$10b fund for big projects

The cabinet yesterday gave the go-ahead for the setting up of a fund with money from the foreign currency reserves, which would be used for government investment in long-term projects.

Sources said the fund, called “sovereign wealth fund”, could be set up as soon as this July and be used for investments in seven sectors, including power, energy and in large infrastructure projects.

“Primarily the fund will start with $2 billion and it will be raised in phases to $10 billion in five years,” Cabinet Secretary M Shafiul Alam told reporters after a cabinet meeting at his secretariat office yesterday.

The cabinet secretary said, “If our reserve is $30 billion or $32 billion and if $2 billion is bought from it, there will be no adverse impact on the economy.”

He said it had been decided in principle that a law and a framework would be drafted in this regard for the cabinet's approval.

From the next fiscal year, the sovereign wealth fund would start functioning and there would be allocations for the fund in the budget, said a finance ministry official.

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

Based on the committee's recommendations, the finance minister yesterday placed the matter before the cabinet.

After receiving the committee report in December, Muhith had told reporters, “If the cabinet approves the proposal, I am hopeful that the act will be presented in the next parliament session. The government will complete the process in three to four months.”

According to the committee report, the fund would have to be formed through a separate law and 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 large infrastructure financing and dealing with proper risk management.

An advisory council or an expert panel, consisting eminent citizens and experts on the financial sector, might be formed to review the fund management and make recommendations for the board, the committee said.

When selecting a project for financing, it has to be ensured that the project tenure is long and that the project is financially viable.

The cabinet secretary said when a project is financed by taking loan from a foreign bank, the government has to provide a “matching fund” in foreign currencies. Sometimes necessary arrangements are not in place for this fund support.

If the sovereign wealth fund was formed, the biggest benefit would be that the “matching fund” could be provided from the sovereign wealth fund, he said.

In its report, the committee said the government could buy the foreign currencies from the central bank with funds raised by issuing treasury bonds in local currency. In this case, a proper provision would be put in place in the budget.

In recent years, many central banks have accumulated reserves in excess of their needs for managing 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 sovereign wealth funds and other long-term government investors.

In 2008, the amount was $3.4 trillion.

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 take the top five spots.

The committee said the sovereign fund of Bangladesh could be like that of the Chinese fund.