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Saturday, 25 October 2014

Zambia's Sovereign Wealth Fund

Alexander Chikwanda in the Budget 2015 announced that Government is establishing a Sovereign Wealth Fund [SWF] :
A culture of living hand-to-mouth does not safeguard the interest of posterity. We have the duty and responsibility to secure the future of the next generations. In this regard, I have allocated K100 million for the establishment of a sovereign wealth fund. Going forward, a significant proportion of the dividends from state-owned enterprises that will fall under the Industrial Development Corporation [IDC] will form part of the fund" 
There’s currently no publicly available government policy document that explains the nature, purpose and governance framework of the new SWF. A scan through the revised Sixth National Development Plan (SNDP) mentions the IDC but says nothing on the new SWF. The only information we have is what is stated in Chikwanda's budget statement.

What is being proposed? According to Chikwanda's statement this appears to be a savings fund where all the state-owned enterprises that will fall under the Industrial Development Corporation [IDC] will deposit their money. This naturally raises three important questions :  (a) Which companies will fall under the IDC; (b) How much will the companies deposit; and, (c) What will be done with the money they deposit?

The answer to (a) was answered by Chikwanda earlier this year. He said that only parastatals facing operational difficulties will be incorporated under the IDC. In his words, “Companies that are under the Act of Parliament and those that were doing fine will not be incorporated under the IDC” (Source: Lusaka Times, January 2014).

That clarification from came because the IDC has actually been incorporated under the Companies Act as "the holding company of all State-owned enterprises that were incorporated under the Companies Act or the Banking and Financial Services Act". Chikwanda's intervention was designed to calm legitimate fears that all SOEs will be run by the IDC.

Chikwanda's January statement presumably answers question (b) on how much the companies will deposit into the SWF. Since the parastatals in the IDC will be initially loss making companies we cannot expect a lot of money to be deposited. Certainly nothing will happen in the early years. In fact more subsidies will be needed to keep them going. Indeed going by Chikwanda's narrower criteria the new SWF will have the likes of Daily Mail, Times of Zambia, Nitrogen Chemicals Zambia and similar bankrupt companies in its portifolio.

Worth pointing out here that ZCCM-IH would not fall under that IDC because it is actually not 100% government owned. The government can of course create another mining vehicle that takes shares in ZCCM-IH. That vehicle can then in turn be held under the IDC. The only problem of course is that the IDC according to Chikwanda is for poor performing companies.

At this point we should also note the chaos around the IDC. The SNDP says "the Government will in the Plan period, operationalise the Industrial Development Commission (IDC) to promote investment, industrial development and deepen reform of SOEs. The IDC will facilitate the optimal use of resources aimed at accelerating the process of transformation of the economy through coordinated development of primary, secondary and tertiary industries" (Sixth National Development Plan, .

President Sata earlier this year issued a presidential directive, making it clear that 75 per cent of dividends from the IDC and its subsidiaries would be deposited in the SWF. Clearly the IDC cannot achieve its goals whilst investing in the SWF, never mind the loss making composition of companies in the IDC.

Back to the SWF. Assuming that some companies which form part of the IDC are eventually turned around the answer to (c) may become important. What will be done to the money deposited in the SWF? But we must slow down and ask a prior question which we should have addressed at the start : What is a Sovereign Wealth Fund?

SWFs are a special purpose investment fund or arrangement, owned by a general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer financial assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.

SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports. Zambia is planning to create its SWF from general business profits of the IDC. Zambia is currently in debt. It is also making very little from commodity exports. So the issue of smoothing out consumption to avoid resource curse problems does not arise.

This observation is cardinal because it helps us address properly the standing question : What will be done with the money which may be deposited by IDC companies in the SWF?

If we look at the Norwegian model, 4% of its annual return goes on public spending and the rest is invested ABROAD as it seeks the highest (safe) return for its money. So Zambia’s SWF would need to hold foreign assets to make money. The problem of course is that Zambia needs investment domestically. We are not Norway.

Therefore one expects that Zambia’s version of the SWF will in fact be an expanded version of IDC, just in another name. It is a fund focused on microeconomic objectives of job creation and better management of existing parastatals not macroeconomic ones. The SWF will be the governance framework for the reborn INDECO. It cannot really be regarded as a sovereign fund in a traditional sense. This probably explains why the SWF is housed at the Ministry of Finance rather than BOZ.

So, does Zambia need a proper SWF?

No! For the simple reason that it has no macroeconomic objectives that would be achieved by such a fund. Zambia is broke and needs every Ngwee to fund infrastructure. It is economic folly to borrow from abroad K100m (via the Eurobond) and then put it into a SWF which runs broke parastatals with no prospects of ever making a profit. If Zambia wants state capitalism it should focus its effort on getting the governance framework of the IDC right rather than creating SWFs.

Chola Mukanga
Economist | Researcher
Copyright © Zambian Economist 2014

1 comment:

  1. Dr Mukanga. Your last paragrph is totally correct.

    Can I just remind readers of the opening articles of the PF Constitution:

    ARTICLE 1.
    The name of the party shall be the Patriotic Front (hereinafter referred to as "the Party").
    The Party guided by humbleness and self-criticism.
    The militant organization of revolutionary peasants, workers and intellectuals.
    ARTICLE 2.
    i) Main Task
    The main task of the Party and the working people of the Republic of Zambia is to accomplish a transition from self centeredness.
    b) Hard Work
    The Party demands hard work, honest, sacrifice and self-reliance in all activities to improve the living conditions and ensure greater benefits to the people of Zambia.
    The Party shall ensure that all the public institutions, State-owned enterprises and popular mass and similar organizations are led by persons who are members of the Party and who are uncompromisingly committed to achievements of the Party.
    The Party shall wage a relentless struggle against all domestic and international forces of reaction. It shall fight for the eradication of Capitalism, with its offshoots of Hunger, Ignorance, Disease, Crime, Corruption and the exploitation of man by man.

    I'm sorry but none of Dr Scott's Party's Articles that speak of Revolutionary Peasants and the eradication of Capitalism with its offshoots of Hunger, Ignorance, Disease, Crime seeems to chime with creating a Sovereign Wealth Fund.

    Please Dr Scott - if there is any revolution to be had, revolutionise the economy. Look after that and all else will follow. You can start by asking your Min of Finance to rip up his 2015 Budget before it bankrupts Zambia.



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