Bangladesh Government mulls $5b sovereign wealth fund

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Bangladesh Government mulls $5b sovereign wealth fund

Bangladesh is set to form a sovereign wealth fund with an authorised capital of $5 billion to finance big projects.

A seven-member team led by Bangladesh Bank's Deputy Governor SK Sur Chowdhury that was formed last year to evaluate the prospects of creating the fund submitted its report to Finance Minister AMA Muhith yesterday.

It is a government or state-run fund usually created with central bank reserves or profits from natural resources such as oil, gas or minerals.

“But Bangladesh does not have any such natural resource. I do say I have natural resource, which is human,” Muhith said, acknowledging the contribution of the expatriate Bangladeshis, who send home vast sums of money every year.

The government had initially planned to directly draw into the country's sizeable foreign currency reserves for mega projects but there are some problems with the budget deficit management, so the idea of creating a SWF is being considered.

“The sovereign wealth fund is a new concept for Bangladesh,” he said, adding that a law needs to be passed first before forming the fund.

A proposal for creating the fund will be sent to the cabinet next month. Once the approval comes, work on enacting the law will start.

“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.”

The paid-up capital for the fund will initially be collected from the central bank's foreign currency reserves. The report recommended initial paid-up capital of $1 billion.

Later, the government will issue various treasury bonds and raise money from the market in local currency.  The money will later be converted into foreign currency for the SWF.

Muhith said there are some limitations on the use of money from SWF: only the projects that are economically sound can be taken up. The money from SWF cannot be used to finance any or every project.

On December 14, the country's foreign currency reserves stood at $31.75 billion, which is enough to honour eight months' import bills. The central bank does not keep the reserves idle: it invests in 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 prompted the government to devise ways to utilise the reserves for a cause that will accelerate economic growth. For the past decade, the economy has been stuck in the 6 percent growth trajectory, the main cause of which is the lack of infrastructure. Once the SWF is formed, the government will borrow from it to spend on big infrastructure projects such as the Padma bridge.

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.

As of September 2016, total assets under SWFs 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 SWF. China Investment Corporation, Abu Dhabi Investment Authority, Saudi Arabia's SAMA Foreign Holdings and Kuwait Investment Authority round up the top five spots.