Namibia: The Sovereign Wealth Fund and Namibia’s Economic Growth
THE BANK OF Namibia, in collaboration with the Ministry of Finance, will officially launch the Sovereign Wealth Fund (SWF) on May 12.
The Namibian economy needs protection from price volatility and investments that are sustainable and able to benefit future generations.
Sovereign wealth funds, or relatively low levels of public debt, will weather the storm.
The creation of a sovereign wealth fund will 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 supposed to be managed by an independent board which determines how the money should be invested.
A diversified economy is better equipped to handle 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 achieve great things.
The impact on financial markets in turn provides additional channels through which rising energy prices would affect economic variables.
However, given the cyclical developments in the global economy, it is unclear to what extent the impending energy price hike was directly responsible for the turmoil in the financial markets of advanced economies and the movements in the foreign exchange markets. .
There are clear indications that rising energy prices have had a negative effect on the economy by affecting the pace of business activity and earnings, as well as confidence.
The disruption caused by a rise in oil prices 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 divided into short-term and long-term funds and will be financed by revenues from the renewable energy industry, mining royalties and fishing quotas, among others.
By investing in economic and social development internally, the sovereign wealth fund can balance an economy and protect it from internal and external economic crises.
Indeed, it is important to act to anticipate the second-round effects of the resulting inflationary pressures.
If the monetary authorities accommodate a shock to energy prices, the resulting rise in inflation tends to be factored into inflationary expectations, which become persistent and significantly increase the costs of subsequent disinflation.
In practice, the situation is more complex because energy prices and gross domestic product (GDP) growth go both ways. High energy prices could dampen economic growth.
Apart from increasing international prices, a weaker exchange rate plays a significant role in driving up energy prices in Namibia.
An increase in energy prices indirectly and directly affects the prices of a variety of goods and services that depend on oil in the production and delivery of those goods and services.
These increases can stifle economic growth through their negative effect on supply and demand. The increase in prices of goods and services reduces the supply and production of other goods and services due to the increase in production costs.
Moreover, the demand for these goods and services would also decrease due to higher purchase costs.
These elements can cause inflation to rise and economic growth to be suppressed. Since Namibia imports a substantial share of the energy it needs, increases in energy prices have a greater negative effect on the standard of living of Namibians.
If all the oil used in Namibia were produced domestically, rising oil prices would not lower the overall standard of living of Namibians in the long run, nor would it lower GDP.
The loss of business and consumer confidence resulting from an energy shock could lead to significant changes in the levels and patterns of investment, savings and spending.
Rising energy prices would undoubtedly lead to higher prices for other fuels, amplifying the overall macroeconomic impact.
Unfortunately, these shifts in spending patterns can be quite disruptive to some key economic sectors and appear to be part of the mechanism by which past oil price shocks contributed to previous economic downturns.
Energy prices remain an important macroeconomic variable.
Higher prices can still inflict considerable damage on the economies of energy-importing countries and on the global economy as a whole.
Businesses are less able to pass on rising energy input costs through higher prices for goods and services due to strong competition in wholesale and retail markets.
As a result, rising energy prices have so far eroded earnings more than they have raised inflation. Yet the economic threat posed by rising energy prices remains real.
Fiscal imbalances would worsen, upward pressure on interest rates would intensify, and the current boost in business and consumer confidence would be interrupted, threatening the sustainability of the current cyclical economic recovery.
The sovereign wealth fund has great potential to help a fragile country with lucrative commodities manage high incomes and invest in sustainable development.
With proper management and learning from examples of successful funds, a sovereign wealth fund in a fragile state could stabilize an economy, protect it against price shocks and help the government invest in long-term development goals.
The sovereign wealth fund can be very beneficial, but there are always opportunities for investments to go sour. This means that it is important for a country to analyze the rewards that can be generated before creating a sovereign wealth fund.
Therefore, if the profits from this fund are used well, they can actually mitigate risk and add considerable value to the economy, for example through diversification.
A well-managed and intelligently invested fund would always benefit the country concerned if used wisely.
These advantages mean that sovereign wealth funds are likely to become increasingly common, making them an important factor in the global economy.
* Josef Sheehama is a banking professional with 19 years of experience. He writes on a personal basis.