The Sovereign Wealth Fund and Namibia's Economic Growth

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THE BANK OF Namibia together with the Ministry of Finance will officially launch the Sovereign Wealth Fund (SWF) on 12 May.

Namibia’s economy needs protection from volatile price changes and investments that are sustainable and capable of benefiting future generations.

The SWF, or relatively low public debt levels will weather the storm.

The establishment of an SWF will be used to serve as a buffer against future economic shocks.

The fund has great potential to manage high revenue inflows from lucrative natural resources and to protect our economy against volatility and unsustainable investments.

The SWF is meant to be run by an independent board that determines how the money should be invested.

A diverse economy is more equipped to manage financial crises or sudden rises or falls in the price of a commodity.

Therefore, by working together, pooling our skills, knowledge, and experience and building on our strengths, we can accomplish great things.

The impact on financial markets in turn provides additional channels through which the energy price increase would affect economic variables.

However, given cyclical developments in the world economy, it is unclear to what extent the imminent increase in the energy price has been directly responsible for the turbulence in advanced country financial markets and movements in currency markets.

There are clear indications that the increase in energy prices has had an adverse effect on the economy by affecting the pace of activity and corporate earnings, as well as confidence.

The disruption caused by an oil price hike also depends on the state of the business cycle, the response of macroeconomic policies, and the flexibility of the underlying economies.

Therefore, the SFW will be split into short- and long-term funds and will be financed by proceeds from the renewable energy industry, mining royalties, and fishing quotas, among other things.

By investing in economic and social development internally, the SWF can balance an economy and protect it from both internal and external economic crises.

Indeed, it is important to take action to pre-empt the second-round effects of the consequent inflationary pressures.

If the monetary authorities accommodate an energy price shock, the resulting increase in inflation tends to be incorporated into inflationary expectations, which become persistent and significantly raise the costs of the subsequent disinflation.

In practice, the situation is more complex because energy prices and gross domestic product (GDP) growth run both ways. High energy prices could dampen economic growth.

In addition to increasing international prices, a weaker foreign exchange rate plays an extensive role in higher energy prices within Namibia.

An increase in energy prices indirectly and directly affects the prices of a variety of goods and services that are dependent on oil in the production and the delivery of these goods and services.

These increases can stifle economic growth by their negative effect on supply and demand. Increasing the prices of goods and services reduces the supply and production of other goods and services due to increased production costs.

Additionally, the demand for these goods and services would also decline due to higher purchasing costs.

These elements can lead to a rise in inflation and the suppression of economic growth. Because Namibia imports a substantial part of the energy it needs, energy price increases have a larger negative effect on the standard of living of Namibians.

If all of the petroleum used in Namibia were produced domestically, higher oil prices would not lower the overall Namibian’s standard of living in the long run any more than it would lower GDP.

The loss of business and consumer confidence resulting from an energy shock could lead to significant shifts in levels and patterns of investment, savings and spending.

Higher energy prices would undoubtedly drive up the prices of other fuels, magnifying the overall macroeconomic impact.

Unfortunately, those changes in spending patterns can be quite disruptive for certain key economic sectors and seem to be part of the mechanism by which the earlier oil price shocks had contributed to previous economic recessions.

Energy prices remain an important macroeconomic variable.

Higher prices can still inflict substantial damage on the economies of energy-importing countries and on the global economy as a whole.

Companies are less able to pass through higher energy-input costs in higher prices of goods and services because of strong competition in wholesale and retail markets.

As a result, higher energy prices have so far eroded profits more than they have pushed up inflation. Yet the economic threat posed by higher energy prices remains real.

Fiscal imbalances would worsen, pressure to raise interest rates would grow, and the current revival in business and consumer confidence would be cut short, threatening the durability of the current cyclical economic upturn.

The SWF has great potential to help a fragile country with lucrative commodities manage high revenues and invest in sustainable development.

With proper management, and drawing on the examples of successful funds, an SWF in a fragile condition could stabilise an economy, protect it against price shocks, and assist the government in investing in long-term development goals.

The SWF can be very beneficial, but there are always opportunities for investments to turn sour. This means it is important for a country to analyse the rewards that can be generated before creating an SWF.

Therefore, if profit from this fund is used well it can actually mitigate risks and add huge value to the economy, such as through diversification.

A well-managed and cleverly invested fund would always benefit the country at hand if it is used wisely.

These benefits mean sovereign wealth funds are likely to become more and more common, making them an important factor in the global economy.

* Josef Sheehama is a banking industry professional with 19 years of experience. He writes in his personal capacity.

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