‘Sovereign wealth funds must be closely guarded’

Sovereign wealth funds remain an integral part of any economy as they act as a fall back when revenue declines, but there is need to ensure their mandates are clearly defined, lest they become prone to abuse by those entrusted in managing them.  This is the message that came out clearly from different speakers at a recent high level conference meant to discuss sovereign wealth funds in Africa, policies that govern them and best practices that can ensure they are sustainable for future use.

Botswana, better known for its mineral resources, especially diamonds is one of the 14 African countries with a sovereign fund, known as Pula Fund. The Fund, which was established in 1994, is managed by Bank of Botswana (BoB), and is a long term fund which forms part of the foreign exchange reserves. The Fund is being used largely to fund some of the country’s budget constraints that include deficits, which have been recurring since the 2008/9 recession, which affected major consumers of the country’s biggest exports, diamonds.

In a briefing after the opening of the two day conference, BoB Governor, Moses Pelaelo told Botswana Guardian that, government has in the past tapped into the Pula Fund, to plug out budget deficits which have largely occurred due to fall in mineral revenue in recent years, which affected the national budget. He could not immediately provide the amount that government has withdrawn from the Fund. “I don’t have the numbers, but it is true government has used part of the Fund to fund budget deficits,” said the Governor. It is not clear if the expected budget deficit of P7,1 billion for the 2019/2020 national budget as announced by finance and economic development minister, Kenneth Matambo will be funded by tapping into the Pula Fund, which is managed 50 percent by the bank and the rest by independent asset managers.

As of February 2019, the Pula Fund was valued at P49, 9 billion, having dropped from P55, 5 billion the year before. Botswana, like most of her peers in Southern Africa is struggling to contain abject poverty, rising unemployment rates, HIV/AIDS, among others.
The question that came from the floor was whether the Pula Fund can be used to help in fighting these social challenges which can in the long term affect the country’s cohesion?

Pelaelo stated that, while he agrees that the country is struggling with some social and economic challenges, it must be understood that, ‘the Fund is for long term purposes’, arguing that the country also has other options either borrowing locally and internationally when the need arises to tackle pertinent problems such as the one mentioned above. “When managing the Pula Fund we are more concerned with its safety, liquidity and return on investments,” noted Pelaelo. World Bank Vice President and Treasurer, Jingdong Hua said sovereign wealth funds could also be important in funding Africa’s infrastructural problems, which in most cases curtail economic developments.

It is particularly critical for this funding, especially in Africa where infrastructure development is largely being done by governments. Botswana also lags behind when it comes to infrastructure development and its Private Public Partnerships (PPPs), which infrastructure was among sectors to benefit from, is experiencing teething problems. “They (Sovereign wealth funds) can also help with long term capital formations,” added Hua who is based in Washington, United States of America. In Africa, where corruption is rampant, various funds have not avoided those who want to enrich themselves at the expense of the larger population.

Pelaelo and Hua concur that, funds need to be carefully managed and protected for future generations, especially for countries like Botswana which depends on limited commodities. Botswana in particular needs to tighten its screws on the Fund especially that it is being funded by savings from revenues from minerals a finite resource which will get depleted and expose the country to shocks. The central bank in Botswana has made it clear, they review all policies and procedures governing reserve management, including the Pula Fund every five years, to ensure they are watertight.

When opening the meeting, which the central bank hosted jointly with The Brown Capital Management, President  Mokgweetsi Masisi also added that, the mandate of sovereign wealth funds have evolved over the years, and called on  regulators to keep pace with these developments. “At the same time, there is less emphasis on Sovereign Wealth Funds as guardians of the nation’s financial wealth, but rather a greater focus is on their active participation, including through funding of infrastructure, to achieve national development objectives,” said Masisi.

He added that governance is key in managing sovereign wealth funds to avoid situations where they are used for political agendas. The President added that accountability to citizens is important for those who manage these types of Funds.
At the end of the closed-door meetings, Pelaelo and other top officials told the press that, a lot has been learnt from the conference.

“Sovereign wealth funds differ in form and mandate, but they all support liquidity,” he said, adding that, proceeds from these funds need to be used for economic priorities of each country. “There is need to look at long term benefits. We also have to work closely with other institutions such as World Bank and IMF (International Monetary Fund,” said Botswana central bank chief. Hua said they are willing to assist any country with issues relating to sovereign wealth management.