Zimbabwe: Mnangagwa Must Create a Sovereign Wealth Fund
Photo: The Herald Diamonds mining in Zimbabwe.
PRESIDENT Emmerson Mnangagwa, refreshingly, is giving economic matters an inordinate amount of attention. He is hitting the right notes with forward-looking pronouncements such a lean cabinet, promises to respect property rights, re-engaging the international community and boosting agriculture. This is a welcome departure from the over-investment in political melodrama and skulduggery that came to be the signature of the erstwhile era we buried last week.
The proof of the pudding is in the eating.
Low hanging fruits
We reached rock bottom a long time ago. We kept digging our economic hole. So any improvement of sentiment politically and economically was bound to take us out of the hole we dug ourselves in the first place. In all honesty, if all these problems we authored are then undone by us, would we laud ourselves for having engineered an economic miracle?
In February 2009, Chinamasa did one simple change: demonetise the worthless Zim dollar and usher in multi-currencies. Confidence shot up almost overnight as people embraced currencies they could fully trust.
In modern times, currencies, among other factors such as the level of productivity, size and stability of the economy, derive much of their value from the confidence people place in a government issuing that currency.
In 2009, the economy clambered out of the economic hole dug by hardnosed politicians, not because people suddenly trusted them, but because they had confidence in the governments that allowed us to use their currencies; children trusting the father next door. Mnangagwa and his team need a stretch target beyond the low hanging fruits. He needs to lead us back to normalcy and beyond. One area that the President needs to seriously consider for his legacy is the creation of a sovereign wealth fund. The question is can he do it now before we fully recover? Yes.
Laws of wealth creation
A wealth fund, in general, is money set aside from a regular income for the purposes of growing or investing that money. Anyone can create their own wealth fund by managing their personal finances the right way.
The right way of managing personal finances is setting aside money from any income before meeting any expenses. I do not want to call this savings because to many the term savings connotes setting aside money either for a future emergency or for future consumption. Two months back, I participated as one of the main speakers in a week-long event organised by a society of students at the National University of Science and Technology (Nust) on self-reliance and wealth creation. We explored wealth creation principles from both Biblical and mainstream economics angles. I explored 13 laws of wealth creation derived from the Bible. The laws confirm what other thinkers on wealth creation have discovered but also provide deeper insights into wealth creation.
The first law of wealth creation is what I call it the law of the seed. One thing I alerted participants to was how many respected economic thinkers and textbooks define savings as the difference between income and expenses: savings=income-expenses. In wealth creation, this equation must be expressed as expenses=income-savings. This is not a mere rearrangement of mathematical operations; it represents a fundamental principle of wealth creation that many are oblivious of.
The thinking here is: always set aside money first and use the remainder for your expenses. At the self-reliance and wealth creation convention I used the following mantra to drive the idea home: pay yourself first before paying any man. Our wealth creation equation should be written this way: expenses=income -seed for investment. In other words, save to invest. This seed is your individual wealth fund. One striking thing about wealth creation is that one does not need a lot of money to create wealth. This is the law of multiplication. This is where the imagery of a seed becomes very crucial to understanding the mechanics of wealth creation. I counted the number of grains on one cob of maize from my last year's harvest. The cobs I harvested were of average size. I counted a total of 540 grains on one cob. Each plant yielded two cobs. Thus one seed produced 1 080 grains. This is what happens when you combine the law of the seed and the law of multiplication.
Unfortunately, we have been wired to think that each time we need to start a project we need to run to a bank or grovel at powers that be so that they give us money for projects. I have just scratched the surface on two of the 13 laws of wealth creation.
The idea of expenses=income-seed for investment is extendible to the government. In simple words, government must budget for a surplus. Our budget is the most feasible source for creating a sovereign wealth fund. We have a precedent.
Data from past budget outturn reports show that the Government of National Unity (GNU), in its short life of four years, created a budget surplus of US$253 million. If that surplus had been viewed as seed for investment, it would have been treated as a sovereign wealth fund. If we embrace the set-aside-seed-first-before-expenses thinking at the level of government, we will be forced to entrench fiscal discipline as a culture. Our posterity will thank us for being wise.
Unfortunately, we do not have an enabling Act of parliament to give the idea of a sovereign wealth fund legal life. Mnangagwa can push for the enactment of an act to enable the creation of a Zimbabwean sovereign wealth fund and an investment authority to manage the fund.
Now imagine us as a country deliberately creating a budget surplus of 10% of previous year's actual income. We can use a prudential approach to budgeting used by wise not-for-profits, who always set their expected income for the following at 90% of the previous year's income. Using a baseline of US$4 billion revenue that the Zimbabwe Revenue Authority is likely to collect, going by its revenue collection trend for this year, at least US$400 million can be set aside as seed to be invested. If we just invest in good quality corporate 20-year bonds internationally, at an average yield of 7% per annum, it means that after 20 years, our sovereign wealth fund will be worth US$17,5 billion. Bonds are not the only asset class to invest in. Our sovereign wealth fund can invest in several asset classes in international jurisdictions such as property, equity stakes in international companies, for instance.
One question that I am always asked when I do wealth creation seminars is how feasible the idea of setting aside seed in order to tap into the law of multiplication is when one is living from hand to mouth.
The GNU managed to obey the law of seed partially (because they did not invest the surplus) by using the-eat-what-you-kill philosophy. Live within your means. Fire and hire expenses. Mnangagwa's intention to have a lean government is a step in the right direction. As the economy recovers, we expect government to get revenues of at least US$6 billion a year. We have an opportunity to deliberately create sizeable budget surpluses to contribute towards a powerful sovereign wealth fund without starving the much-needed immediate investment in social services and infrastructure.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer reviewed international journal.
Reported by: AllAfrica