Israel’s plan to launch a sovereign wealth fund – the Israel Citizens’ Fund – this year has been scuppered due to lower-than-expected revenue from tax on excess profits on gas and other natural resources. The Middle Eastern state’s experience underscores the challenges faced by governments seeking to leverage excesses of commodity revenues or foreign exchange reserves to establish an SWF.
Established under the Sovereign Wealth Law of 2014, the fund will only launch when tax collection on super-profits reaches NIS 1 billion (US$305 million), but so far the Israeli authorities have only raised NIS 741 million (US$226 million). Once established, it will distribute 3.5% of revenue for social and economic development. Although revenue is expected to exceed the target by the year-end, the fund is unlikely to be established until 2022.
The start-up date for the Israel Citizens’ Fund has been pushed back several occasions, moving it well away from the original target of 2018, due to slower revenue flows from its gas reserves and resources such as potash and magnesium. Between 2011 and 2020, a total of NIS 486 million was collected from gas revenues and NIS 225 million was raised in the first half of 2021. The slump in energy prices during the pandemic has undermined expectations for royalties and has also undermined the long-term energy profit revenues, which have been revised down to NIS 44-53 billion (US$13-16 billion) for 2021-64.
While Israel’s experience demonstrates the difficulties in establishing and funding a long-term savings and investment fund, Global SWF still expects to see several new SWFs being established in coming years. However, the share of resourced-sourced SWFs, like the Israel Citizens’ Fund, is decreasing rapidly. Mozambique, Congo-Kinshasa and New Caledonia are expected to start up funds based on gas, coltan and nickel, respectively.
Another source of funding is surplus reserves. According to IMF projections, only four of the top 10 countries by current account surplus in 2021-2025 have a major SWF. Those without an SWF include Germany, Japan and Taiwan, which are projected to have total surpluses over 2021-25 of US$1,610 billion, US$858 billion and US$359 billion, respectively.
The trend is, however, towards the establishment of “SWFs without Wealth”. India’s National Investment and Infrastructure Fund (NIIF) is increasingly seen as a model for other governments, such as the new funds emerging in Indonesia and Djibouti. Countries likely to consider such a fund include Romania, Bangladesh and South Africa. Bangladesh is also looking to utilize foreign exchange windfalls through the Bangladesh Infrastructure Development Fund (BIDF), which we warn carries the risk of potentially risky FX reserve depletion and the build-up of a bad loan portfolio that could ultimately undermine its purpose. Yet, these are not without challenges, not least the need for high standards of governance and competence to win co-investors and secure debt.