Does Sub-Saharan Africa Need A Sovereign Wealth Fund?

Does Sub-Saharan Africa Need A Sovereign Wealth Fund?

On June 27, 14 African central bank governors will be meeting in Switzerland to discuss the formation of a sovereign wealth fund that they hope will help cushion member countries in times of commodity price weaknesses, Xinhua reported.

According to the forum organizer, the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) which operates in 14 African countries, the continent has for long been criticized for not taking advantage of its vast natural resource wealth to ensure sustainable growth in its economies and a sovereign fund was one way to ensure this.

A sovereign wealth fund is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.

Such funds also act as fiscal stabilization mechanisms giving governments access to liquid assets they can draw on in times of need—crucial for resource-dependent countries vulnerable to commodity price shocks.

“Africa’s resource wealth is a great asset to the continent, but it is crucial that it is best used to ensure long-term and sustainable economic wealth for these countries, even in times of commodity price weakness,” said Katherine Tweedie, executive director of the Investec Investment Institute.

A research report by Tweedie’s specialist asset management group, the Center for International Development and the Belfer Center at Harvard University, focusing on the structures, policies and operations of sovereign wealth funds, will be used shape the African central bank governors’ discussion.

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“The message from the resultant research reports is that all is not lost in terms of the momentum behind Africa’s emerging sovereign wealth funds, even following the lull in commodity prices,” Caleb Fundanga, the executive director of MEFMI, told Xinhua.

African sovereign wealth funds are emerging to save and invest resource revenue in oil rich countries like Nigeria, Ghana and Angola, which have come under heavy financial constraints after crude prices more than halved globally since the last quarter of 2014.

Other countries that have set aside revenue for a rainy day include Botswana, Mozambique and Zimbabwe, while East African nations of Tanzania, Rwanda and Kenya have shown intend to do so too.

How Can They?

“The label sovereign wealth fund sounds sexy. ‘Norway has one, Chile has one, Qatar has one, we want one too,’ is what we are hearing a lot from African leaders,” Andrew Bauer, an economic analyst at New York-based Natural Resource Governance Institute, told Good Governance Africa.

But some civil society activists, like Angola’s Elias Isaac of the Open Society Initiative for Southern Africa, think creating sovereign funds is not something African governments, which are faced with entrenched poverty and low life expectancy, should be pursuing.

“How can [they] even think about that when such a large portion of the current generation is living in poverty without access to basic services?” Isaac asked.

Others however believe that well managed sovereign funds, like Botswana’s Pula Fund set up in 1994 to manage diamond revenue, can protect these resource rich countries from the ‘Dutch Disease’  where mineral export boost the local currency making product more expensive and less competitive.

The Pula Fund is now worth nearly $7 billion and growing.

“The (Pula) fund has been a good vehicle to smooth government revenue in periods of economic downturns and to transfer mineral wealth for future generations,” Javier Capapé, a researcher at Esade business school’s Center for Global Economy and Geopolitics in Spain, told Good Governance Africa.