In an effort to avert negative effects of the natural resource curse such as commodity price volatility, more and more African governments are turning to commodity-based SWFs.
However, many of these efforts have been deemed premature by experts.
Many African governments are establishing commodity-based SWFs without taking into cognisance factors that enable the successful operationalisation of this institution.
These include a prudent natural resource revenue management framework, robust macroeconomic policies and a sound governance framework.
Natural resource discovery in a developing country is frequently not as thrilling as it appears to be. In reality, resource-rich developing countries face tremendous challenges in harnessing their wealth of resources to improve the standard of living of average residents rather than squander it using weak institutions and corruption – a situation described as the “resource curse.” Armed conflict and political turmoil intensify the problem.
The commodity-based sovereign wealth fund (SWF) is one increasingly popular solution for coping with the resource curse. Angola, Ghana, Mozambique, South Africa, Uganda, and Nigeria are set to join other African countries such as Botswana and Mauritania in utilizing these special-purpose financial tools to help assure proper resource revenue management.
Sovereign wealth funds invest globally to benefit their home economy and government. They are commonly used by nations with large reserves of foreign currency or commodity export revenues to strengthen the domestic economy and avoid depletion of commodity wealth. Whilst an investment Fund is a pool of capital that several individual investors pay into, which is used to collectively invest in different securities.
There are some differences between a sovereign wealth fund and an investment fund.
A sovereign wealth fund is fully owned and controlled by a nation’s central government. An investment fund can be owned by public or private entities, corporations, or individuals.
A SWF’s primary aim is to invest funds for the benefit of the economy and future generations. Investment funds focus mainly on generating returns for their owners/shareholders.
SWFs manage huge assets since they pool a nation’s surpluses. Regular funds generally have smaller pools of capital from many investors.
SWFs take a long-term, generally more conservative approach. Investment funds may pursue faster returns through higher-risk strategies.
Oversight is key. SWFs have geopolitical implications, so they face more public and governmental scrutiny. Funds are overseen mainly by regulators and their investors.
Accountability is also crucial. SWFs must balance economic/political priorities set by governments. Funds are accountable mostly to their legal structure and investors financially.