Sovereign Wealth Funds or simply SWF is an investment phenomenon in existence since the 1950s but has caught widespread public attention only recently. SWF is usually established when you have excess foreign reserves to invest and put it in a structured investment vehicle. An unlikely new breed of SWF is being launched recently with no established historical success rate and that new breed is coming out of countries like Pakistan where we face large deficits and extremely high debts.
There used to be a time that countries like Saudi, Kuwait, UAE and Sweden with surplus funds would create a fund to invest on behalf of its citizens for their benefit. These funds are established through excess foreign reserves but are managed absolutely separately from the country’s regular foreign reserves. This is where the controversy develops and develops fast, especially in corruption-ridden political setups where transparency dies its own death. State assets are put into such funds and most probably than not, there is no parliamentary oversight or a debate in the legislative halls of power as to how these funds are being managed.
Understanding the matter better
According to The World Bank, as much as $10 trillion is being managed through these SWFs as of 2021. A 120% increase since 2008. SWFs can invest in anything they desire from stocks, bonds, real estate, mining, and commodities to infrastructure. And when such a big canvas for investments is provided then disasters happen such as 1MDB, the Malaysian SWF which lost over $6 billion dollars in one go. Other concerns about SWFs are more serious than losing money. These concerns are aired by many countries especially The United States of America which passed The Foreign Investment and National Security Act in 2007 citing concerns that hostile foreign entities or wealthier nations can gain control of national assets through investing in the fund and taking indirect control of a country’s biggest assets.
A threat not only to the political future and independence of a country but its national security is dependent on economic manipulation by large investors.
Borrow and invest?
The policy of borrowing and investing to generate results is not always a bad policy but borrowing by a country already indebted to the tune of $120 billion dollars to foreign lenders will only add to the burden if the fund does not perform. Secondly, if the intention is to put national assets such as OGDC or other state-owned enterprises into the fund and generate investments through it then a simple question comes to mind: Why not outrightly privatize these intuitions through a transparent bidding? 6 out of 10 loss-making SOEs will not become profitable if they are inducted into a fund nor will their value will increase. The only thing that could happen by putting these institutions into a fund will raise more questions about transparency as the fund will have no oversight of the parliament or be open for debate as to which assets could be sold and which ones cannot.
Less-than-perfect transparency is a concern both for investors and regulators alike. Source of funds, size of the fund, investment goals, end beneficiary of investments such as hostile countries camouflaging their investments, and a million other concerns come to mind. Even the most transparent of countries like France with $1.4 trillion in fund assets and even Norway with $1.3 trillion have to face transparency issues and foreign government investment issues.
So much emphasis is put on foreign governments covertly investing in a country’s sovereign funds that “on 5 March 2008, a joint subcommittee of The U.S. Congress held a hearing to discuss the role of “Foreign Government Investment in the U.S. Economy and Financial Sector”. The biggest fear which was addressed was wealthy countries usurping smaller countries’ assets through investments in their sovereign funds and dumping the investments abruptly and causing economic chaos in order to force the smaller country to listen to its geopolitical or other demands.
The United States of America even after having so much procedural transparency does not have a large SWF. It can invest trillions at a strike of a pen by promulgating laws to raise funds through congressional approvals, but it has stayed away from this exercise. Small funds such as Alaska Permanent Fund with just $80 billion or Texas Permanent University Fund with $69 billion do exist but no “America Sovereign Fund” exists.
Another huge concern that arises from SWF investment is that it usually ignores the local economy and invests overseas in order to fight local inflation in foreign currency. The cost to the country of origin of the fund tends to become much higher when the local economy is ignored.
If the local economy is the target of the fund then why should a government manage its economy? Why should a bureaucratic process be introduced in a country like Pakistan where local economy is being controlled by a few people who are managing the fund and favouring the local companies with whom they might have a relationship of benefit with?
Another issue that is faced repeatedly like Malaysia or even China is that of poor investment choices in the local economy. What are the policies of investment by the government? Do we have strict guidelines which are already developed in a corruption-ridden economy like Pakistan or have we just identified sectors such as mining and minerals on an ad-hoc basis for the investments which will be indirectly controlled through investments by the camouflaged foreign investment?
China Investment Fund invested in Blackstone Group, a giant in the fund management industry, but ended up losing most of its investments due to a lack of transparency and an economic downturn.
Clarity of investment objectives is extremely important even before we think of establishing a SWF because the fund belongs to the “people” of Pakistan and not the government of Pakistan. The government is just the custodian of those funds.
Full financial reporting, audited reports made public, influence and repercussions of investment decisions, investment prohibitions based on the principles of Islamic Sharia and much more comes to mind when it comes to establishing a SWF. All this has to be done years in advance. It cannot be done in haste.
Pakistan cannot take a chance on its assets or investments. We cannot keep borrowing more in a new guise of a SWF. This cannot be dealt like a gamble and it cannot be rushed through the parliament for approval without an open debate as it was. The bill to establish Pakistan Sovereign Wealth Fund was rushed through the parliament on a day when 53 other bills were presented without a debate.
We all want Pakistan to prosper. We all want Pakistan to grow. We all want a great future for this beautiful country of ours. But repeating the same mistakes which have brought Pakistan to the brink of an economic collapse will God forbid, ruin our future. We have always made ad-hoc decisions without open public debate and a transparent process of establishing new investment guidelines. We have done it before in haste and we are doing it again in haste.
The economics of sovereign wealth funds is a specialized subject with many benefits and many drawbacks. But in a nontransparent system like Pakistan, the drawbacks far outweigh the benefits. The whole reason for this article is NOT to oppose a PSWF but to encourage transparency, regulations, open public debate and clear investment objectives with the least amount of political maneuvering. And I hope we do that. Ameen.
Pakistan Zindabad and may we prosper beyond our imagination. Ameen.
Mir Mohammad Ali Khan is a former investment banker and the founder of ECademy. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.