Africa ponders how to manage new wealth

Mon Jan 25, 2010 7:20pm EST
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By Natsuko Waki

DAVOS, Switzerland (Reuters) - As Africa moves from a significant fiscal deficit largely funded by aid to a continent with a fiscal surplus, the search is on for a framework to manage countries' resource-driven wealth.

Some -- such as Nigeria, Angola and Tunisia -- are considering launching sovereign wealth funds (SWFs), which would accelerate the already rapid growth of the $3-trillion industry.

But in sub-Saharan Africa, the challenges posed by such plans are significant: on the one hand is the need for a vehicle to invest windfall surpluses for future generations and ring-fence today's wealth from greedy leaders.

On the other, investing offshore -- as do the sovereign funds of major developed and emerging economies -- would be political dynamite in Africa. In many African countries, badly in need of infrastructure and poverty reduction, the funds would be more likely to be deployed at home.

"With a move from deficit to surplus and the commodities boom which affected many countries in Africa, they face a new reality where they have resources that they have to save for next generations," said Efraim Chalamish, an SWF expert and global fellow at the New York University Law School.

Particularly important for Africa is the assumption that political instability in such countries would endure: "You want to make sure there are many different mechanisms for the next government and money will be there for next generations and pay for national pensions, liabilities, etc."

Africa's current account balance has improved in the past few years, with the total balance standing at 3.3 percent of gross domestic product compared with 1.3 percent in 2004, according to data from the African Development Bank.

Its fiscal balance has moved to a surplus of 2.8 percent of GDP from a deficit of 0.1 percent in 2000. That would leave room for extra capital to be allocated to wealth funds.   Continued...