Just as individuals must invest and save for the future, so must countries. A Sovereign Wealth Fund (SWF) is basically a country’s endowment to future generations. It is not a fund to be plundered and used to meet current needs, but a savings account that must accumulate over time and be used to meet future developmental needs.

It is a fact that mining and other resources of any country cannot be replenished and it is therefore important to save the income generated from those depleting resources for the future. A SWF can also be used to replenish the resource industry in the future and replace industries. Huge income earned from resources can easily be abused and the sovereign wealth fund can be a mechanism to ring fence or protect that income from immediate abuse, and cushion the country from the risk of sudden large inflows of excess income. This, of course, requires discipline, patience and foresight.

A sovereign wealth fund can only be viable where there is disciplined fiscal management and there is no temptation to use that money for recurrent expenditure. This implies that we must seek to maximise the returns on the savings and invest them prudently so that the investment value of the Sovereign Wealth Fund increases with time before we can start spending. We must also ensure that where we invest Sovereign Wealth Fund income, we achieve real returns. The Fund must be managed like a stand-alone investment portfolio that is well diversified and at least, beats inflation.

Source: New Times