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Kenya races ahead of peers in sovereign wealth fund set up

By Dominic Omondi | December 6th 2021
By Dominic Omondi | December 6th 2021

Studies presented during the forum on Friday highlighted the progress made in some countries to improve policies. [Courtesy]

Kenya has been lauded as one of the major African countries that are making great strides on sovereign wealth funds.

Economic experts who spoke during the second day of the 2021 African Economic Conference in a hybrid format, in Cape Verde also recommended setting a tax threshold.

The experts said although sovereign wealth funds are gaining ground in Africa, urgent financial reforms are needed to boost foreign investments in a pandemic period.

This comes after the government came up with the Sovereign Wealth Fund 2019 Bill through which the State may save petro-dollars for the benefit of future generations, and similarly invest the same with a view to diversity Kenya’s income streams.

The fund will be capitalised from several sources - including natural resource royalties from other minerals such as titanium and coal.

Other countries that the studies showed have made progress on sovereign wealth funds include Botswana and Zimbabwe.

Studies presented during the forum on Friday highlighted the progress made in some countries to improve policies.

The experts argued that more work is needed to diversify and deepen financial markets to expand beyond commercial banks.

Moses Nyangu, a researcher at Strathmore University, who presented a paper on “What drives financial stability? The nexus between market power and bank efficiency within the East African Community,” said financial systems remain underdeveloped in the region, with concentrated banking sectors and inefficient financial intermediation functions.

“However, most banks remain profitable… non-performing loans have been on the rise in the region,” he said, adding that there is still a heated global debate around the implications of increased market power.

More work is needed to diversify and deepen financial markets to expand beyond commercial banks. [Courtesy]

Naomi Koske from Moi University who presented the findings of her research into financial distress among Kenya’s listed firms said most companies continue to experience financial distress, resulting in an increase in delistings with some firms being placed under statutory management.

She said plant and equipment newness increased the likelihood that firms listed on the Nairobi Securities Exchange would experience financial distress. In addition, share tradability, she noted, moderates the relationship between plant and equipment newness.

Munashe Matambo, Associate Research Scientist at the Zimbabwe-based Scientific and Industrial Research and Development Centre, said there are at least 117 sovereign wealth funds currently operating or in the pipeline around the world, managing $9.1 trillion (Sh950 trillion) – 10 per cent of global GDP.

Matambo said currently, 24 African countries have established or are considering establishing sovereign wealth funds.

According to Matambo’s paper, the Pula Fund in Botswana has strong management and is governed well. In Zimbabwe, the sovereign fund was “unable to perform its role” given the existing governance framework.

According to the World Investment Report, global foreign direct investment fell by 35 per cent in 2020, with most of the decline concentrated in developed countries, where FDI flows fell by 58 per cent.

The distribution was uneven across regions, with Africa witnessing a reduction of 16 per cent.

Panellists said institutions need to focus their efforts on building trust at all levels to mobilise funding. Failure to do this will result in poor funding absorption in many African countries.

“Tax policy is also critical to mobilising FDI,” said the session moderator, Dr Eric Ogunleye, Advisor to the African Development Bank’s Chief Economist. Dr Adamon Mukasa, a consultant in the African Development Bank’s Macroeconomics Policy, Forecasting and Research Department said policymakers need to set a clear limit for taxation.

Property rights and procedures also need to be considered in terms of investment arrangements. While the experts appreciated the role of incentive policies, they recommended caution in determining how an investor can benefit from such measures.

The forum is organised by the African Development Bank, the United Nations Development Programme, and the Economic Commission for Africa.

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