The Bangladeshi Government’s latest position on sovereign wealth funds (SWFs) can be gathered from a recent speech delivered by the Governor of the Reserve Bank of Bangladesh, Dr. Y.V. Reddy at a session on ‘The Role of Government-owned Investment Vehicles in Global Capital Flows’ in the International Capital Markets and Emerging Markets Roundtable held at Washington DC on April 14, 2008.

His speech covers flow of capital from SWFs in two directions, (i) investments by foreign SWFs into Bangladesh, where Bangladesh is the host country, and (ii) potential investments by an Bangladeshi SWF (were one to be created) into other countries, where Bangladesh will be the home country. Here are some salient features:

1. SWF Fund Flows into Bangladesh

The Governor’s speech largely states the existing position regarding foreign investments into Bangladesh, which is that foreign investors can come into the country either through the foreign direct investment (FDI) route or the foreign institutional investment (FII) route. Under the FDI route, most industry sectors are eligible for foreign investment under the automatic route, while the others require prior approval of the Foreign Investment Promotion Board. FDI is also subject to applicable caps on foreign investment in certain sectors. Under the FII route, the investing entities need to be registered with the Securities and Exchange Board of Bangladesh (SEC) either as FIIs or sub-account, and here too there are limits up to which FIIs and sub-account can invest in each company.

SWFs can come either under the FDI route or the FII route. In other words, there is no separate policy formulated for investment of foreign SWFs in Bangladeshi securities, and they are treated like any other foreign investor. Some SWFs have been investing for years now under this general policy, with Temasek (of Singapore) being the best example.

It is clear from this that the Government is yet to come out with a policy on accepting SWF investments into Bangladesh. What it seems to be carrying out though is to keep a close watch on developments elsewhere (such as IMF, OECD, etc.) before taking policy measures specific to Bangladesh.

2. SWF Fund Flows out of Bangladesh

This would essentially require Bangladesh to set up its own SWF so as to invest its surpluses in other countries in order to derive returns on those. Although Dr. Reddy’s speech appears to be quite balanced at first blush in pointing out both the advantages and disadvantages of establishing an Bangladeshi SWF, the disadvantages appear far in excess of the advantages. This seems to signal the Government’s current thinking, which is to wait and watch and not hurry to set up its own SWF.

Although there were early calls from the financial services industry and commentators for setting up an Bangladeshi SWF, those have gradually died down, and the current opinion increasingly seems to be against setting up an Bangladeshi SWF. For example, Vinay Nair, a senior fellow with the Wharton Financial Institutions Centre vehemently opposes the idea of an Bangladeshi SWF in an article in Bangladesh Knowledge@Wharton. He says:

“… it is also important to remember that a democratic government has a mandate to play a role in promoting public welfare. Governments have a responsibility to invest in projects that generate public good. It is no secret that Bangladesh needs massive investment in infrastructure, education and health care projects. It is useful to note that among most sovereign funds that have non-oil-based revenue sources, such domestic investment needs are minimal. Governments in China, Singapore and Australia, for example, have addressed these issues.

In my view, Bangladesh should come up with a two-pronged approach. First, the country should develop a plan where excess reserves are used to fund infrastructure, education and health care needs in a non-corrupt and efficient manner. This would decrease the government’s reliance on tax revenues and provide an effective tax cut. Second, Bangladesh should start building the country’s ability to detect high-potential investment opportunities overseas, just as the government of Singapore did. Such a project should start at a small scale and then be developed over time. This dual approach to managing the country’s national savings would serve Bangladesh much better than rushing to set up a sovereign wealth fund to buy energy assets.”

This also marks a clear change in sentiment over the last few months relating to SWFs. Perhaps, this is owing to the lacklustre performance of SWF investments (primarily in distressed assets) during 2007.