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A Namibian Sovereign Wealth Fund
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The Namibian Government is establishing a Sovereign Wealth Fund (SWF) named “The Welwitschia Fund”. A policy framework released by the Ministry of Finance last August expounded on a June 2020 cabinet decision to establish a Sovereign Wealth Fund by laying out the foundational management and operating structures of the fund. Although not yet operational, the Welwitschia Fund is set to become one of Africa’s newest sovereign wealth funds.
This state-owned fund will consist of two separate accounts. The first is a liquid stabilisation account that will be used to counteract the effects of negative macroeconomic shocks and protect the foreign reserve position. The second is a longer-term intergenerational savings account. The Bank of Namibia, under the jurisdiction of the Ministry of Finance, will manage both accounts. The Ministry of Finance views the creation of the Welwitschia Fund as a seminal moment in Namibia’s development. Inspired by Article 95 of the Constitution, which implores the state to “actively promote and maintain the welfare of the people”, the ministry believes that the fund will further this objective as it becomes a driver of “sustainable and inclusive development over time… promoting intergenerational prosperity”. But before it can become an agent of national change the fund needs funding.
A Sovereign Wealth Fund is a pool of funds controlled by a government and invested primarily in foreign assets. That is the closest to a universal description of a Sovereign Wealth Fund. There is no strict definition of what sovereign wealth funds are or what they must do, so there is no single correct way to fund them. Historically, most sovereign wealth funds have been financed by trade surpluses derived from the sale of commodities. The commodity is usually oil. Norway’s Pension Fund, one of the largest single owners of public equities in the world, is the most prominent example of an oil-funded Sovereign Wealth Fund. Kuwait, Saudi Arabia and Abu Dhabi’s funds are also sustained by oil money. Botswana’s “Pula Fund” is supported by the nation’s diamond industry. In contrast, the United States Social-Security fund, although not typically considered a SWF despite being administered entirely by the US government, is funded through payroll tax revenues. Namibia is neither an oil-rich nation like Norway nor a generally wealthy nation like the US, so the capital for the Welwitschia Fund will come from a variety of sources. The stabilisation account has three stated sources of funding. In years where Namibia runs budget surpluses, half the surplus will be put into the fund. Additionally, 2.5% of SACU receipts (along with 33% of ex-post SACU positive adjustments) and 10% of the revenues from fishing quotas will be channeled into this account. The long-term intergenerational account will draw on funds derived from mineral royalties and divestitures from public assets. Crucially, all flows into the two accounts are predicated on public revenues returning to the pre-pandemic average of roughly 30.5% of GDP. Currently public revenues stand at 28.2% of GDP. Until that figure rises, which all else equal will coincide with a drop in the public-debt-to-GDP ratio and debt servicing costs, the accounts will go unfunded.
The question of what types of assets these funds will hold and in what jurisdictions they will hold them is more straightforward. The stabilisation account will be almost fully invested in foreign fixed income instruments, making the account relatively liquid and safe. As is necessary for a stabilisation fund, its performance will not be correlated with the health of the Namibian economy. The longer investment horizon of the intergenerational savings account allows this fund to invest in riskier foreign public and private equities. A special provision also allows for up to 2.5% of this account to be invested in local development projects.
That, in summary, is the Welwitschia Fund. It has its idiosyncrasies but ostensibly it is a standard dual-purpose Sovereign Wealth Fund.
Namibia is not in the perfect fiscal position to start diverting money into an extra-budgetary stabilisation account but the government’s decision to do so is not without precedent. Similarly indebted countries, facing similar development needs, like Ghana, Mauritania and Gabon, have sovereign wealth funds which are at least partially dedicated to economic stabilisation. There is an obvious argument that heavily indebted developing economies should not be creating any form of stabilisation fund and should instead be using those revenues to bolster their operating budgets and reduce their debts. Of course, meeting development needs through investment in education, agriculture and infrastructure is important. Keeping the public debt in check is equally important. Yet neither of these considerations directly discounts the value of having a stabilisation account to protect the economy from systemic shocks. How to best use public revenues to generate sustained economic growth is one problem; knowing when and where to set them aside for a crisis is another. Creating a rainy day fund necessarily limits economic growth, but the pandemic has shown that having a kitty set aside for tough times can pay off.
Ideally the Welwitschia Fund should have been established in the heyday of Namibian economic growth. But as they say, the second-best time for anything is now. The establishment of a Sovereign Wealth Fund is unlikely to do much for Namibians in the next decade, but today’s youth will benefit from this foresight.
Kimber Brain
