SWF to boost economy

The mining sector will play a key role in setting up the Sovereign Wealth Fund

The mining sector will play a key role in setting up the Sovereign Wealth Fund

Business Reporters
ZIMBABWE’S planned Sovereign Wealth Fund will help stimulate investment in strategic sectors of the economy, including funding the huge infrastructural backlog estimated by the African Development Bank as requiring about US$15 billion.
Last week, Government gazetted the Sovereign Wealth Fund of Zimbabwe Bill expected to be tabled in Parliament soon. Zimbabwe still has significant challenges with regards to industrial performance, agricultural productivity, sovereign debt clearance, balance of payments equilibrium, dilapidating infrastructure and limited fiscal space.

The SWF will be funded from Zimbabwe’s diverse mineral endowments.
Deposits and accruals into the fund shall not exceed a quarter of royalties’ payable, in respect of each of the respective minerals. The minerals include gold, diamonds, coal, nickel, chrome and platinum among others.

Considering that Zimbabwe has more than 40 known mineral occurrences, but is also deemed to be grossly under-explored, the Sovereign Wealth Fund’s potential to significantly impact the economy is limitless if the country invests in exploration.

Already, Zimbabwe is known to be home to the second’s biggest platinum reserves after South Africa and on the evidence of Marange diamond fields, is estimated to have potential to supply 25 percent of gems traded on global markets annually.

To move the economy from stagnation to remarkable sustained growth and address related economic ills, the economy requires significant amounts of money.

But the traditional sources of finance in the form of taxes, foreign aid, foreign direct investments and exports have not been able to significantly contribute to the fiscal requirements.

According to the Bill, the objectives of the fund would be among others, to support Government’s developmental projects including its long term economic and social programmes also covering areas not endowed with natural resources.

Extractive resources based development, in which the SWF is anchored also dovetails into the Government’s medium term economic blueprint, the Zimbabwe Agenda for Socio-Economic Transformation, covering the period 2014 to 2018.

It will also supplement the National Budget especially when the revenues are prejudiced by the fluctuations of prices payable for minerals resources on which royalties and other taxes are collected on for the benefit of the Consolidated Revenue Fund.

Since the turn of the millennium, a number of SWFs increased dramatically.
Traditionally, SWFs were created when governments had budgetary surpluses and had little or no international debt. There are two types of funds, saving and stabilisation.

Stabilisation SWFs are created to reduce the volatility of governments’ revenues, to counter the boom-bust cycles’ adverse effect on the Government spending and the national economy.

SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. SWFs in resource-rich countries can help avoid resource curse although in the literature on this question is controversial.

However, analysts say SWFs can be a challenge if stringent control measures are not put in place and proper governance practice is inadequate.

The analysts are agreed that the fund will only be able to play a prominent role if corruption and mismanagement do not creep in.  It is suggested that the fund should follow the pattern of the SWFs the world over where the management of the fund is co-shared by the fund itself and a number of independent professional fund managers to enable it to benchmark performance.

The annual performances of different fund managers act to give a useful method of benchmarking the fund’s performance.
Countries with SWFs funded by commodity exports, primarily oil and gas exports, totalled US$2,7 trillion at the end of 2011. Non-commodity SWFs totalled US$2,1 trillion.

Asian countries account for the bulk of such funds. Some of the countries include Norway (US$656,2 billion), United Arab Emirates (US$627 billion), Saudi Arabia (US$532,8 billion), Russia (US$149,7 billion), Botswana (US$6,9 billion) and Nigeria (US$1 billion).
All these countries have a SWF coming from oil except Botswana which is using diamonds and other minerals.

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  • JZ

    If a mineral based sovereign wealth fund is 6.7 billion, what could be the strategy to create a 100 billion wealth fund. The greatest resource we have is our people and we should ensure all resources are used in a way to transform people’s lives. We will end up with more financial literate people, a growing market, a healthy and productive population. Simply put the greatest value we can create is a to use resources to create productive, creative, population and an inclusive market, these are the things to attract investors and sustain demand, in the end sustaining production and exports, increasing the wealth of our nation.

  • Danmanyika

    The proposed Sovereign Wealth Fund of 25% on top of other mining taxes may seriously inhibit future mining investments and expansion. For example, Platinum already has an extra 15% tax on unprocessed exports from January 1st together with 10% royalty levied, diamonds are saddled with 15% and gold 7%.
    So total platinum taxes are 50%, combined with 51% indigenous “free” Government participation?? Difficult to see how platinum miners will make enough profit to cover daily running costs, let alone save sufficiently to invest US$ billions in a refinery demanded by Government? I wonder which foreign mining firms will simply cut their losses and just pack up and leave, dismantling their movable assets before relocating to more investor friendly African nations?

  • Jindaguru

    We don’t expect Zimbabwe to reach the dizzy heights of Norway, with a population of only 5 million and a Sovereign Wealth Fund of nearly US$1 trillion, any time soon, but further information over the transparency of its administration would be welcome. Also how theoretical US$ billions in assets, in unexplored and unverified underground mineral deposits, making up a large part of this hypothetical wealth, can be used in any practical way to attract real physical investment money?