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Looking beyond Sovereign Wealth Fund

A SOVEREIGN Wealth Fund (SWF) is a special purpose investment fund that is owned by the government. In general, these funds hold financial assets such as stocks, bonds, property or precious metals.

Jealous Chishamba

Around the globe, SWFs have been created to achieve savings, development, reserve investments and stabilisation roles at national level.

Savings and stabilisation funds have been more prevalent where the former is created to build up savings for future generations while the latter helps to reduce the volatility of government revenues.

The increasing relevance of SWFs has also been supported by the characteristics of mineral resources revenue such as volatility of resource prices, unpredictability of extraction and exhaustibility of resources.

In light of the foregoing, countries endowed with vast natural resources have created these SWFs to stabilise revenue flows.

Recently, Zimbabwe introduced a SWF and the Bill for its establishment has already been passed. The objective of Zimbabwe’s fund is to secure investments for future generation as well as to support the current fiscal and macroeconomic stabilisation programme.

The fund is expected to be driven by at most 25% of the royalties from mineral exports which include gold, platinum, diamonds, nickel, coal, bed methane gas and chrome. In addition, dividends from sales of diamonds, gas and granite will also form part of the revenue inflows for the fund.

The government has cited gold bullion, stock piles of precious metals and foreign assets as possible assets to be held by the investment fund. The Reserve Bank of Zimbabwe (RBZ) will be the custodian of the fund.

Generally, the benefits of a wealth fund become more visible in the long run. For example, the SWF can help to partly address the issue of intergenerational inequity which is currently evident in Zimbabwe.

In the context of investment, this involves fairness policies to ensure that investment gains from resources are spent fairly or equally on current and future generations. Intergenerational inequity happens when one generation may benefit more from government programme created by deficit spending and debt accumulation.

This may however come at an increased expense or cost to future generations in the form of either future higher taxes or perpetual debt bondage. Zimbabwe has a high external debt position of over US$8 billion.

Thus, for every dollar of debt held by the government, the SWF can be lightly viewed as a small step to partly ensure that an asset can be counted or passed on to benefit future generations.

In view of the above motive, Zimbabwe is endowed with abundant mineral resources which will become extinct at some time and the idea to set-up the sovereign wealth fund is credible. However, the current status quo in Zimbabwe gives rise to economic controversy by putting the SWF in a position of priority.

Historically, countries which run a budget surplus and have lower levels of external debt possess a convincing investment case for creating a sovereign wealth fund.

By contrast, Zimbabwe’s debt position is unsustainably high.

Treasury is making continuous efforts to engage multilateral financiers to come up with acceptable lenient terms to either clear debt arrears or provide a debt pardon. At the same time, the country is riding on a persistently high budget deficit and the Consolidated Revenue Fund which is expected to fund the SWF is also in deficit.

In addition, while the mining sector is expected to generate inflows into the fund, it is imperative to appreciate that the contribution of the sector goes beyond paying royalties and taxes.

Already, various major mining houses like Zimplats, Bindura, Implats, Unki and RioZim among others have retrenched employees in excess of 1 000 which signal different levels of dwindling capacity utilisation in the mining sector.

Additionally, precious metals like gold and platinum have been subjected to external price shocks in 2014 and which has heavily weighed down on the mining sector and export proceeds. Previously, growth was magnified more by higher prices than increased production.

The SWF has also come at a time when the mining sector faces liquidity challenges to finance production coupled with high royalty rates. For example, current royalties for gold and platinum are 5% and 10%, respectively.

Previously, upward revisions of royalty rates in Zimbabwe were attempts by the government to gain some share of the windfall gains from rising commodity prices. According to the Chamber of Mines, mining sector capacity utilisation is only 50%.

In the context of a “back-to-basics” approach, the key to the success of Zimbabwe’s SWF is to first prioritise improving capacity utilisation in the mining and resource extraction sectors.

This can be done through resuscitation of existing mining operations, developing new mines and enacting policies that encourage beneficiation of mineral output. In addition, there is need to ensure economic discipline such that the fund will not be utilised to refinance recurrent expenditure.

Currently, more than 90% of revenue collection is being channelled to recurrent expenditure signalling constrained fiscal space. Further to the above, given the shortage of liquidity in the economy, there is a need to create plausible Public-Private-Partnerships which attract the much-needed foreign direct investment. A well-performing primary sector is a prerequisite if the SWF is to provide the intended stabilisation results.

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