Resource-rich African countries are busy setting up sovereign wealth funds, but critics say the funds may not serve the long-term interests of poor countries that still need to invest in basics such as schools and roads.
Three oil producers, Angola, Ghana and Nigeria, started funds in the last two years. Before them, only Botswana, Gabon and Equatorial Guinea had such schemes.
Other countries are following. Zambia and Liberia announced plans for funds last month. Tanzania, Kenya, Uganda, Mauritius, Mozambique and Zimbabwe have similar intentions.
The funds can serve useful purposes, analysts say. Commodity earnings can be split into one fund for infrastructure and another for savings that can be used as collateral for even bigger amounts.
“Africa needs higher savings,” said Razia Khan, the head of Africa research at Standard Chartered Bank. “If it is done properly, the sovereign wealth fund and the accumulation of long-term savings essentially means that countries are improving their creditworthiness and opening up access to bigger sources of financing on more favourable terms. It does not preclude investment in infrastructure.”
But critics say Africa could reap more from its resources by investing in education, energy, and transport to feed other industries, rather than parking the money in liquid but low-yield assets in safe havens, as sovereign funds tend to do.
Many successful wealth funds belong to countries with surpluses and rich citizens, which can afford them. That is not the case with many sub-Saharan African governments struggling to feed or educate their people, said Kwame Owino, the chief executive at the Nairobi-based Institute of Economic Affairs.
“It would be a luxury to have. The political will may exist, but the economics of it suggest that a sovereign wealth fund is not a good idea for many sub-Saharan countries,” he said.
“In many of these countries as well, transparency is a big problem and the amount of leakage that takes place in public funds is a reason to be concerned.”
Liberia is looking at various models of wealth funds, including Norway’s, the world’s most transparent sovereign wealth fund, Finance Minister Amara Konneh said. The west African country also wants to avoid the so-called “Dutch disease”, where a dependence on resource extraction causes other industries to wither.
Botswana’s $6.9 billion Pula Fund was the continent’s most transparent on the Linaburg-Maduell index, with a rating of 6 out of 10. Nigeria’s $1 billion kitty had a rating of 4 in the third quarter of 2013. The country added $550 million to the fund in February.
“We have a real governance deficit,” said Aly-Khan Satchu, a Nairobi-based independent analyst. “My concerns are that in a majority of these countries where there is a commodity-related windfall, it is proven already that in those countries the governance is the poorest of all the African countries.” He cited Nigeria and Angola as example.
Angolan President Jose Eduardo dos Santos, who has been in power for more than three decades, appointed his eldest son to run the country’s $5 billion fund in 2013. That undermined confidence in how it will be managed, given the country’s reputation for squandering or siphoning off petrol dollars.
The southern African country began the FSDEA fund to lessen its reliance on crude oil, which accounts for over 95 percent of export income and 45 percent of economic output.
Botswana’s Pula Fund – started in 1994 to invest surpluses from diamond exports – came in handy during the global economic crunch, when demand for the gems largely vanished. The mines that gouge millions of tonnes of rock from the country’s vast interior closed down for four months in 2009.
It was the first time they had shut down in the former British colony’s 40-year history of diamond mining. Government finances were thrown into disarray.
Neighbouring Angola’s money bags have been stuffed with cash since the end of the country’s civil war in 2002. It is now investing in developed-market equities and bonds issued by sovereign agencies, investment-grade companies, high-yield emerging market assets and Africa’s hotel sector.
Nigeria’s reserve was created in 2011 for three main purposes. One is infrastructure, another is a collective savings account and another is a so-called stabilisation fund, to cushion against commodity price shocks. A remaining 15 percent is unallocated.
Unlike Asian and Middle Eastern wealth funds created to reduce capital and avoid inflation, African funds are relatively small. They are unlikely to have a similar impact on money supply.
“Asia is able to attract more overseas capital and bigger amounts,” said Michael Maduell, president of the U.S.-based Sovereign Wealth Fund Institute. “The whole hot-money effect wouldn’t affect African countries.”