Sovereign wealth fund to take off with reserves

The much talked-about sovereign wealth fund is likely to be formed with Bangladesh Bank's foreign currency reserves and finances from multilateral donor agencies following recommendations from a high-powered committee.

For the past decade, the economy had been stuck in the 6 percent growth trajectory and the lack of adequate infrastructure has been blamed for it. To address the issue, the government has decided to use the sovereign wealth fund to bankroll long-term physical infrastructure projects like the Padma bridge for the most part.

Foreign currency reserves currently stand at upwards of $32 billion, which is enough to honour eight months' import bills. But the central bank does not just sit on the reserves: it invests in lucrative areas. In recent years the rate of interest in the world market has dropped sharply, and in many sectors it is zero percent.

As a result, Bangladesh Bank's returns from its investment have shrunk. This prompted the government to devise ways to utilise the reserves for a cause that will accelerate the economic growth and the idea of creating a sovereign wealth fund came up.

In 2015, the government formed a seven-member team led by Bangladesh Bank Deputy Governor SK Sur Chowdhury to evaluate the prospects of creating the fund. The team submitted its report to Finance Minister AMA Muhith in December.

In its report, the committee said the government may buy foreign currencies from the central bank with funds raised by issuing treasury bonds in local currency.

In this case, a proper financial provision will be put in place in the budget.

Scope to expand the sovereign wealth fund by taking loans from Bangladesh Bank and any multilateral financial institution may also be kept.

“If the fund is formed in this process there would be a compulsion to pay the loan, which will ensure efficiency in fund management and strengthen its legal, institutional and management structure,” the committee said in the report.

It will also work as a catalyst in increasing good governance, accountability and subscribers' trust.

Finance ministry officials said the finance division will soon send a proposal to the cabinet division about the formation of the fund.

If the cabinet gives the green light, all preparations will start in line with the recommendation of the committee, said one official.

Initially, the fund's authorised capital will be $5 billion and the paid-up capital $1 billion.

The committee said the sovereign fund will have to be formed through a separate law; there must be a provision for appointment of an executive management and a board of directors.  The fund should be managed by a team of efficient and professional financial managers capable of handling big infrastructure financing and proper risk management.

An advisory council or expert panel may be formed with financial sector experts and eminent citizens who will review whether the fund is being managed properly and make recommendations to the board accordingly.

To ensure transparency and accountability, the minutes of board meetings, the report of expert panel and annual audit reports must be published on the website.

The committee said a healthy foreign currency reserve is good for the economy but if it is very large compared to what the economy needs then it creates some problems such as overvaluation of the local currency.

In the last two to three years, the central bank had to undertake a sterilisation programme regularly to keep the foreign currency market stable, which is very costly for the central bank, according to the report.

In recent years, many central banks have accumulated reserves in excess of their needs to manage liquidity or exchange rate, and most of them have diversified into assets other than highly liquid short-term assets.

As of September 2016, the total assets under sovereign wealth funds around the world stood at $7.4 trillion, up 0.76 percent from a year earlier, according to the Sovereign Wealth Fund Institute, a US-based company that analyses public asset owners such as SWFs and other long-term government investors.

Norway's government pension fund ranks number one in terms of the size of sovereign wealth fund. China Investment Corporation, Abu Dhabi Investment Authority, Saudi Arabia's SAMA Foreign Holdings and Kuwait Investment Authority round up the top five spots.

Experts, however, called for cautious approach.

The opportunity to employ the growing reserves in infrastructure development might provide Bangladesh with a cushion against debt liabilities, according to the Centre for Policy Dialogue.

However, utilisation of this national asset must be considered with utmost care, the think-tank said  last month.

Pragmatic policies must be chosen. Independent institutional mechanism, moderate interest rate, feasible maturity period and appropriate monitoring governance should be the priority issues, the CPD said.