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Sovereign Wealth Fund could stabilise economy

Sovereign Wealth Fund could stabilise economy

Staff Reporter

THE Bank of Namibia (BoN) and the Ministry of Finance will officially launch the Sovereign Wealth Fund (SWF), intended to serve as a buffer against economic shocks, on Thursday.

President Hage Geingob will officiate the inauguration and launch.

“The Sovereign Wealth Fund has great potential to help the fragile country with lucrative commodities manage high revenues and invest in sustainable development,” Josef Kefas Sheehama, an independent economic analyst, said.

According to Sheehama, the fund is meant to run as an independent board that determines how money should be invested. He further explained that it could stabilise the economy, protect it from price shocks and assist the government in investing in long-term development goals.

He also explained that the fund will be divided into short and long-term funds and will be financed with the proceeds from the renewable energy industry, mining royalties and fishing quotas, among other things.

Sheehama said that the increase in energy prices has harmed the economy by affecting the pace of activity and corporate earnings, as well as confidence. This increase affects the prices of a variety of goods and services that are dependent on oil in the production and delivery process.

“Increasing prices of goods and services reduces the supply and production of other goods and services due to increased production costs. Additionally, demand for these goods and services will also decline due to higher purchasing costs. These elements can lead to a rise in inflation and suppression of economic growth,” Sheehama added.

Sheehama further explained that the higher prices can still inflict substantial damage on the economies of energy-importing countries, such as Namibia, which imports a substantial part of its energy needs. In this way, energy price increases have a larger effect on the standard of living of Namibians.

He also pointed out that the high energy prices have also eroded profits as companies are less able to pass through higher energy-input costs due to strong competition in wholesale and retail markets.

Furthermore, Sheehama warned that fiscal imbalances would worsen, pressure to raise interest rates would grow and the current revival in business and consumer confidence would be cut short. This, he said, would threaten the durability of the current cyclical economic upturn.

According to the economic analyst, the loss of business and consumer confidence resulting from an energy shock could lead to significant shifts in levels and patterns of investment, savings and spending.

“Higher energy prices would undoubtedly drive up the prices of other fuels, magnifying the overall macroeconomic impact. Unfortunately, those changes in spending patterns can be quite disruptive for certain key economic sectors and seem to be part of the mechanism by which the earlier oil price shocks had contributed to previous economic recessions,” he said.

Taking this into consideration, Sheehama emphasised that if the profit from the SWF is properly managed, it could mitigate risks and add huge value to the economy, such as through diversification.

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