How relevant is the concept of sovereign wealth funds?

Since the US dollar is an international currency, i.e. 'reserve currency', most countries invest their foreign currency reserves in bonds (treasury bills and bonds) issued by the US government and keep them in US banks. Although the returns from such investments are low because they are safe and liquid, most of the countries invest their foreign exchange reserves through these instruments. Through sovereign wealth funds, excessive dependence on one country, one currency and limited instruments can be reduced and economic returns from foreign currency reserves can be increased and risks can be diversified.

Many countries with large foreign exchange reserves have established funds according to their needs. Where, how much, when, in what kind of project and through what kind of structure foreign currency reserves will be mobilized by each country will be decided after evaluating the objective, priority, overall economic situation and especially the situation in the external sector. We should also set up a sovereign wealth fund for the benefit of the nation through a structure that suits our circumstances. In the case of more foreign exchange reserves than required, it is appropriate to invest the foreign currency in projects that increase the productivity and output of the economy and earn foreign currency.

According to the latest report of Rashtra Bank, the country has foreign exchange reserves equal to 14.7 billion dollars at the end of May 2081. A significant reduction in imports and an increase in remittance flows have increased reserves by more than $5 billion over the past 20 months and increased by 25.7 percent over last year. That reserve covers 12.6 months worth of goods and services imports, while the reserve is more than Nepal's entire foreign debt (about 9 billion dollars). According to various indicators and international standards, the reserve situation of our country is very strong. Most of the foreign currency of the state is owned by Nepal Rastra Bank and some part is in banks and financial institutions. Therefore foreign exchange reserves appear under various headings in the central bank's balance sheet. According to the balance sheet of Nepal Rastra Bank for the last financial year 2079/80, the foreign currency reserves are 1.3 billion dollars in cash and foreign central banks, 4 billion dollars in foreign banks, about 5 billion dollars in foreign government bonds (USA and India) and the rest is invested in other financial instruments. is.

However, the returns earned from the investments mentioned above are very low. Investment returns in international financial markets are generally dictated by policy interest rates set by the US central bank, the Federal Reserve. Since the interest rate is usually low, Nepal has been earning only marginal returns. However, since the beginning of 2022, since the policy interest rate has increased, the income from foreign exchange has also increased in the same proportion for the past three years. More than 20 percent of foreign exchange reserves are invested in Indian bonds, which yield relatively good returns. But the financial returns obtained from strategic projects that increase the productivity of the economy as a whole are qualitative than the returns from investments in foreign banks and bonds.

In order to upgrade Nepal to a high-middle income country by the year 2100, increasing investment and diversification of resources is indispensable. The country needs a large amount of capital for economic transformation and development. The possibility of mobilizing capital from traditional sources is low. Our traditional sources of capital formation are revenue, foreign financial assistance and loans mobilized from the country's banking sector. Another important resource - foreign direct investment mobilization situation is critical. The import-based revenue policy is not sustainable and since the revenue has not increased for the last two years, public finance management is becoming a challenge. Therefore, this fund should be established as an important source and supplement of capital formation.

The most important source in our context is dispatch. Despite the large amount of remittances coming into the country for three decades, capital formation through savings has not been possible. According to the latest report, more than 70 percent of households in Nepal receive regular remittances. But since a large part of the remittance is spent on basic needs, there is no possibility of building capital by saving at the individual level. That is why the various savings and investment schemes aimed at millions of Nepalis abroad have not been successful.

Even though remittances keep the economy running by increasing demand, the country is becoming more dependent because domestic production cannot be produced in the same proportion. The contribution of remittances is the highest with about 60 percent in foreign exchange earnings, and this year, remittances equal to about 11 billion dollars are coming in, more than the total foreign debt of Nepal. Therefore, foreign exchange reserves that have been depleted due to remittances should be mobilized through the latest mechanism and a strategy should be taken to increase investment in the productive sector. Foreign exchange is an important asset of the state and, being liquid, it is an important source of investment.

However, most of the foreign currency is spent on imports. The share of capital goods and services in total imports is only about 10 percent. Therefore, foreign exchange has not been mobilized for capital formation. An economy highly dependent on imports cannot be productive and dynamic. The concept of this fund is relevant to address over-dependence on imports and enhance export capacity. Being based on foreign exchange, this fund must necessarily be mobilized to diversify sources of foreign exchange, increase income, reduce imports and increase exports. Otherwise, if the project selection criteria and conditions are too flexible, it may be misused due to political interference and personal interests.

There was a big problem in the external sector in 2078/79 due to high imports. In that year, the country imported the highest amount ever and suffered a high trade deficit, current account deficit and trade deficit. There was fear everywhere that the country would become Sri Lanka. But there has been significant improvement in the external sector in the last two years. A significant drop in imports and an increase in remittance inflows have resulted in a current account surplus since the beginning of this financial year after a long period. But it is important to understand the fact that domestic production has increased and imports have not decreased. Until the productive capacity and production of the economy is increased by increasing investment, the country will have to face the risk of instability in the external sector. Therefore, the concept of sovereign wealth fund is timely to raise the necessary financial resources to increase the country's productivity and production.

Private sector investment and credit growth has almost stopped for two years. In such a situation, as an important measure of economic stimulation, to make the economy dynamic and to increase private sector investment (crowding in), public investment in productive infrastructure should be significantly increased. But financial resources are shrinking. Due to new challenges in revenue mobilization and increasing financial obligations, it is not easy to mobilize additional resources through the regular budget process. The condition of infrastructure construction through regular public expenditure is very critical in terms of prioritization, construction period and quality. It is not easy to mobilize financial resources through various resources and tools available in the name of climate change due to many difficult criteria.

Foreign grants are drying up. In 2026, the availability of concessional loans will definitely decrease after the country is upgraded from a least developed country to a developing country. In such a situation, it will be helpful to mobilize financial resources in the productive sector as a supplement to the capital expenditure through the budget by establishing an immediate fund. For this purpose, the Council of Ministers should immediately decide to establish a sovereign wealth fund and implement the project sponsored by it through a special purpose vehicle and complete the necessary legal process. This fund, which will be established as a holding company, will invest in various projects through various companies, i.e. special purpose vehicles.

A special purpose vehicle is a fully autonomous entity that has all legal rights, can carry assets and liabilities, and can earn and spend income. Who will keep their financial statements according to law. Projects operated by sovereign wealth funds must be of a cash flow nature and can be implemented through special purpose vehicles. Otherwise it will not be possible to continue the fund. For example, this mechanism is not suitable for raising resources for basic infrastructure such as highways and irrigation because these infrastructures are important for the country but cannot generate income on their own. It is not practical to charge farmers for irrigation facilities and general public to use highways of a general nature. Important public infrastructure projects of such nature should be addressed through the regular process of the government budget.

The foreign currency of the state is owned by Nepal Rastra Bank. After the establishment of the Sovereign Wealth Fund, the National Bank, as the sole founder i.e. shareholder, transfers the specified foreign currency to the fund's account and the amount is deposited as capital in the fund's account. As this fund is an autonomous legal entity with full authority, it will be operated according to its statutes, charter and regulations. A committee of 11 people can be formed with the deputy governor of the National Bank as the chairman of the board of directors of the fund and two executive directors, one joint secretary each from the Ministry of Finance, the Ministry of Industry and the Ministry of Materials, the general manager of FNCCI, CNI and NRN and two independent experts. It is appropriate to entrust the Executive Director of Rashtra Bank as the Chief Executive Officer of the fund. This fund will evaluate various projects and invest foreign currency in the interest of the nation through 'Special Purpose Vehicle' according to its purpose.

Assessing the current state of foreign exchange reserves, the country's priorities and project implementation capacity, it is appropriate to provide one billion dollars immediately after the establishment of the Sovereign Wealth Fund. In the long run, it is appropriate to set aside a system of foreign exchange that can cover 8 to 10 months of imports and mobilize the rest of the resources through this fund for the country's development, after assessing the state's total foreign assets, liabilities and income and expenses.

A comprehensive information technology and innovation park with study institutions like IITs in India, at least one state-of-the-art teaching hospital in each state in collaboration with local hospitals, construction of electricity transmission line infrastructure in major cities with the aim of replacing cooking gas can be transformative projects. Investments can be made through the sovereign wealth fund in strategic projects such as mechanisms to export soil, stone, gravel, sand from the mountains, establishment of training centers to displace Indian workers and impart skills to Nepalis going abroad, electricity generation infrastructure under the Sunkoshi-Marin multi-purpose irrigation project, Nijgadh International Airport.

There is a narrow understanding that only countries that export natural resources like oil, gas and minerals can establish such a fund. In fact, countries that do not export natural resources like China, Singapore, Hong Kong, Korea, and Japan have also established such a fund. The intensive issue for the establishment of this fund is more important than the source from which the foreign exchange is earned, the amount and trend of foreign exchange reserves. Remittances are to Nepal what oil is to Middle Eastern countries. A country cannot run on remittances forever. Middle Eastern countries are also diversifying their economies to reduce overdependence on oil and gas. Any country having foreign exchange reserves in excess of its short-term needs can set up this fund for its larger interests. It will be a very important and strategic investment source for a developing country like ours that has less financial resources.

Most of our big projects are built with the financial support (often loans) of foreign countries and organizations, so they have more influence and are directed according to their interests. Everyone wants to build a project in their own way. From the design of the project to the selection of contractors, the purchase of goods and the selection of project personnel, it is according to their wishes. However, since this fund will be built by this fund, we should not have such an unnecessary foreign intervention and is completed in low cost. The effective implementation of this fund can also be decreasing to the foreign debt, while in the future development of the country, can be mobilized in the country development through this cell.

will play a very important role for economic and financial stability of developing countries like Nepal. After the Asian Financial Crisis, almost all developing countries have adopted a policy to increase foreign currency reserves. Foreign economic development of foreign currency is confirmed by foreign exchange history in both normal and unusual. Avoidance of foreign liability and trade for the country for proper management and operational operations of foreign exchange reserves. The Foreign liability of our country is more secure as many obligations are having a concessional debt in long-term nature. It is also necessary to mobilize highly reserved in foreign wrath in foreign exchange. & Nbsp;

, a forex was increased in seven years of reserves from seven billion in 2074 BS. The current account saved for a long time was saved for a long time saving due to high remittances and medium imports. The reserves had increased by rating imports in 2073. Shortly, the increasing import and declining remittance rise increased by increasing arms. Thus, the first historic occasion was lost by spending extracted foreign currency reservations, spending Durgeani. Foreigners and imports of the economy of the economy is not allowed to increase the productivity of the economy of the economy in the 2074/2079. About the external area will always be risky. It is appropriate to establish a loan of the foreign exchange mechanisms that millions who earn by millions of foreign Nepalis and can only establish a mechanism to invest in our country development. The thought and tendency to take a loan with the international financial institutions and foreigners to invest in foreign countries but also the tendency to invest a foreign currency in their own country is not right.

Time Chakra has provided a second historical occasion. Intensive and high interests that remittances could not be mobilized for country development can be addressed only through this mechanism. The historical occasions of the world owned by the country and will continue to mobilize only for importance, the historic occurrence provided by remittances and demographic structure. The country will continue to be victims of trade value. Definite sources for any country (remittances) Periods of availability of availability and not eternity.