What Are Sovereign Wealth Funds?

The States harness the power by making and enforcing laws, collecting taxes, participating in wars, and engaging in trade. As a result, a Sovereign Wealth Fund is a pool of funds owned and used by the central government for its own investment purposes. Just as Adam Smith predicted that sovereign states could and do acquire wealth, governments invest this money in businesses and real estate around the world to benefit their economies and citizens. Popular sources for funds include money from state-owned natural resources like oil and minerals, foreign currency operations etc.

The first sovereign wealth fund was established by the Singapore government in 1981 and was known as the Singapore Government Investment Corporation (GIC). In India, SWF was established by then-Finance Minister Mr Arun Jaitley in his 2015-2016 federal budget. His SWF in India is the National Investment and Infrastructure Fund (NIIF).

Sovereign Wealth Fund

The History of Sovereign Wealth Funds

• Kuwait was the first country in the world to launch a sovereign wealth fund. After Kuwait discovered oil in 1953, it decided to set up a fund to invest its surplus oil revenues. Soon it was considered the richest country in the whole world.

• In 1990, the small Persian Gulf country was invaded and occupied by Iraq, then liberated by 35 US-led nations. The reason for this war was oil and the money that came with it, leaving Kuwait with a population of just 4.1 million.

• Today Kuwait, whose Sovereign Wealth Fund is worth over $500 billion, is considered to have one of the largest funds in the world.

• East Asian countries such as China, Hong Kong and Singapore are also known to have sovereign wealth funds. Unlike oil producers, these countries built up excess reserves when the Asian export boom started exporting more than importing. Their surplus funds are sent to financial markets around the world to make more and more money.

• But just as sovereign wealth funds represent the peak of globalisation and a superior way for a country to diversify its wealth, they can also represent the trough of globalisation in a world of desire. With global trade facing major hurdles and a tense political climate evident, sovereign wealth funds appear to have millions of countries bidding rather than independent merchants just looking to make money.

Sovereign Wealth Fund Logo

Types of SWFs

• The stabilisation fund's main purpose is to support the government in the event of an emergency or unexpected situation that causes economic shock—for example, the rapid rise in unemployment and oil and other natural resources that increase government expenditures.

• The Future generation fund aims to cover the new costs of the future elderly population. This reduces the future budget for the country.

• The Reserve Investment fund's purpose includes only generating long-term returns. It focuses on long-term investment opportunities to attain high returns.

• The pension reserve's purpose is to support the national pension system. The fund is aimed at reducing the budget burden for paying a pension. A country with an increased elderly population can set up this fund.

Significance of SWFs

Some sovereign wealth funds may be owned by a central bank, which accumulates funds in the process of managing a country's banking system, and this type of fund usually holds major economic and fiscal importance. Other sovereign wealth funds are merely designated savings that various companies invest in for investment income and may not play a significant role in tax administration. Accumulated funds can come from foreign currency deposits held by central banks, International monetary funds, and special drawing rights. These are assets of sovereign nations and are typically held in domestic and other reserve currencies such as pounds, dollars, yen etc.

Limitations of SWFs

• Some sovereign wealth funds are not as transparent as others. For example, Some sovereign wealth funds may disclose their investment holdings on a regular basis, and other sovereign wealth funds may not disclose investment details.

• SWF guarantees no returns, and exchange rates may also affect the Sovereign wealth funds.

Case Study

India surpasses China in sovereign wealth funds. Give points to support your answer.

Ans: India has quietly replaced China as the most sought-after destination for global sovereign wealth funds investments in the private sector which is seen as a sign of the country’s growing attraction for investors. According to the data by New York Global SWF, which tracks over 400 sovereign wealth funds in the year 2020 to date which is nearly three times more than what they have put in china, i.e., dollar 4,5 billion. It started in the year 2019 when a dollar of 10.1 billion was invested by SWFs in India, surpassing the $6.4 billion amount it did in china.

Summary

Few human creations represent the pinnacle of globalisation and sovereign wealth funds. Some state funds invest the revenues achieved by the government. Some other sources include budget surpluses and reserves. The Sovereign function is to stabilise the economy of the country through diversification and create wealth for future generations. The Sovereign Wealth Funds have grown significantly in influence over the last two decades, collectively managing more than $8 trillion in assets worth about 10% of the world's Gross Domestic Product.