The Treasury has set off plans to open a special account to handle cash inflows expected from oil exports and sale of other mineral resources in proposed regulations that ring-fence the bulk of the anticipated revenues for infrastructure development.
The draft Kenya Sovereign Wealth Fund Bill, 2019, proposes to divide the revenues into three streams that will offer insurance against budgetary shocks, provide capital for infrastructure development and build a savings base for future generations, known as the Urithi component.
Opening of sovereign funds is seen as a key strategy in warding off the resource curse that has afflicted many oil and mineral producing countries, especially in Africa, where they become overly-dependent on mineral revenue, leaving other sectors to lag behind in productivity.
The fund will be held in an account at the Central Bank of Kenya (CBK) that will also hold income from Kenya’s upstream oil profits, petroleum licence fees and royalties as well as mining royalties.
“Any deposits into the holding account shall be transferred into the components of the fund in the following proportions; at least 15 percent to the stabilisation component, at least 60 percent to the infrastructure development component and at least ten percent to the Urithi component,” reads the draft bill.
On the depletion of petroleum and mineral resources, all the funds will be collapsed into a single account where withdrawals will be limited to earnings from assets and dividends for infrastructure development.
Kenya is moving closer to joining the league of petroleum producing economies after launching the early oil pilot export scheme last year. A pipeline to move crude from the Turkana oilfields is set to be built before full production starts in 2021/22. British exploration company Tullow Oil in its January 2019 update said it is dispatching an average of eight trucks every two days, transporting approximately 600 barrels of crude to Mombasa. The company expects to increase this to 2,000 barrels per day from April, paving the way for the maiden overseas shipment of oil.
The draft bill also stipulates that any windfall revenue from resources (such as additional money from a spike in oil prices) will be spent on reducing the country’s debt burden, and will also be filtered through to the ordinary Kenyan through tax cuts. Such revenue, it adds, will also be put into basic services such as education and healthcare.
The move to set up a sovereign fund has been in the works since the country discovered recoverable and commercially viable oil reserves. Sovereign wealth funds are aimed at helping economies that are rich in mineral resources to manage and save revenues to cushion themselves against future price volatilities and to extend the earnings beyond the life of the resources.
Kenya is borrowing from successful examples globally, such as the Norway sovereign fund that has in excess of $1 trillion (about Sh100 trillion) in investments globally. Instructively though, African countries such as Angola, Gabon and Nigeria, which have fallen foul of the oil dependency curse all have active sovereign funds.
Kenya’s fund mirrors closely that of Nigeria, which has similar components of infrastructure development, a stabilisation fund and future generations fund. The Nigeria fund has, however, only managed to set aside about $2 billion since it was activated in 2011, indicating that most of the country’s annual oil revenue of more than $30 billion is being gobbled up before reaching the fund’s coffers.
Economist Robert Shaw warns that it will take huge fiscal discipline for Kenya to make a success of the proposed fund, citing the difficulties that the government faces in financing its annual budget. “The concept is a good one, but when you bear in mind the current fiscal situation that the government has got, it becomes very difficult to attain. The question becomes whether there would be enough fiscal discipline to set aside money when we haven’t got enough to pay wages and other recurrent expenditure,” said Mr Shaw.
The draft bill says the minimum of 15 percent that will be set aside for the stabilisation component will be used to “insulate expenditure under the budget estimates of the national government from fluctuations in resource revenues and management of shocks which may affect macro-economic stability.” This potentially opens the door for the Treasury to dive into the fund to finance budget deficits.
The draft, however, stipulates that the contribution to the stabilisation component shall cease when it grows to 20 percent of GDP, with the share thereafter being used to service national debt.