The Herald (Harare)

Zimbabwe: 'Nation Needs Wealth Fund'

SINCE the formation of the inclusive Government, a power sharing arrangement between the country's main political parties, there has been significant improvement in the performance of the economy which saw inflation plummeting from 231 million percent in June 2008 to below 5 percent.

Industrial capacity rose from average level of below 15 percent to around 60 percent.

The Government adopted a multi- currency regime in 2009 with the US dollar, South African rand and Botswana pula being used as the preferred currencies.

The abandonment of the Zimbabwe dollar, which had become worthless due to hyperinflation, brought stability in the economy as it became easier for Government and companies to plan and make realistic budgets.

Some gold mines that had closed down due to lack of working capital re-opened following major gold trade reforms by the Reserve Bank of Zimbabwe.

There was a gradual return of foreign direct investment. According to the World Investment Report Statistics, total investment inflows in 2008 amounted to US$52 million but steadily rose to US$105 million in 2009, up again to US$166 million the following year and were US$387 million last year.

But despite these gains realised in the past three years, there are signs that the economy has stagnated.

Analysts say Government revenue is growing at a "worringly decreasing" pace since 2009, and so are other key indicators such as public and private sector consumption.

Government revenues, which grew 141 percent in 2010, 25 percent in 2011 and 16 percent this year although it is likely to grow only 6 percent next year.

Economic analysts say both private and public sector wage growth seem to have hit a plateau, dealing a "worrying blow" to domestic demand.

The "weak and misdirected" domestic demand is a huge cause for concern for the Government that finds itself with a population that has no capacity to drive growth. The options to boost domestic demand are also limited.

The huge trade imbalance remains a huge concern. A simple analysis on the balance of payments position for the six months to June 30 2012 shows that for every US$1 worth of exports, Zimbabwe imported goods worth about US$5,50.

Under such circumstances, economists say a casual conclusion would therefore be that Zimbabwe's consumption of manufactured foreign goods is sustaining more jobs in South Africa and "elsewhere other than at home".

Zimbabwe still has significant challenges with regards to industrial performance, agricultural productivity, sovereign debt, balance of payments, dilapidating infrastructure and limited fiscal space.

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

Unfortunately, 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.

Some economists believe the answer lies in the setting up of a national fund - the Sovereign Wealth Fund.

"Zimbabwe is in dire need of finance," says SA-based economist Mr Gift Mugano.

"The budget of US$3,8 billion is a mere joke for a mineral-rich economy. Although it was the best the Finance Minister has done under the current circumstances, more can be done going forward.

Zimbabwe needs a Sovereign Wealth Fund more than anything else using its vast minerals.

"This SWF will be among other things be responsible for financing infrastructure backlog which needs close to US$14 billion, retiring the national debt which is hovering around US$10,6 billion, budgetary support, provide concessionary loans to industry, address balance of payments problems, provide funding to the informal sector and critical social programmes.

"It is enlightening to see that the Minister of Youth Development, Indigenisation and Empowerment has set up the National Indigenisation Economic Empowerment Fund which is earmarked to support economic empowerment programmes which will definitely spur economic growth."

Harare economists Mr Erickson Mvududu concurred but expressed the need for the Government to first establish the actual value of the minerals.

"While it is a good idea, the problem that we have is we do not know the value of minerals that Zimbabwe is holding," he said.

"Government needs to know how much the mineral it can mortgage. Until a survey is done to determine the mineral wealth in the ground, we can go that direction."

Nature and Purpose

SWFs have been around for decades. But since the turn of the millennium, a number of Sovereign Wealth Funds 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 government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy.

Savings 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.

Challenges of SWF

SWF can be a challenge if stringent control measures are not put in place and governance is lacking. Governments may also be able to spend the money immediately, but risk causing the economy to overheat.

Overheating of an economy occurs when its productive is unable to keep pace with growing aggregate demand. It is generally characterised where economic growth is occurring at an unsustainable rate.

Size of SWFs

Assets under the management of SWFs increased for the third year running in 2011 to a record US$4,8 trillion. There was an additional US$7,2 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations' funds and US$8,1 trillion in other official foreign exchange reserves.

Countries with SWFs funded by commodities' exports, primarily oil and gas exports, totalled US$2,7 trillion at the end of 2011. Non-commodity SWFs totalled US$2,1 trillion.

Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.

These include Norway (US$656,2 billion), United Arab Emirates (US$627 billion), Saudi Arabia (US$532,8 billion), Russia (US$149,7 billion), Botswana (UUS$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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