On the 16th of August, various international media generously reported on the lucrative profits that were earned by Norway, through their Sovereign Wealth Fund (SWF). Known as the Government Pension Fund Global (or the Oil Fund), the country’s SWF earned $143 billion profit, in only the first half of 2023. As it stands, its total assets under management, are currently over $1.4 trillion dollars, making it the largest SWF, worldwide. Under the management of the Norwegian central bank, the main activities of the fund are focused on, investing part of the nation’s oil revenues and budget surplus balances. The fund’s earnings are then used to balance budget deficits, in times of economic crisis, stimulate economic growth, whilst having the ultimate objective of safeguarding the country’s wealth for future generations, so that they will have access to it, long after the oil resources are depleted. The fund owns about 1.5% of all listed stocks, worldwide and also invests in bonds, unlisted real estate, renewable energy projects, etc. The success of the Norwegian Oil Fund, and other SWFs around the world, has led a number of governments, to emulate and establish their own funds. The Sovereign Wealth Fund Institute states that, there are currently about 30 SWFs on the African continent, with Zimbabwe’s own- Sovereign Wealth Fund of Zimbabwe, included. Although it is a great initiative to establish a SWF, not all have been successful or make good economic sense. Thus, it is vital to dissect the major considerations to evaluate when establishing a Sovereign Wealth Fund, in order to increase the chances of success.
Definition
A Sovereign Wealth Fund, is an investment vehicle which collects surplus revenue sourced by the government, with the purpose of investing the gathered wealth, on behalf of current and future citizens. Sources of the funds may be; revenues from government commodity sales, budget surpluses, privatisation of states assets, reinvested SWF earnings, etc. The SWF may be used to invest in various industries and financial products, domestically or internationally. Earnings from the fund are used to address budget deficits, stimulate economic growth, support government development plans through investing in priority areas, transfer wealth to the country’s future generations, respond to global economic shocks, etc. Revenue earned by the fund, therefore, accrues to the state. To put it another way, a SWF is the equivalent of a country saving up for the future and increasing preparedness for unfortunate and unpredictable economic circumstances. Zimbabwe’s, Sovereign Wealth Fund of Zimbabwe (SWFZ), was created in 2014, through the Sovereign Wealth Fund of Zimbabwe Act, and subsequently set up in 2015. Since it was under-resourced at its introduction, it had limited scope and capacity, although its influence has been growing, through the years. In November 2020, it was assigned a significant disbursement of, $100million, in the national budget. Since then, it is reported to have assets in local coal and lithium, plus a keen interest in oil and gold, among other ventures. The SWFZÂ is administered by a seven-member board, led by Dr. Andries Rukobo, with Dr. Kupukile Mlambo, serving as the chief executive officer.
Funding
When establishing a SWF, it is of paramount importance to determine where funds will be sourced. There are a number of options which have been used by different countries, most of which are available to Zimbabwe. For a country endowed with natural resources, the government can use proceeds from taxes on strategic commodities such as coal, gold, platinum and lithium. In this regard, Zimbabwe’s SWF was designed to be funded by, 25% of royalties on mineral exports, special dividends on sales of diamonds, granite, gas and other minerals. No update has been offered in the public domain, regarding the amounts that have been channelled through this avenue, so far, if any. Profits realized by government owned mining companies or public-private joint-ventures in mining, can also be added to the SWF purse, as this is a suitable destination for such. Additionally, partial privatisation of parastatals may provide significant funds which can be assigned to the fund. For instance, part of the 49% stake in the Post Office Savings Bank (POSB), which has been offered to the private sector, can be used to bolster the assets of the SWFZ. With more state-owned corporations set for privatisation ( Agribank, TelOne, NetOne, Air Zimbabwe), the SWFZ, may be useful destination for some of the proceeds from the sale of the companies. Sovereign Wealth Funds, therefore, assist in streamlining the assignment of government resources. Their existence provides a clear channel for directing surplus funds, instead of inefficient spending or assigning them to unprofitable endeavours.
Once Treasury begins to realize budget surpluses, funds can also be assigned to replenish the SWF. Last year, the country had a budget deficit of 0.9% of GDP. At the end of this year, Treasury aims to keep the deficit below 1.5%. With such momentum, budget surpluses seem within reach.
In China, the major SWF, Chinese Investment Corporation (CIC), was financed through the issuance of government bonds to the public, through the Ministry of Finance. The proceeds from the bonds were in-turn used to purchase U.S. dollar reserves from the Chinese central bank (People’s Bank of China). The forex was then used to establish the fund. Starting with a capital of $200 billion in 2007, the CIC has grown its assets under management to reach the current, $1.3 trillion. In 2009, China’s Ministry of Finance, converted the debt (bonds) to equity, thereby relieving itself of interest obligations, whilst offering debt holders greater value, in the form of a burgeoning investment corporation. In the same manner, the Zimbabwean Treasury may imitate the Chinese example, if need be. Since government bonds typically have low-yield, whilst SWF investments have greater returns, a spread (difference in interest rates or returns) can be easily identified and utilized.
Areas of investment
Each Sovereign Wealth Fund has to be clear on the preferred areas to direct funds, if it is to operate efficiently, productively and without public criticism of investment choices. A lack of clarity in that regard, gives way to a number of issues which will likely make the fund inefficient or wasteful. If a government prefers more activity in capital markets, then stocks, foreign bonds and treasury bills, or high yielding local and foreign private debt instruments, provide a viable alternative. For a government with less interest in financial products; infrastructure, agriculture, mining, or renewable energy, may provide suitable options.
In order to balance risks and insulate a country from global shocks, SWFs can be used to invest in both domestic and foreign assets and enterprises. In the case of Norway, The Global Pension Fund is invested entirely outside of the country, so as to offset challenges which may occur in the local economy. This means that, if the Norwegian economy gets in distress and government revenues uncharacteristically fall, foreign investments will ensure that the country has room to respond to local challenges. This may be the case when international oil prices are unsustainably low. In the case of Zimbabwe, investing in Western nations will not be a viable or possible option, as the country has had cases were government assets were confiscated by the latter, due to political and economic sanctions. Instead, investments may be directed in the SADC region and Eurasian states such as, China, India, Russia, Turkey, etc. Successful Zimbabwean businesses operating outside the country and exporting entities, may also be a good destination for deploying local SWF capital. This has the potential to ignite increased forex repatriation, whilst promoting the culture of entrepreneurship.
Withdrawal of returns
Before the fund yields positive returns, issues on, when and how much to withdraw, will require pre-set determination. Admittedly, learning from other funds will assist in making a suitable decision. In Norway, the Oil Fund did not have any withdrawals, for two decades. Since it’s first deposit in 1996, a withdrawal from the SWF was only made in 2016. This ensured that the SWFs growth was compounded, as earned profits were reinvested, together with the principal amounts. The country maintains, what it terms, the 3% rule. The regulation outlines that, a maximum of 3% of the funds value can be assigned to the government’s yearly budget resources. This is based on the determination that, the whole SWF, earns more than the 3% limit, annually. Additionally, injecting more than 3% of the SWF into the economy, is understood to bring the risk of overheating (inflation). During periods of crisis, the government is however permeated to exceed the withdrawal limit. The Norwegians have accepted that the fund is largely meant to serve the future generations, when the country’s oil resources are depleted. The organisational and strategic ability of Norway, provides a worthy plan for Zimbabwe’s SWFZ to emulate. Within a few decades, similarly, some of Zimbabwe’s mines will be mature or unproductive. Moreover, substitutes for locally produced, in-demand commodities, may be introduced. This includes lithium and coal, for instance, which are at risk of being substituted by sodium and renewable energy, respectively. Modalities on the procedure for withdrawal also need to be determined beforehand, in order to create a robust governance mechanism. For instance, funds may only be withdrawn with the consent of Parliament. This works to reduce corruption and improve the efficient use of profits earned.
Management
Administration of the fund can be assigned to Treasury or the central bank, depending on availability of resources and expertise, between the two. In Zimbabwe, the Minister of Finance is responsible for appointing a competent board of directors, in accordance with the Sovereign Wealth Fund of Zimbabwe, Act. An independent board of advisors may still be needed. Such non-executive members, serve to provide expert ideals which the SWF should maintain, for maximum returns. In the case that the current board fails to perform, external asset managers provide an alternative worth exploring.
The road to significance
Zimbabwe’s SWFZ, is agreeably a minnow at this stage. However, competent management and excellent governance, may launch it into a sizeable and successful investment vehicle. A thorough consideration on how best to apply the different SWF features outlined above, provides a template to establish the fund as an efficiently run organization. The onus is on the current SWFZ board and management, to ensure that the fund is not an addition to a growing number of “premature funds”, around the world. The tag “premature fund”, is assigned to Sovereign Wealth Funds which have failed to offer meaningful returns, have become liabilities to government and offer more of a symbolic, rather than effective role, in a country’s public finance system. Taking a leaf from Nigeria (Nigeria Sovereign Investment Authority) and Botswana (Pula Fund), on the continent, provides more valuable information on how best to manage Zimbabwe’s SWF. The success of the fund will provide an alternative development sponsor, apart from the traditional Bretton Woods Institutions (World Bank, IMF).
Kevin Tutani is a political economy analyst- tutanikevin@gmail.com
