• September 25th, 2020

Establishment of Namibia’s Sovereign Wealth Fund accelerates

Cabinet has directed the Ministry of Finance to establish an Inter-Institutional Team to finalise details for the establishment of a Sovereign Wealth Fund for Namibia, according to a Cabinet briefing shared by ICT Minister Peya Mushelenga. Cabinet has already in principle approved the establishment of a Sovereign Wealth Fund, which is a state-owned investment fund, comprising pools of money derived from a country’s reserves. Local economists and financial sector players have been advocating for the establishment of Sovereign Wealth Fund to minimise revenue shortfalls elsewhere. 

The Inter-Institutional Team will be tasked with finalising the appropriate model and implementation of the Sovereign Wealth Fund (SWF) for Cabinet’s consideration and approval.

Local Economist, Klaus Schade, welcomes the idea of a SWF because it can address revenue shortfalls from sources such as the SACU Revenue Pool and generally smoothens revenue declines. “A SWF needs to have a robust and string government framework to ensure the funds are invested according to set criteria to yield expected returns,” said Schade. However, he cautioned that a SWF must be shielded from political influence to avoid any mismanagement or corruption.  

A SWF is also described as a financial instrument that utilises funds set aside for investment to benefit the country’s economy and its citizens. The funding for an SWF usually comes from central bank reserves which accumulate because of budget and trade surpluses, official foreign currency operations, money from privatisations, governmental transfer payments and revenue generated from the exporting of natural resources.
In general, SWFs tend to prefer returns over liquidity, making them more risk-tolerant than traditional foreign exchange reserves, according to the non-profit organisation, Sovereign Wealth Fund Institute. 

Traditional classifications of sovereign wealth fund include Stabilisation funds, Savings or future generations funds, Pension reserve funds, Reserve investment funds or Strategic Development Sovereign Wealth Funds. 
The acceptable investments included in each SWF vary from country to country. Countries with liquidity concerns limit investments to only very liquid public debt instruments. In some cases, sovereign wealth funds will invest directly in domestic industries.

Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates relies on oil exports for its wealth. Therefore, it devotes a portion of its reserves to an SWF that invests in diversified assets which can act as a shield against oil-related risk. 
The amount of money in an SWF is substantial. According to the World Economic Forum, as of 2018, the UAE’s fund was worth about US$683 billion. The Forum also finds that Norway’s sovereign wealth fund, the largest in the world, has exceeded US$1 trillion since 2017.
There is, however, a shared concern that SWFs may be susceptible to political influence. Some of the most significant sovereign wealth funds, except for Norway, are not entirely transparent about their investments and corporate governance practices, which leads some to think they are for political and not financial motives.

Edgar Brandt
2020-06-29 10:09:11 | 2 months ago

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