Sovereign Wealth Funds: Are Kenya and Other Developing Countries Ready to Implement Sovereign Wealth Funds as a Means of Promoting Growth and Development and Tackling the Resource Curse?

Having discovered oil deposits in 2012, Kenya is one of the newest entrants into the petroleum industry and aims to become a major oil producer. To manage revenues from oil exports and other proceeds from the sale of mineral resources, The National Treasury in February 2019 published the Draft Kenya Sovereign Wealth Fund Bill.[1] The purpose of the Bill is to “create a Sovereign Wealth Fund to ensure effective management of the proceeds from oil and other mineral exports”.[2] This Bill, once in force, will provide the framework for the management of natural resources revenue in Kenya with the aim of promoting long-term infrastructure development. 

Sovereign Wealth Funds are state-owned investment funds for revenues from natural resources. They have been established in both developed and developing countries such as Norway, China, Nigeria, Canada, and Botswana, to manage revenues from minerals and oil. According to the Sovereign Wealth Fund Institute, over 65 economies have such a Fund, with the majority in developed countries.

Sovereign Wealth Funds can promote infrastructure development, and provide a buffer against potential economic shocks that could affect the stability of an economy owing to the price volatility of minerals and petroleum. Such shocks can be fatal to developing economies, especially in resource-dependent countries. Sovereign Wealth Funds also create savings and reserves for future generations, thereby promoting inter-generational wealth. Further, such Funds enhance countries’ capacity both to repay debts, and to extend earnings beyond the life of their resource-dependent industries. This is particularly important, since natural resources are non-renewable and are bound to be depleted. Such Funds aim to ensure that mining communities benefit from mineral revenues so as to avoid conflicts as have been observed in the oil rich region of Turkana in Kenya as well as in Nigeria.

The overarching rationale for a Sovereign Wealth Fund is to alleviate the resource curse by ring-fencing the bulk of proceeds from oil and minerals for the reasons outlined above. Although Sovereign Wealth Funds could be used as instruments to alleviate some socio-economic issues in developing countries, it may not be an effective measure in certain developing nations such as Kenya. Despite having operational Sovereign Wealth Funds, conflict has erupted in Nigeria and Angola in recent years because of disagreements over the distribution of oil proceeds. On the other hand, Norway and other developed countries have such a Fund, but have managed to avoid such conflicts that are often observed in resource-rich developing countries. This is attributed to the proper management and resource governance. There is clearly a problem with the ways in which Sovereign Wealth Funds operate in developing countries as opposed to developed countries.

In a country with a poverty rate of nearly 50% of its population, it is difficult to justify allocating oil reserves to such a Fund because money is desperately needed for healthcare, education and other amenities in Kenya. Therefore, saving for future infrastructure development projects, albeit desirable, may not be feasible. By contrast, Norway is renowned for having the largest Sovereign Wealth Fund in the world with a value of more than $1 trillion. Norway can afford to have such a Fund because it has a rate of poverty of less than 10%, has little to no foreign debt and the population is only about 5.5 million. Thus, the context is conducive to a Sovereign Wealth Fund, unlike Kenya that requires funds to combat the myriad of socio-economic challenges that it faces currently. 

It is because of the insufficient funds for socio-economic development that Kenya often borrows from other countries and international organizations like the International Monetary Fund (IMF) and the World Bank. These loans service infrastructure development projects, but also increase Kenya’s indebtedness.[3] The question then becomes, should Kenya be saving its oil and mineral revenues in Sovereign Wealth Funds instead of settling its international debts, which accrue interest every year? 

The majority of the countries with successful Sovereign Wealth Funds have little or no debt, which explains why they can afford to save oil and mineral revenues for strategic purposes. Kenya and many other developing countries lack sufficient reserves to enable them allocate oil revenues to Sovereign Wealth Funds. Instead of establishing such a Fund, money is required to settle the increasing foreign debts that Kenya has from its trading partners, notably China and the UK. It is therefore unreasonable to save money for the future amid such circumstances.

The proposed Kenya Sovereign Wealth Fund Bill provides that politicians will manage the day-to-day running of the Fund.[4] This creates a dicey situation as it lays the Fund open to political interference and pressure in its management. Kenya, like many developing nations, struggles with corruption in the political sphere. Therefore there is a need to manage the Fund independently because politicians could attempt to utilize the Fund to finance their preferred projects in the communities or for personal reasons. Kenya is infamous for scandals relating to the theft or misappropriation of public funds especially by politicians. Some examples include the Goldenberg scandal (which concerned the smuggling of gold from Congo) and the National Youth Service (NYS) scandals in which Billions of Kenyan shillings were stolen. With politicians at the helm, managing the proposed Sovereign Wealth Fund in Kenya, and taking into account the history of the management of public resources, one cannot rule out the possibility of the funds being stolen or misappropriated.

Developing countries should consider international best practice when running and operating Sovereign Wealth Funds. For example, the Norwegian government hires independent managers to manage the Fund and this is a major contributing factor for the success of the Fund.

Despite the numerous benefits of initiating a Sovereign Wealth Fund, it is evident that developing countries such as Kenya may not yet be ready to implement such Funds. The environment for such a Fund is not conducive in the developing country context because of poverty, foreign debts and the potential interference in the management of the Funds by politicians and other political appointees. It is therefore up to the respective countries to create the requisite conditions for Sovereign Wealth Funds to thrive. They must create the conditions to sustain such a Fund for example by encouraging a savings culture amongst the populations and the politicians. Only once these issues are addressed, would these Funds achieve the goals they are intended to achieve.

Written by Kennedy Chege.