eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
So much talk has been going on in the past couple of weeks with the Mutapa Investment Fund at the centre due to either lack of information or bad communication by the authorities.
Today we will talk about how important it is to have a well-managed sovereign wealth fund and also the dangers of the fund to the economy.
What is a Sovereign Wealth Fund?
Sovereign Wealth Funds (SWF) are state-owned investment funds usually financed by surplus revenues or reserves. They are often created by commodity-rich exporters, such as Norway, Saudi Arabia, and Qatar, to stabilise national budgets, create savings for their citizens, or promote economic development.
Major developing countries, including Brazil, Russia, India, and China, use sovereign wealth funds to finance major infrastructure projects. Our neighbour, Botswana, established a sovereign wealth fund in 1994 with a similar goal to promote infrastructure investment.
Specifically, the sovereign wealth fund would be used to build capital-intensive infrastructure projects like dams, power grids, and bridges.
If successful, a sovereign wealth fund has the potential to address Zimbabwe’s major infrastructure needs and promote economic growth.
Critics, however, warn that the fund could create opportunities for corruption and divert resources away from the country’s other needs.
Mutapa Investment Fund
President Mnangagwa last month announced the official renaming of the Sovereign Wealth Fund of Zimbabwe (SWFZ) to the Mutapa Investment Fund. The change was implemented through Statutory Instrument (SI) 156 of 2023.
The fund was first established in 2014 following the enactment of the Sovereign Wealth Fund Act.
As part of the new investment fund the President added a few shares of state-owned enterprises into the newly created investment fund.
Parastatals and entities listed under the Fund include; Defold Mine, ZUPCO, Kuvimba, Silo Investments (GMB commercial arm), National Oil Company of Zimbabwe, Cold Storage Commission, Petrotrade, POSB, Netone Cellular, National Railways of Zimbabwe Holdings & NRZ Ltd, TelOne, ARDA Seeds, Zimbabwe Power Company, Powertel, Allied Timbers, Telecel Zimbabwe, Air Zimbabwe, Industrial Development Corporation, Cottco, AFC Limited and Hwange Colliery.
SWF powerhouses
SWFs are important to the economy and literature is available to back it up.
Arab SWFs are an insurance policy against economic shocks whilst in Kuwait, for instance, the KIA has been a lifeline post-Covid-19 when the Government could not afford to pay civil servants’ salaries.
During the pandemic, state funds bailed out several national companies, especially local airlines.
SWFs are also the financial powerhouse behind the extraordinary changes we see around the Middle East region. For example, in Saudi Arabia, the PIF has existed since 1971 but was wholly reshaped when Mohammed bin Salman took over as chair in 2015. Today, the fund is investing hundreds of billions to fuel Vision 2030, the kingdom’s master plan to diversify away from oil.
The PIF invests in landmark projects like Neom, a US$500 billion new city, but also in a myriad of locally established companies like Ceer, a new electric vehicle brand; Riyadh Airlines, a new US$37 billion national carrier; AviLease, an aircraft leasing company and it covers virtually all sectors of the economy, even sectors that do not exist yet.
When building from scratch is impossible, state funds know that abundant liquidity is an important argument for convincing foreign companies to bring their skills directly to a certain country.
Over the years, Arab sovereign funds have become fearsome investors.
Today, high energy prices allow them to expand their outreach even further, potentially tilting the global economic balance of power toward the Middle East and in Africa particularly Zimbabwe, we can also focus our SWF to be an investment vehicle.
Worries about Sovereign Wealth Funds
While the idea of using a SWF to invest domestically may resonate with government officials and politicians in low-income countries, particularly at this time of low commodity prices and surging fiscal deficits among oil and mineral exporters there are strong arguments against using SWFs for this purpose.
A fund with multiple objectives, say promoting domestic economic development and generating financial returns on savings for the benefit of future generations can undermine public financial management systems, and lead to poor investment decisions, patronage and even corruption.
Governments can establish safeguards to limit SWF mismanagement and corruption, namely conflict-of-interest standards combined with legislative approval and strong fund transparency and oversight.
However, the challenges associated with creating a parallel budget or multiple mandates may not be so easy to overcome. A single SWF may not be well-placed to be a checking account, a savings account, an education or health financing vehicle, and a development bank all at once.
In countries where funds have helped to improve macroeconomic management, fiscal rules have determined how much resource revenue is saved and spent. All spending is then channelled through national or sub-national budget processes, or through state-owned entities like development banks that act at arms’ length from the Government. In most of these successful cases, savings are placed in a SWF and invested abroad with purely financial returns in mind.
Conclusively, a successful sovereign wealth fund would address the country’s significant infrastructure deficits, which hamper economic development. Such a result would make Zimbabwe a more attractive destination for foreign investment of all kinds.
Tapiwanashe Mangwiro
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
