Is Zim ready for Sovereign Wealth Fund?

OVER the past week, President Emmerson Mnangagwa renamed the Sovereign Wealth Fund (Chapter 22:20) Mutapa Investment Fund through SI 156 of 2023.

Sovereign Wealth Fund (SWF) in its most basic sense is a state-owned investment fund that invests in real and financial assets, such as stocks, bonds, real estate, precious metals, or in alternative investments, such as private equity fund or hedge funds.

Sovereign wealth funds invest globally to benefit their home economy and government. They are commonly used by nations with large reserves of foreign currency or commodity export revenues to strengthen the domestic economy and avoid depletion of commodity wealth. 

Whilst an investment fund is a pool of capital that a number of individual investors pay into, which is used to collectively invest in different securities:

There are some differences between a sovereign wealth fund and an investment fund;

Ownership - A sovereign wealth fund is fully owned and controlled by a nation's central government. An investment fund can be owned by public or private entities, corporations, or individuals.

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Objectives - A SWF's primary aim is to invest funds for the benefit of the economy and future generations. Investment funds focus mainly on generating returns for their owners/shareholders.

Scale - SWFs manage huge assets since they pool a nation's surpluses. Regular funds generally have smaller pools of capital from many investors.

Strategy - SWFs take a long-term, generally more conservative approach. Investment funds may pursue faster returns through higher-risk strategies.

Oversight - SWFs have geopolitical implications so they face more public and governmental scrutiny. Funds are overseen mainly by regulators and their investors.

Accountability - SWFs must balance economic/political priorities set by governments. Funds are accountable mostly to their legal structure and investors financially.

In the Zimbabwean context, the Mutapa Investment Fund is an SWF, according to SI 156 of 2023. At a family level, this is when after paying expenses the family is left with a saving that is not just put in a piggy bank, but in a long-term investment for future use, such as 30 years from now.

The most interesting thing is that, ordinarily, SWF are built out of budget surpluses or sale of natural resources. Zimbabwe has ailing infrastructure and poor service delivery. Is Zimbabwe ready for this kind of a fund? This article will unpack the pros and cons of the SWF and what needs to be in place for a successful SWF.

Why develop SWFs?

SWFs usually come into existence in order to tackle macroeconomic or fiscal concerns associated with resource abundance, such as commodity price volatility and Dutch disease (i.e., an increase in the economic development of one sector of the economy while diminishing in others) (Dixon 2020).

For example, Zimbabwe currently has large deposits of lithium, which is high demand because of energy transition. It is only wise that, before the mine is depleted or its price drops, Zimbabwe has a stabilisation buffer.

In order to reduce the negative impacts of Dutch disease, cash-rich economies, such as Singapore and Norway invest excess financial capital, resulting from current account or fiscal surpluses abroad for the benefit of future generations (Balding 2012).

Determinants of a successful SWF

Investment strategy and goals – It is important for the fund to have a clear strategy and objectives that are aligned with the country's overall economic priorities. Are they aiming for growth, capital preservation, supporting specific industries, etc.

Management and oversight - The fund needs to be well-run by experienced investment professionals, but also have proper governance and oversight so the investments stay on track. Strong leadership and accountability are important.

Risk management - Sovereign wealth funds must balance risk and returns. Success means achieving their goals while avoiding big losses that could set back the country. Managing risk is a big part of long-term success.

Economic environment - External market and economic conditions play a role in any investment fund's performance. Successful funds can navigate different environments and seize opportunities when they arise.

Transparency - Some level of transparency, while protecting sensitive info, helps maintain credibility and support for the fund domestically and internationally. Successful funds operate with integrity.

Resources - Larger funds with more assets to invest generally have more options and stay power, but success depends more on the above factors than sheer amount of money.

Cost-benefit analysis of an SWF

Pros:

It could help Zimbabwe diversify its financial assets beyond just foreign currency reserves. The fund could invest globally to generate stronger long-term returns.

Careful investment of the funds could support important development priorities in Zimbabwe like infrastructure, healthcare, education, etc. This could boost the economy over time.

It might give Zimbabwe more leverage in negotiating with international partners and organisations by demonstrating commitment to strong fiscal management through the sovereign fund.

Successful funds in other countries show how sovereign wealth can stabilise an economy and provide a savings vehicle to support future generations.

Cons:

Zimbabwe faces economic and political instability currently. This could undermine the proper management and oversight needed for a sovereign wealth fund to succeed.

There is a risk that lack of transparency or accountability in the investments could undermine confidence both domestically and abroad.

Establishing and growing the fund would require financial resources that may be better spent addressing immediate needs in the country right now.

Past experiences managing state funds have not always been positive in Zimbabwe, so trust would need to be rebuilt.

It is a complex decision. Building wealth for the future could help, but stability would be paramount to realise the pros and avoid potential cons.

Why Zimbabwe cannot be ready

Economic challenges: Zimbabwe still faces major economic headwinds like high inflation of 106,3% according to Zimstats and unemployment rate of establishing a SWF requires strong economic fundamentals first.

Institutional maturity: For a SWF to succeed, Zimbabwe needs highly capable institutions with proven integrity overseeing finance and investment. Those foundations may not be fully in place.

Budget priorities: The country has pressing needs that current tax revenues must address - healthcare, education, infrastructure. An SWF may divert funds from immediate development goals.

Political stability: Frequent changes in leadership and policy have made the business environment volatile. Stability is important for the patient, long-term outlook a SWF requires.

Track record of management: Past experiences managing significant state assets, while the economy struggles, have not always led to the best outcomes unfortunately.

Citizen trust: Rebuilding confidence in government stewardship of finances after challenges may take time. A SWF risks losing public support if not handled well.

While sovereign wealth funds have benefited many nations by supporting long-term growth and stability, it seems Zimbabwe still has progress to make before fully embracing this model.

The country faces ongoing economic and institutional challenges that an SWF could exacerbate if not carefully implemented. That said, with continued reform and capacity building, an SWF may serve Zimbabwe well down the road.

Prioritising basic fiscal responsibility, transparent governance of state assets, and economic development focused on citizens appear to be prerequisites.

Only with strengthened foundations of stability, accountability and public trust will a large investment fund avoid potential pitfalls seen elsewhere

• Mutowekuziva is a registered legal practitioner. She has a keen interest in human rights, development and governance. These weekly New Horizon articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.