In September 2017, the Economics Association of Zambia called on the Zambian government to create a mineral stabilisation fund to help the country weather economic downturns.
When copper prices are high, a portion of Zambia’s mining revenues would be invested in such a fund; when copper prices were low, the country would be able to draw on it to help plug the earnings deficit.
Many ordinary Zambians do this all the time, putting money away into savings accounts during the good times, and drawing on it when times are tough.
Should Zambia be looking to establish such a mineral stabilisation fund – sometimes also known as a Sovereign Wealth Fund (SWF)?
A successful SWF is dependent not only on wise investments, but also ensuring that those managing the funds have their eye on tomorrow rather than on today, and are protected by law from political interventionism.
This is not the first time the idea of an SWF has been floated for Zambia. In 2014, the administration of the late President Michael Sata announced that the country would establish an SWF to stimulate the non-mining sectors of the economy. There were also plans to create an Industrial Development Corporation under which the fund would be established. In October 2014, it was announced that the government would be putting K100-million towards the establishment of the SWF. Since then, nothing further has been heard of it.
Norway’s SWF has been particularly successful. Established as recently as 1996 to provide for future generations of Norwegians, the fund invests the revenues the state receives from petroleum in financial assets abroad. The fund has grown at a dizzying pace, with its assets rising 13-fold since 2002. On the 19th of September this year, the fund exceeded US$1-trillion in assets for the first time; it now owns on average 1.3% of every listed company in the world. Today, the fund has a substantial property portfolio, mainly in Europe and the US, and its sheer size and diversity of assets has over time protected Norway against a declining oil price. The fund has also become an increasingly active investor, taking on the leadership in some of the world’s biggest companies such as Apple and Facebook – not bad for a small country of just 5.2-million people.
One country that could have benefited from an SWF (and had the resources to build a well-funded one) is oil-rich Venezuela, which instead today is on the brink of economic ruin. The Financial Times estimates that the country could have benefitted handsomely if it had used the proceeds of an oil stabilisation fund (established in 1998) to create a SWF, investing in other non-oil assets. According to the newspaper, had it done so, Venezuela could have had a cash mountain of US$223-billion by 2015 – more than enough for it to cover its current crippling liabilities, with plenty left over. Instead, in 2005 – a parliamentary election year – the Venezuelan government spent the proceeds on various social development projects around the country, to the extent that there was soon nothing left. Whilst this undoubtedly boosted the popularity of the then-President Hugo Chavez during the boom years, it has left the country and his successors penniless, now that the oil price has turned.
Chile, the world’s largest copper producer, also has an SWF. In contrast to Venezuela, the government cannot just spend freely to suit short-term electoral cycles, but has to generate a budget surplus every year and put money aside in the fund. This is enshrined in law in terms of legislation known as the Structural Surplus Fiscal Rule. The fund is presently valued at US$27-billion, which meant that the government could draw on the fund during the 2009 financial crisis, and again in 2014 and 2015, during the global mining slump.
The contrasting fortunes of the SWFs of Norway, Chile, and Venezuela lead to two related conclusions.
Firstly, that the success of a SWF is not about whether a country has state participation in its resource sector (all three countries do), but whether it has good governance and sound democratic accountability.
Secondly, that a successful SWF is dependent not only on wise investments, but also ensuring that those managing the funds have their eye on tomorrow rather than on today, and are protected by law from political interventionism. The contrast between Venezuela and Norway, in particular, is an enlightening example of the difference between populist and long-term thinking. Today, Norway can call on a fund worth over US$1-trillion to cover almost any eventuality, while Venezuela continues to slide into economic anarchy.
If Zambia were indeed to set up an SWF, what might some of the challenges be?
Firstly, SWFs take many years to build up, and there is no guarantee they will be successful. A Zambian SWF would have to compete with many pressing, more immediate financial needs, especially in the current economic climate.
Also, there are the governance issues to consider. Even in Norway, widely considered one of the most well-governed and least corrupt countries on the planet, there is pressure from politicians to raid the country’s SWF for short-term gain.
Any Zambian SWF would have to be subject to some sort of constitutional or legal guarantee to ensure it was always operated in the interests of the country. It would require a watertight mandate that could not be easily overturned.
The proceeds of the fund would have to be managed and invested independently and professionally to ensure good returns from a well-diversified portfolio – for example, Norway’s SWF is invested in some 10 000 companies in 80 countries, which suggests a good spread of risk.
Finally, when Zambia did finally draw on the fund, it would be critical that the money was spent wisely, and not on dubious projects or populist ventures aimed at buying off voters. Venezuela has shown what can happen when a country goes down this path.
These challenges notwithstanding, the evidence from successful SWFs around the world suggests that Zambia might well want to consider – finally – getting such a fund off the ground.
See also: Chile holds valuable lessons for Zambia