These investment vehicles are much associated with affluent economies such as Singapore, China, or the UAE, and not the desperate circumstances of the world's least developed countries. But they have spread across Africa this decade, and Liberia could be considering establishing its own fund. Below is the better part of a February 13th Reuters article:
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...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 stabilization fund, to cushion against commodity price shocks. A remaining 15 percent is unallocated.
While some of the funds may be invested in capital projects, like public infrastructure or stakes in private ventures, a good portion of it stays outside of Africa, invested in bonds and stocks. Instead of investing in children’s health or education, the money purchases US Treasuries. Instead of teachers’ and nurses' salaries, the profits from the crude are going into the pockets of fund managers in fees paid in Geneva, London, and New York. From a Bloomberg report from February on Nigeria’s new fund set-up:
Goldman Sachs, UBS AG and Credit Suisse Group AG were among four managers named in August to help run a $200 million fixed-income fund. Eight more managers will be appointed before the end of June, with two expected to be announced next month, Orji said.
So, not only is the money not injected into the domestic economy, it is sucked up into the global banking industry and first-world finance markets.
This is not necessarily inherently evil: prudent savings for future generations, and global expertise in managing and allocating the proceeds from extractive industry could do a lot of good. The Center for Global Development has covered this topic in some detail over the last few years. In October 2011, it published a brief paper, “What Role for Sovereign Wealth Funds in Africa's Development?” that surveyed the proliferation of Sovereign Wealth Funds across Africa, looking at established funds like those in Botswana, and more recent developments such as those in Angola and Nigeria.
The paper raises a lot of the structural problems latent in a undeveloped, resource-rich economy, such as an inability to accept large injects of capital and the high likelihood and risk that such big accumulations of government cash and authoritarian attempts to disperse that cash within the country’s administrative budget would end badly. The heart of the paper sets out the ideal best practices for a successful SWF.
Which all sounds good, but starting point in so much of the discussion of African SWFs (and much else in the world today) remains the unchallenged notion that global financialization is good. While acknowledging how incongruous it is for the world’s poorest countries to be launching investment funds, there is little exploration in all this discussion of whether or not more current spending, on infrastructure, on education, on health care, would be a better “investment” in the future than offshore investments in U.S. Treasuries or even just in foreign currencies—piles of cash.
The paper was also published before the launch of Nigeria’s fund, which has hardly been immune from Nigeria’s notorious politics, but more positively may direct some of its investment into Nigeria’s decrepit power sector. In the case of Angola’s Sovereign Wealth Fund, most of what has happened thus far is that the President’s son was appointed manager last June, a controversial Swiss firm as given a huge contract to manage the fund, and a massive expensive London office building was purchased as the fund’s office. The result on the streets of Luanda? The city’s street vendors were harassed by the police and banned from trading.
I know little about economics, but even after reading these papers, the drive to funnel resource revenues into offshore funds still seems a bit shocking, especially in our current age when the over-financialization of even the U.S. economy is widely questioned.
Most startling, and difficult to accept, is the idea that rather than better-paid teachers or more paved roads or clinics, megabanks like Goldman Sachs or politically-connected Swiss-registered outfits will be receiving their fee for managing the assets of the world’s poorest people, who are excluded from enjoying the benefits of their country’s natural resources, and that rather augment public and private spending, by buying low-risk assets such as government bonds or foreign currencies, the world's poorest are essentially lending the world's richest money.
This is not necessarily inherently evil: prudent savings for future generations, and global expertise in managing and allocating the proceeds from extractive industry could do a lot of good. The Center for Global Development has covered this topic in some detail over the last few years. In October 2011, it published a brief paper, “What Role for Sovereign Wealth Funds in Africa's Development?” that surveyed the proliferation of Sovereign Wealth Funds across Africa, looking at established funds like those in Botswana, and more recent developments such as those in Angola and Nigeria.
The paper raises a lot of the structural problems latent in a undeveloped, resource-rich economy, such as an inability to accept large injects of capital and the high likelihood and risk that such big accumulations of government cash and authoritarian attempts to disperse that cash within the country’s administrative budget would end badly. The heart of the paper sets out the ideal best practices for a successful SWF.
Which all sounds good, but starting point in so much of the discussion of African SWFs (and much else in the world today) remains the unchallenged notion that global financialization is good. While acknowledging how incongruous it is for the world’s poorest countries to be launching investment funds, there is little exploration in all this discussion of whether or not more current spending, on infrastructure, on education, on health care, would be a better “investment” in the future than offshore investments in U.S. Treasuries or even just in foreign currencies—piles of cash.
The paper was also published before the launch of Nigeria’s fund, which has hardly been immune from Nigeria’s notorious politics, but more positively may direct some of its investment into Nigeria’s decrepit power sector. In the case of Angola’s Sovereign Wealth Fund, most of what has happened thus far is that the President’s son was appointed manager last June, a controversial Swiss firm as given a huge contract to manage the fund, and a massive expensive London office building was purchased as the fund’s office. The result on the streets of Luanda? The city’s street vendors were harassed by the police and banned from trading.
I know little about economics, but even after reading these papers, the drive to funnel resource revenues into offshore funds still seems a bit shocking, especially in our current age when the over-financialization of even the U.S. economy is widely questioned.
Most startling, and difficult to accept, is the idea that rather than better-paid teachers or more paved roads or clinics, megabanks like Goldman Sachs or politically-connected Swiss-registered outfits will be receiving their fee for managing the assets of the world’s poorest people, who are excluded from enjoying the benefits of their country’s natural resources, and that rather augment public and private spending, by buying low-risk assets such as government bonds or foreign currencies, the world's poorest are essentially lending the world's richest money.
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