9 July 2014

Tanzania: Sovereign Wealth Fund Formation - Dar Needs to Tread Carefully

TANZANIA is on course to establish a Sovereign Wealth Fund to manage proceeds from oil and gas finds, but experts caution that to reap maximum benefits from its resources, the country must have in place effective mechanisms to foster good governance and transparency.

Our Staff Writer CHABY BARASA reports in this second and final installment (about the Fund)... THE Bank of Tanzania (BOT) report indicates that the country exported 2.3bn US dollars worth of gold in the fiscal year 2011-12.

The mining sector's contribution to Tanzania's GDP more than tripled between the mid-1990s and 2012, reaching 3.5 per cent. However, since the mining boom started in the early 1990s, the East African country has failed to transform this into wealth for communities near the mines, critics say, hence the need for the government to rectify mistakes and ensure the Sovereign Wealth Fund works for the population from grassroots.

Dr Honest Prosper Ngowi, Senior Lecturer, Researcher and Consultant (Economics and Business) Mzumbe University, Dar es Salaam says the proposed Fund is a good way of managing the expected revenues from the natural gas wealth.

"The purpose should be to stabilise the economy by taking away extra money from circulation as part of ways of avoiding Dutch Disease. If the country gets 'too much' cash than the economy can absorb, the economy can operate artificially including very high inflation," he cautioned.

He says the funds should be used to diversify the economy away from natural gas (invest in non-gas related sectors such as agriculture, industry, tourism and others). "The Fund is important too as a way of saving. What is important when the country wants to use money from the fund is to use the interest rate (return) from the Sovereign Fund.

Given the huge size of the expected cash, such funds should be placed or invested abroad with experienced fund Managers who will invest the funds on behalf of the Government. Best practices of such funds exist from some countries such as Norway," observed Dr Ngowi.

He stressed on the need to learn from best performers, but also ruled out a Sovereign Wealth Fund to cater for mining. "No, we are not making huge earnings from the sector to warrant such a fund in mining," he says. A member of the Tanzania Extractive Industry Transparency Initiative (TEITI)-Multi Stakeholder Group, Buberwa Kaiza cautioned that a thorough study must be conducted before tabling the Sovereign Wealth Fund bill in parliament.

"We don't have to rush or work under pressure," notes Mr. Kaiza who calls for a national strategy, complete with policy and strong institutions such as a court, to be in place before the SWF.

Mr. Kaiza who is also the National Coordinator of the Publish What You Pay (PWYP) campaign says the country could only start reaping oil and gas fruits after a decade or more, hence in the meantime, the government must iron out thorny issues such as ownership of the resources. He says ideally, the government must own the gas economy.

"Having wasted the opportunity in mining, the government must be smarter and make sure past mistakes are not repeated in the oil and gas sector," he says.

Dr Rugemeleza Nshala, Executive Director of Lawyers Environmental Action Team (LEAT) says ideally the country should have thought of having such funds to cater for mining revenue yesterday, but "all was not lost as government could ensure maximum revenue from the sector by addressing taxation, transfer pricing by mining firms and other pertinent challenges afflicting the sector," he observes.

To ensure the anticipated fund does not destabilise the economy, the funds must be spent wisely lest they lead to inflation, cautioned Dr Nshala, stressing that a clear strategy must also be in place to ensure the funds serve future generations. Dr Nshala calls for a clear vision and commitment, saying Tanzania can learn best practices from Botswana and other countries that have excelled in managing such funds.

Quoting various critics, The African Globe's recent report observes that while many African countries are busy setting up sovereign wealth funds, they (funds) may not serve the longterm interests of poor countries that still need to invest in basics such as schools and roads.

The report says Africa could reap more from its resources by investing in education, energy, and transport to feed other industries, rather than parking the money in liquid but low-yield assets in safe havens, as sovereign funds tend to do. "Many successful wealth funds belong to countries with surpluses and rich citizens, which can afford them.

This is not the case with many African governments struggling to feed or educate their people," said Kwame Owino, the chief executive at the Nairobi-based Institute of Economic Affairs. "It would be a luxury to have. The political will may exist, but the economics of it suggest that a sovereign wealth fund is not a good idea for many African countries," he said.

"In many of these countries as well, transparency is a big problem and the amount of leakage that takes place in public funds is a reason to be concerned."


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