Gov't greenlights new Sovereign Wealth Fund
Mbongeni Mguni | Monday February 17, 2025 11:33
Whilst the country currently has the Pula Fund acting as a fiscal buffer and a store of reserves for future generations, experts have said the fund has structural weaknesses, which include the lack of commitments around deposits and poor control of frequent withdrawals.
Delivering his inaugural budget speech, Gaolathe said government was committed to ensuring long-term macroeconomic stability and fostering intergenerational equity by preserving sufficient assets and wealth for future generations.
“To achieve this, we will re-design our macroeconomic policy framework to safeguard the needs of future generations by ensuring that they benefit from our natural resource wealth,” he said. “Efforts are underway to create a new fully-fledged Sovereign Wealth Fund. “This fund will invest in sustainable domestic and foreign assets across various industries, thereby transforming resource wealth into financial wealth.”
Gaolathe, who is also the Vice President, explained that the fund will help to cushion against unforeseen disasters whilst creating wealth for current and future generations. The fund will also enable future generations to have a foundation to realise their own ambitions, he said.
The Finance minister’s revelations follow expert advice from the Bank of Botswana which noted weaknesses in the structure of the Pula Fund and its ability to be used as a store for generational wealth.
“It is recognised that although commonly referred to as a Fund for future generations, the current Pula Fund is primarily an ‘overflow’ or ‘residual’ account for surplus reserves, subject to short-term trade and capital account fluctuations,” BoB executives stated.
At the height of the pandemic, the BoB began pushing for a portion of the Pula Fund to be protected from frequent withdrawals, a process known as “ringfencing”. The bank doubled down on its calls last year, as budget pressures grew on government amidst the downturn in diamond sales.
The IMF in September published a 20-page report detailing the urgency and benefits of transforming the Pula Fund into a Sovereign Wealth Fund (SWF) and weighing the various ways government could do this.
Through various scenarios and comparisons with best-case SWFs in Norway and Chile, the IMF researchers estimated that maintaining an overall budget surplus of about one percent of Gross Domestic Product over the medium term and channelling this to an SWF, would be sufficient to create a credible insurance buffer against shocks.
The IMF said Botswana is “very vulnerable to shocks”, given its dependence on “one luxury good faced with erratic global demand and an artificial substitute”. Creating buffers against shocks would strengthen the country’s resilience.
“A SWF could be very helpful to build up an insurance cushion for the budget, helping smooth out public expenditure when diamond prices fluctuate,” the IMF said. “Falling fiscal buffers reflect a declining revenue-to-GDP ratio and sustained expenditure,” the IMF said. “The budget balance has shifted from a surplus of more than 12% of GDP in 2006–2007 to deficits averaging five percent of GDP over the past five years. “Indeed, total revenues have fallen from more than 40% of GDP in 2007 to 28% of GDP in 2023.”
The difference between the Pula Fund and a new SWF would be both the objectives and the rules around withdrawals and deposits. The IMF researchers said while the current Pula Fund has a legal basis in the BoB Act, it is not legally separated from the foreign exchange reserves, and there are no legal provisions requiring monies to be paid into the Fund, nor legal restrictions on drawdowns from it.
“An Act of Parliament, either a new one or an amendment to the BoB Act, may be needed to set out the rules for inflows and outflows,” the researcher said.
A new SWF would be critical because, like many other resource-rich countries, Botswana struggles to spend its mineral revenues efficiently, the IMF said.