New oil, gas finds: Is East Africa ready for sovereign wealth funds?

 

The majority of wealth funds of the oil-exporting countries of the Middle East and Asia are stabilisation funds to act as a buffer against the volatility of oil and gas prices in the international market while in the African context savings and development is also a key objective. TEA Graphic 

By Christine Mungai The EastAfrican

In Summary

• Question vexing analysts is whether these funds are suitable for the region’s economic, social and demographic profile, considering that the countries in which sovereign wealth funds have been successful have small populations, huge current account surpluses and very low public debt—none of which characterises EA.
• Conflicting political interests are also a problem that governments have to negotiate, particularly in the context of devolving power to sub-national units as has been done in Kenya.
• Still, sovereign wealth funds reflect increasing acceptance of the power of finance by developing countries, giving emerging economies an opportunity to achieve some form of balance between globalisation and national sovereignty

Sovereign wealth funds are fast becoming the “must-have” for any natural resource-exporting country, and for any country hoping to commercialise reserves of oil, gas or minerals in the near future. East Africa has not been left behind, with Kenya, Uganda and Tanzania all considering the establishment of such funds.

But the question vexing analysts is whether these funds are suitable for the region’s economic, social and demographic profile, considering that the countries in which sovereign wealth funds have been successful have small populations, huge current account surpluses and very low public debt—none of which characterises East Africa.

According to some estimates, the total wealth held by such funds globally is more than $5 trillion, expected to grow quickly as more and more countries move to set up their own national funds.

Originally created in the 1950s by oil and resource-producing countries to help stabilise their economies against fluctuating commodity prices, and to provide a source of wealth for future generations, they have proliferated considerably in recent years.

Since 2005, 32 sovereign wealth funds have been created around the world; about 60 per cent are financed by proceeds from oil and gas while the rest are based on non-commodity sources, such as from the manufacturing sector.

Last month, Tanzania enacted the Natural Gas Policy of 2013, which provides for the establishment of a sovereign wealth fund, a state-owned investment vehicle where proceeds from its vast reserves of natural gas will be channelled to finance social and economic development; and generate wealth for future generations.

READ: Tanzania to set up fund from gas to finance development

The creation of a similar fund in Kenya was part of President Uhuru Kenyatta’s Jubilee campaign manifesto. In October, a taskforce on parastatal reforms set up by the President proposed the establishment of the Kenya Sovereign Wealth Fund.

It is intended to support local communities with the proceeds of oil, gas and mining, support government savings and act as a stabilisation fund to cushion the economy from the abrupt inflow of foreign exchange, which could destabilise monetary policy, making exports more expensive and thus negatively affect other sectors of the economy such as agriculture.

“A sovereign wealth fund is a good idea. Kenya has had a problem with high domestic borrowing which crowds out the private sector and pushes up interest rates. Government can borrow from the fund and reduce competition for credit,” says Dr Moses Ikiara, managing director of the Kenya Investment Authority (KenInvest). “It will also allow us to do long term investments in infrastructure and energy.”

Uganda and Mozambique, too, are mulling the setting up of such funds, anticipating the windfall that will come with the commercialisation of oil and gas in the next five to 10 years.

Rwanda already has a sovereign wealth fund in the form of the Agaciro Development Fund, which was set up to support the government development budget following an abrupt cut in donor aid in August 2012.

READ: Aid cuts: No major effect as Agaciro comes to the rescue

Valued at $41 million as of June 2013, Agaciro is however not funded by the proceeds of natural resources but rather is financed by voluntary contributions from Rwandan citizens at home and abroad, as well as “private companies and friends of Rwanda”, according to official government statements.