Sovereign wealth funds are key to proper management of resources

Wednesday November 13 2013

Professor Mthuli Ncube is the chief economist and vice president of the African Development Bank. Photo/FILE

While African economies are growing, they are not creating enough jobs or improving the lives of the region’s poor.

Berna Namata spoke to chief economist and vice president of the AfDB Professor Mthuli Ncube about issues affecting the continent’s development agenda.


For the past decade, Africa has seen strong growth; however, high unemployment and high inequality persist across the continent. Where is the problem? 

Africa has many universities but their graduates are not ready for the job market because their skills are misaligned or they get employed in the wrong jobs.

Governments and the private sector need to work jointly to ensure students are better trained for the job market. Governments must invest in vocational education while the private sector partners with public institutions to offer apprenticeship programmes.


I also feel that the private sector in Africa is not growing fast enough — we need more entrepreneurs who can create jobs. 

What can be done to avert the growing risk of social upheaval as the youth increasingly find themselves without jobs?

The dilemma in Africa is that you have high unemployment rates but at the same time a critical shortage of skills. People have degrees that do not match required job skills. There is a mismatch, which can be solved through retraining. The private sector should be greatly involved in all retraining programmes.

Africa’s share of global foreign direct investment (FDI) remains low despite a general improvement in the doing business environment. Why is this so?  

FDI to Africa is not low by historical standards. Last year it was approximately $50 billion — this is in addition to remittances by Africans living abroad, which are currently estimated at approximately $60 billion a year. 

There are also portfolio flows into Africa including the bond and securities market, though this is still quite low, at approximately $30 billion. But it is true that a good proportion of FDI to Africa is linked to natural resources, where investments do not create a lot of jobs.

Natural resource FDI does not create a lot of jobs but the industries around it do. In a sense, when you talk about jobless growth, there is also jobless FDI.

We need a new type of FDI that can begin to focus on other industries to diversify Africa’s economies. There is a need for FDI that focuses on manufacturing and the services sector, where more jobs are likely to be created.

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EAC has become an oil and gas hotbed with recent discoveries in Kenya, Uganda and Tanzania. Governments are keen to bring more regulations into this nascent sector, which threatens the same investments that could drive growth in the coming years. What is your assessment?

The positive thing about East Africa is that there is a high quality of economic management. The economic managers understand the issues and I don’t think there is a risk of bad policies being implemented. 

We are hearing the right language and intentions being pronounced around creating sovereign wealth funds, which means these managers are aware that the resources need to be properly managed.

But the resources also need to be deployed appropriately and to support recurrent expenditure. I’m optimistic that things will go right.

There is a need to communicate clearly and manage the revenues transparently and strategically — this will allay fears among citizens once they see where the resources are being spent. The idea of sovereign funds must be explored.

What risks do you see arising from this usually volatile but highly lucrative sector? 

These investments do not create jobs and can tilt the economy towards dependency on natural resources without necessarily creating jobs. Therefore, it is important that countries invest in industries revolving around natural resources as this will create jobs.  

It has been said that the EAC, like the rest of the blocs in Africa, is ready for economic takeoff.  But part of this takeoff relies heavily on investments in infrastructure — power, roads, railway, and airports. Given that these power projects are expensive, where will the cash to fund them come from?

Tapping into pension funds and private equity money in Africa and globally is part of the solution. There are also sovereign wealth funds outside Africa in the Middle East, Singapore and Norway.

The money is there but what has been missing is bankable projects with regional impact. As a bank, this is why we have proposed the establishment of the Africa50 fund, whose primary objective is to increase the number of bankable infrastructure projects in the continent.

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EAC countries are increasingly introducing new taxes, raising the tax burden for businesses and households.  How can countries strike a balance to avoid the repercussions of a high tax burden? 

I think that countries make those decisions based on their understanding of their system. There is a need to raise domestic resources in Africa but it is not always about raising taxes. Countries are free to implement policies but it does have regional implications. However, every policy has to be weighed against costs and benefits.  

How would you assess the readiness of the region to enter into a monetary union?

The planning has to be done right. There is a need for a convergence of fundamentals, everything needs to be harmonised including the tax regime, labour market and financial system of each partner state before a single currency can be put in place.

It is good to have the intention of one currency because it reduces the cost of transactions and is convenient. East Africa needs to harmonise a lot of things before one currency can be instituted.

What do you see as the sectors or fundamentals that will drive growth in the coming year?

The prospects are good. Natural resources will drive foreign investments and when output starts flowing, it will have a positive impact. The quality of macro-economic management has equally been good and the region is dynamic. Agriculture remains a key driver, while the consumer sector and tourism are also driving growth.

What key risks do you foresee in the coming year?

The global outlook remains a key risk, any slowdown is always a risk to East Africa. The other risk is related to security issues, which can affect tourism.