Columnists Features

Zambia needs wealth fund

To help shield the country’s economy from the risks associated with unstable copper price
IN THE 2015 national budget Government, through the Ministry of Finance, has set aside K100 million towards the creation of a sovereign wealth fund.
Minister of Finance Alexander Chikwanda has proposed that the fund be housed by Zambia’s nascent investment vehicle, the Industrial Development Corporation (IDC).
The Bank of Zambia (BoZ) has, however, suggested that it houses the fund.
Deputy Governor for Administration Mabula Kankasa recently said the central bank has taken this position after studying a number of sovereign wealth funds around the world.
Dr Kankasa said the most successful fund in Norway is managed by the central bank of that country.
The issue of the sovereign wealth fund has been discussed at various fora since the budget presentation.
Experts, pseudo experts and outright charlatans of every hue have offered all manner of explanation for and against.
Questions that have kept coming up include the source of the money for the fund and how it will be sustained.
However, the focus of my article is just to shed some light on sovereign wealth funds and how they help stabilise financial markets and boost national economies.
What is a sovereign wealth fund (SWF)?
According to Investopedia, this is a pool of money sourced from a country’s reserves, which is set aside for investment purposes that are aimed at benefiting the country’s economy and improving the lives of citizens.
In short it is a strategy governments use to channel national reserves towards the funding of social and economic development.
“The funding for an SWF comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources,” Investopedia explains.
A country may have several sovereign wealth funds managed under different arrangements but with the same goal.
Usually, countries with liquidity concerns limit investments to only very liquid public debt instruments that can easily be recouped.
According to Investopedia, some countries have created SWFs to diversify their revenue streams as a safety measure.
“For example, the United Arab Emirates (UAE) relies on oil exports for its wealth.
Therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk,” it says.
Similarly, Zambia largely depends on copper exports to meet recurrent expenditure and finance development programmes.
The proposed SWF will therefore help shield the country’s economy from the risks associated with unstable copper prices on the international market.
Part of the reserves from copper exports and trade surpluses can be put in the SWF and then invested in convertible assets and liquid short-term public debt instruments.
The fund can be grown incrementally as the country builds up its reserves from increased copper exports and untraditional sources.
Monies from the fund can be used to finance economic growth and poverty reduction programmes – infrastructure development in social and economic sectors – while providing relief to the national budget.
With copper production anticipated to skyrocket to a million metric tonnes per year by the end of next year, there is no cause for doubt that the swf will have a steady source of money and be sustainable.
It is a bold measure that needs a lot of support because of its potential benefits to the national economy and citizens.
Examples of successful SWFs from which to draw inspiration abound.
Ng Kok Song, the managing director and group chief investment officer at Singapore’s Investment Corporation with 37 years of experience, explained to YaleInsight why even the best performing economies need SWFs as economic safety nets.
He said his government came up with the idea of creating a body to manage the country’s foreign reserves and prepare for a “rainy day” after a serious study of global and national economic dynamics.
“These are basically the reasons why we felt it was important for the stability and long-term growth of our economy to build up a store of national savings, and to manage these funds prudently,” Mr Ng Kok said.
As can be seen, Government has noble intentions by coming up with the idea of creating an SWF.
The benefits of the SWF far outweigh the negatives. Let us not disparage the baby before it is born.
The author is editorials and analyses editor at the Zambia Daily Mail.

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