There has been a significant increase in the number of sovereign wealth funds (SWFs), especially in Africa over the last decade.
The Ritesh Anand Column
An SWF is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.
There are currently 51 SWFs with combined assets in excess of US$4 trillion. The Abu Dhabi Investment Authority (Adia) is the largest SWF with assets in excess of US$620 billion. Adia was established in 1976 to manage excess earnings from the oil sector.
Africa accounts for 14 SWFs with a total amount of US$114 billion in 2009, representing 3% of global SWFs. The largest SWFs are the Libyan Investment Authority and Algeria’s Revenue Regulation Fund with US$65 billion and US$56,7 billion respectively of total assets.
In 2012, three SWFs have been launched in Angola, Ghana and Nigeria while the Tanzanian and the Zimbabwean government recently announced plans to create SWFs. The Nigerian SWF has already grown to US$1,4 billion (Table below shows the top 10 SWFs in the world).
While the IMF has advised Zimbabwe to delay the introduction of a SWF due to the fiscal stress, and the administrative and managerial burden associated with the establishment of such a fund,
I strongly disagree and believe that Zimbabwe has the capacity and management expertise to move forward with its plans to establish a SWF.
The SWF can be used to hold shares acquired as part of Zimbabwe’s structured and clear indigenisation policy. An SWF provides greater transparency, accountability and provides broad-based empowerment.
It can be established for a variety of reasons. The nature and purpose of each fund varies as do its objectives:
Protect and stabilise the budget and economy from excess volatility in revenues/exports;
Diversify from non-renewable commodity exports;
Earn greater returns than on foreign exchange reserves;
Assist monetary authorities dissipate unwanted liquidity;
Increase savings for future generations;
Fund social and economic development;
Sustainable long-term capital growth; and
It’s a political strategy
The SWF will be jointly established by the Ministry of Finance and the Reserve Bank of Zimbabwe.
It’s mission is to improve the lives of the general populace through social and economic development.
Its aim is to exist in perpetuity for the benefit of current and future generations.
Investment philosophy: Maximise long-term returns while mitigating risk.
Beneficiaries: Zimbabweans through community development and employment creation through business enterprise.
Possible SWF organogram
The fund can be established using presidential powers or through the constitution.
In fact, the government has already prepared a SWF Bill, which is currently going through parliament. The fund can be established as a company which will appoint an independent board of directors (as shown in the organogram below) who will delegate authority to an investment committee which will comprise of executive as well as non-executive directors.
The investment committee should include investment professionals with significant investment experience. The investment team, led by a chief investment officer, will undertake the day-to-day management of the fund.
Zimbabwe has the technical and managerial skills to establish an SWF without placing significant burden on the fiscus.
I agree that Zimbabwe does need to have some fiscal discipline especially around the huge wage bill. Given the sharp slowdown in economic activity, fiscal revenues are likely to decline placing further pressure on spending.
Some fiscal reform is required before Zimbabwe embarks in earnest on establishing an SWF. In the meantime, government should lay the foundation and establish a framework and timetable for the establishment of the fund.
The establishment of an SWF will go a long way in removing the stigma attached to the indigenisation policy and could provide the key to unlock much-needed foreign investment.
I believe that foreign investors would be more willing to transfer equity to an SWF than to individuals who quite often don’t have the finance available to purchase the shares.
An SWF will also provide greater transparency and accountability than the community share schemes, which have been subject to abuse and mismanagement.
Government should, therefore, seriously consider the establishment of an SWF as part of the indigenisation plan.'