BLACK GOLD

Sovereign Wealth Fund: Effectively managing Kenya’s natural resources

Prospect of petrodollars significantly boosting Kenya’s monetary pool is on the horizon.

In Summary

• Since the first commercial oil discoveries around 2010, the general populace has largely played a waiting game.

• A source of significant revenues, may at times be a double-pronged sword if not effectively managed.

A decade down the line, the prospect of petrodollars significantly boosting Kenya’s monetary resource pool is on the horizon.
A decade down the line, the prospect of petrodollars significantly boosting Kenya’s monetary resource pool is on the horizon.
Image: PSCU

The shipment of Kenya’s first oil export via the Early Oil Pilot Scheme (“EOPS”), 200,000 barrels of oil valued at $12 million, generated fanfare and excitement throughout the nation.

Since the first commercial oil discoveries around 2010, the general populace has largely played a waiting game, with patience wearing thin, following the expectation that Kenya will speedily become a natural resource producing nation, specifically petroleum.

A decade down the line, the prospect of petrodollars significantly boosting Kenya’s monetary resource pool is on the horizon.

With the expectation of petrodollars flowing into the Kenyan economy, it stands to reason that it is incumbent on the government to chart out a fiscal strategy on how to maximise benefits arising from the sale of petroleum in international markets, in view of the finite nature of natural resources and, particularly in relation to petroleum resources, the volatility of global oil markets.

 

As has been evidenced by petroleum-dependent economies, such as Nigeria and Venezuela, the natural resource, while a source of significant revenues, may at times be a double-pronged sword if not effectively managed.

Due to the volatility of global oil markets, together with the finite nature of natural resources, an economy wholly dependent on petroleum revenues exposes itself to adverse consequences, most notably being the resource curse.

The resource curse, coined by British economist Richard Auty and colloquially known as the paradox of plenty or the Dutch Disease, refers to the failure of many resource-rich countries to benefit fully from their natural resource wealth, and for governments in these countries to respond effectively to public welfare needs.

Per numerous studies on the utilisation of natural resource revenue and its impact to the economic standing of a resource-rich nation, it is indeed paradoxical that resource-rich countries often tend to have higher rates of conflict and authoritarianism, lower rates of economic stability and economic stability as compares to their non-resource rich peers.

These challenges largely arise due to the mismanagement of natural resource revenue, exploitation of natural resources revenue by multinational corporations and heavy reliance on oil revenues in exclusion of other revenue streams or industries.

In order to proactively prevent Kenya from falling prey to the resource curse, it is imperative that adequate policies and mechanisms are put in place that ensure natural resource revenues generated through the exportation of petroleum stand to benefit the Kenyan economy in the long term.

A tried and tested solution, is setting up a sovereign wealth fund, through which the government may save petrodollars for the benefit of future generations, and similarly invest the same with a view to diversify Kenya’s income streams.

This ensures that the economy is not dependent on petroleum revenues, which may place the nation at the mercy of volatile oil prices, and that future generations may benefit from the natural resource, even once depleted.

Karen Kandie – MD IDB Capital