Sovereign wealth funds are gaining ground in Africa, although urgent financial reforms are needed to boost foreign investment following the COVID-19 pandemic, say economic experts on the second day of the 2021 African Economic Conference.
Studies presented during one of the sessions on Friday December 3, highlighted the progress made in some countries over the past few decades to improve policies. The experts argue that more work is needed to diversify and deepen financial markets so as to expand beyond commercial banks.
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 – 10 per cent of global GDP.
Matambo said currently 24 African countries have established or are considering establishing sovereign wealth funds, but the process is not advanced. He referred to funds established in Botswana and Zimbabwe. According to Matambo, 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.
For his part, Moses Nyangu, a researcher at Strathmore University, presented a paper, “What drives financial stability? The nexus between market power and bank efficiency within the East African Community.”
“Financial systems remain underdeveloped in the East African Community region, with concentrated banking sectors and inefficient financial intermediation functions. However, most banks remain profitable…At the same time, 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.
Naomi Koske from Moi University in Kenya presented the findings of her research into financial distress among Kenya’s listed firms. She looked specifically at the impact of plant and equipment newness and shares tradability. She said listed firms continue to experience financial distress, resulting in an increase in delistings and some firms being placed under statutory management. Her definition of “financial distress” refers to a situation where cash flows are lower than contractually required payments.
Koske concluded that plant and equipment newness significantly increased the likelihood that firms listed on the Nairobi Securities Exchange would experience financial distress. In addition, share tradability significantly moderates the relationship between plant and equipment newness.
According to the World Investment Report, global foreign direct investment fell by 35 per cent in 2020. This decline was 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.
One important effect of the financial sector developing and expanding is the increase in competition and contestability throughout economies, the panelists said. Institutions need to focus their efforts on building trust at all levels to mobilize funding. Failure to do this will result in poor funding absorption in many African countries.
“Tax policy is also critical to mobilize FDI,” said the session moderator, Dr Eric Ogunleye, Advisor to the African Development Bank’s Chief Economist. Experts recommended setting a tax threshold. “Policymakers need to set a clear limit for taxation,” said Dr Ndungu Adamon Mukasa, a consultant in the African Development Bank’s Macroeconomics Policy, Forecasting and Research Department.
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 2021 African Economic Conference is being held in a hybrid format, with key delegates gathering on the Cabo Verde island of Sal, as well as virtually. The event attracts a wide range of stakeholders, including policymakers, development institutions, the private sector, and researchers, to discuss ways to sustainably grow the continent’s development funding sources. The conference is organised by the African Development Bank, the United Nations Development Program, and the Economic Commission for Africa.
By Ibrahim Oredola Falola, Bernadette Namata Umutoni and Frederick Nwabufo and edited by Neil Ferguson.