Sovereign wealth fund in the offing to fix infrastructure

Bangladesh plans to form a sovereign wealth fund with its foreign currency reserves to invest in infrastructure, the lack of which is turning out to be the main barrier to getting out of the 6-percent economic growth trap.

A sovereign wealth fund (SWF) is a pool of money derived from a country's reserves, set aside for investment purposes that will benefit the country's economy and citizens.

The initial size of the fund would be $1-$2 billion, according to Bangladesh Bank Governor Atiur Rahman.

At present, the central bank has foreign exchange reserves of more than $25 billion, and by the end of the year will cross the $26-billion mark.

The central bank does not keep the reserves idle: it invests in various lucrative areas, so much that a big chunk of its profits come from them.

But in recent times, the rate of interest in the world market has dropped sharply, and in many sectors it is zero percent. As a result, BB's returns from its investment of the reserves have shrunk.

The development has prompted the government to devise ways to utilise the reserves for a cause that will accelerate the growth rate of the gross domestic product.

For the past decade, the economy has been stuck in the 6 percent growth trajectory, the main cause of which is the lack of conducive infrastructure.

Once the SWF is formed, the government will borrow from it to spend on big infrastructure projects like the Padma bridge, according to the BB governor.

Many central banks in recent years have accumulated reserves in excess of needs for liquidity or exchange rate management, and most of them have diversified into assets other than highly short term liquid assets, said Zahid Hussain, lead economist at the World Bank's Dhaka office.

“It is about time that Bangladesh Bank joins the ranks of these banks. Its SWF initiative is certainly a timely step in the right direction,” he added.

The government has already formed a seven-member committee headed by BB Deputy Governor SK Sur Chowdhury to explore the SWF prospect.

The committee, which comprises economists and representatives from the finance ministry, has already held a meeting in connection to raising the amount for the SWF, according to Chowdhury.

It will examine the similar funds from other countries in the next few meetings, after which it will submit its recommendations to the government, he added.

Hussain said the central bank will need to do a lot of homework and learn from experiences in managing SWFs in countries such as Norway, Singapore, Abu Dhabi and Kuwait.

BB will have to set an optimal legal and economic structure of the SWF and specify the spending rule.

It will then have to select one or more agents to manage the money and specify performance benchmarks, and it must deploy technically sound professionals to do all these work, the WB economist said.

The central challenge will be to ensure good financial return while diversifying risks.

It may be wise to start relatively small and then gradually build the fund up as experience is gained and institutional oversight capacity in BB is strengthened, Hussain added.

As of March 2015, sovereign wealth funds around the world stood at $7.1 trillion in assets under management, according to the Sovereign Wealth Fund Institute, up from $3.4 trillion at the start of 2008.

China ranks number one in terms of the size of SWF followed by the UAE, Norway, Saudi Arabia and Kuwait.