WEALTHY AND WISE?

Though there are examples of national wealth funds succeeding elsewhere, in SA public mistrust in government institutions could prevent the state from becoming the custodian of SA’S savings

Riddle: the ANC has resolved to establish one as the custodian of the state’s share of natural resources; the EFF is pushing hard for one to house all state assets and spearhead the state’s developmental agenda; but the DA and some private economists have serious reservations about creating one in SA.

What is it?

Answer: a Sovereign Wealth Fund (SWF). At its December policy conference the ANC passed a resolution to establish an

SWF “to ensure that the free-carry shares in mining and other resource sectors be retained by the state”. But the EFF is the party really pushing the SWF agenda. It intends bringing a private member’s bill to parliament to hasten its introduction within the next two years.

An SWF is a state-owned investment fund that typically invests on global markets with all its profits accruing to the state. Most of the profits are reinvested to save for future generations but a small portion is used to fund state expenditure into the domestic economy through the usual budget process.

An SWF is typically used to house fiscal or balance of payments surpluses or the wealth generated from exports of natural resources, like oil in the case of Norway’s oil fund.

Established in 1991 to save windfall revenues resulting from the discovery of huge offshore oil and gas reserves, the Norwegian fund is now worth more than US$1 trillion — or two-and-a-half times the country’s GDP.

The big question is whether it would be appropriate for SA to establish an SWF to accumulate savings when the fiscal deficit has been sticky at around 4% of GDP for the past 10 years, and the country borrows about R246bn annually to fund this shortfall.

SA has vast unmet developmental needs. How does it make any sense for the country to be saving for future generations while borrowing to meet immediate needs?

Norwegian economist Martin Skancke, a former director-general of the division within the Norwegian finance ministry which acts as the custodian of Norway’s oil fund, says it is not recommended that a country set aside money in an SWF if it has a borrowing requirement, except perhaps as a short-term buffer against volatile revenues from natural resources.

A crucial feature of the Norway model is that government is not allowed to borrow externally at all.

It can run a budget deficit only equal to the amount it is allowed to take out of the fund each year. The amount is capped, according to a hard fiscal rule, at 3% of the assets in the fund at the beginning of the budget year (3% is the fund’s expected annual rate of return).

In other words, government has no discretion to increase public spending by more than this amount.

“One key component of the Norway model is that the politicians have agreed to impose a hard budget con-