians collaborate in the national interest.
Developing a coherent investment strategy which has a long term view and invests in diversified assets.
Robust governance structure with an operational structure that includes checks and balances to ensure that no single body or person can abuse the fund.
Transparency and accountability.
Flexibility in adapting to changes in the marketplace.
Strong political will and consistent policies.
Resource endowed countries such as Zimbabwe can certainly learn from this.
- Vince Musewe is an independent economist. He writes here in his personal capacity. You can contact him directly on [email protected]
