What Is the Pula Fund?

The Pula Fund is a sovereign wealth fund (SWF) launched by the government of Botswana. Since its inception in 1994, the Pula Fund has been jointly owned by the government of Botswana and the Bank of Botswana, the nation's central bank.

The revenues invested in the Fund are drawn from Botswana's diamond industry, a finite resource that is expected to wane in the coming decades.

Key Takeaways

  • The Pula Fund is the sovereign wealth fund (SWF) of Botswana.
  • It was launched in 1994 and is funded by the nation's diamond resources.
  • Observers have criticized the governance of the Pula Fund, citing its lack of transparency and the frequent withdrawals made by government officials.

Understanding the Pula Fund

The Pula Fund is one of Africa's largest and oldest SWFs. Named after Botswana's national currency, the Botswana pula (BWP), the Pula Fund was created to preserve and invest the earnings drawn from the nation's diamond resources. To that end, the fund was seeded with foreign currency reserves drawn from the nation's diamond industry, which many experts expect will run out of diamond resources sometime in the mid-2030s.

This looming shortage of diamonds represents a severe threat to Botswana's economy. Between 2000 and 2010, the diamond industry was responsible for roughly 40% of Botswana's economy and 80% of its foreign exchange earnings. The government hopes that by saving and investing these earnings while they are still available, the long-term economic impact on Botswana can be softened.

The governance of the Pula Fund has been a subject of some controversy, with recent reports expressing concern over the transparency of fund management and suspicions that the central bank and finance ministry may have made inappropriate use of the Fund's resources. 

The Pula Fund, which is overseen by the governor of the Bank of Botswana along with an unnamed management committee, has withdrawn capital from the Pula Fund several times since 2000. It has justified these withdrawals by claiming they were necessary to fund social welfare programs and to avoid unpleasant political decisions, such as ending tuition-free schools.

Outside observers like the Columbia Center on Sustainable Investment have expressed skepticism at these claims, citing a lack of documentation for the committee's explanations. They have also criticized fund managers for poor fund performance over recent years, in spite of a booming international diamond market.

Sovereign Wealth Funds

The Pula Fund represents roughly $6 billion of investment capital. While this is certainly large in absolute terms, it is small by the standards of SWFs. By comparison, the largest single SWF is the Government Pension Fund of Norway, which holds over $1 trillion in assets. Collectively, however, the world leader in SWF assets is China, which holds over $1.5 trillion across a range of SWFs.

Real World Example of the Pula Fund

The Pula Fund is modeled after several SWFs established by other nations over the second half of the 20th century, the first of which was established by Kuwait in 1958. Countries with particularly valuable natural resource reserves often establish an SWF to provide a cushion for future periods when either resource prices or supplies might decline significantly or suddenly.

Top-performing SWFs, such as those of Norway or the United Arab Emirates, have succeeded by pursuing a policy of setting money aside for overseas investment under rigorous oversight and restrictions on government access to those funds. Botswana's Pula Fund uses a similar asset aggregation and investment strategy but is considerably weaker with respect to fund oversight.