A Sovereign Wealth Fund is premature at this stage

An oil rig. Although Kenya is anticipating surplus revenues from oil, gas and minerals, it cannot quantify the amounts of the natural resources that will available for export because they are still under exploration. Photo/FILE  

By George Wachira

In Summary

• We should not rush to prematurely set up another State agency for which the country is not yet ready.
• As for the management of revenues from extractive resources it is not too early to start developing frameworks for transparent accountability of revenues. The SWF can come much later when we have genuine surpluses.

In its draft report, the Presidential Taskforce on Parastatal Reforms has recommended the creation of a Sovereign Wealth Fund (SWF) which was part of the Jubilee manifesto.

SWF is a State-owned investment fund or entity established from balance of payment surpluses mainly from commodity exports.

In the case of Kenya, it is in anticipation of surplus revenues from oil, gas and minerals which are currently undergoing exploration and development. The defining words for us here are “anticipation” and “surplus.”

Anticipation because Kenya is yet to quantify the amounts of oil, gas or even minerals available for export into the commodity markets.

It is only after quantities are known that the government can be sure of its future share of revenues from such resources. Further, having surplus funds to invest means the country will have already spent sufficient cash on urgent basic infrastructure and socio-economic programmes for its citizens.

Kenya is starting off from a very low level of per capita spending on basic essential infrastructure and may take many years before we can count surplus revenues.

In principle, I agree we need to conceptualise and define a SWF which is very forward thinking. This will permit the policies and structures supporting a future SWF to be enshrined in the proposed law that will actualise the framework for the proposed parastatal reforms.

But we should not rush to prematurely set up another State agency for which the country is not yet ready. Any new agency, as we have experienced with the recently set-up commissions, consumes large sums of money in set-up and maintenance costs.
 
One of the key defining principles of a sovereign investment fund is saving money for the benefit of future generations. Many including myself have argued that priority should be to intelligently spend money today on key developmental programmes and infrastructure before we rush into setting up a sovereign investment fund.

Any genuine and relevant development we undertake today will benefit future generations. Money well spent today on projects and programmes is worth a lot for future generations.

We need much of the cash from natural resources to implement major irrigation projects to make the country less of a rain-fed economy and ensure sustainable food security. On the social side we still have to spend sufficiently on health and education facilities and the associated supporting human resource.

Even before we contemplate investing our “surplus” cash, we should at least have ensured that we have retired the bulk of existing foreign debts so as to reduce budgetary pressure on future generations.

A sovereign fund will become relevant when we have real surplus revenues, but I do not see this happening any time soon. In many developing resource-rich countries, pseudo “surpluses” are manifested through irresponsible wastage and theft of revenues from extractive resources.

It is how we account for every shilling of revenue that is important, and if through correct and responsible budgeting we have genuine surpluses then let us push the cash into a SWF.

When that time for genuine surpluses comes, and I am sure it will come, then Kenya will have upped its game into international money markets, which is currently being played by the Middle East countries with huge revenue surpluses to invest in global markets.

A SWF will then become a very important tool in fiscal management to absorb surplus liquidity and prevent overheating of the economy.