Exploring the Potential of Sovereign Wealth Funds in Senegal, Mauritania

Sovereign Wealth Funds

According to the International Monetary Fund, oil and gas income from these two projects will increase from 0.5% of GDP contribution (or 6% of total non-resource government revenue) to 3% (or 16% of total non-resource government revenue) at peak production, and officials are already researching the appropriate structure for managing oil and gas revenue, with sovereign wealth funds (SWF) serving as important avenues for financing economic growth in this regard.

The potential of SWFs is largely untapped in the MSGBC region but using Norwegian-style SWFs might allow Mauritania and Senegal to benefit from their natural resources while helping the countries manage the upcoming resource boom envisaged with GTA Phase 2. Norway itself serves as a relevant benchmark for resource-rich countries such as those in the MSGBC region. The Norwegian oil fund avoids investing in domestic assets, both physical and financial, but focuses on foreign assets, primarily financial investments. This strategy could allow for capital outflows that align with current account surpluses and help protect the Senegalese and Mauritanian domestic economies. Investing in international financial assets provides liquidity and efficiency in trading, spreading risks effectively.

Effective management of government revenues from extractive projects poses a significant challenge for countries abundant in natural resources. When effectively implemented, it allows these revenues to fuel economic growth and development by investing in projects that increase productive capacity, promote economic diversity and, eventually, raise residents’ standard of living. The Nigeria Sovereign Investment Authority, established in 2013, which has consistently achieved profitability, has proven the success of the economic tool. However, inadequate revenue management, on the other hand, might result in missed opportunities and impede the potential advantages of resource riches. Indeed, governments with especially poor management of extractive earnings may find themselves in a worse position than before the discovery of resources, a phenomenon known as the resource curse.

In Mauritania, Moustapha Bechir, Director of Hydrocarbons at the Ministry of Petroleum, Energy and Mines, explained in a recent interview with Energy Capital and Power that “currently, there is a lot of deliberation on how to best utilize the energy resources, not just for bridging budget gaps but also for investing in other areas, potentially via a wealth fund.”

The respective Ministries of Economy and Finance are conducting research on this subject, but no final decision has been reached yet. Implemented by the Mauritanian government in 2006 to better manage the revenue from the now-abandoned Chinguetti oil field, the National Fund for Hydrocarbon Revenues (FNRH) intended to collect all state revenues derived from the exploitation of national hydrocarbon resources. This fund serves as a savings and investment fund for future generations while also playing a stabilizing role in fiscal policy. The unused assets of this fund are invested under the best market conditions, following optimal and prudent management.

Meanwhile, in Senegal and according to the National Resource Governance Institute (NRGI), authorities have been considering saving a fixed percentage of annual oil and gas revenues in a national fund, allocating the remainder to the general budget. The intergenerational fund the government plans to establish is set to be managed by the Fonds Souverain d’Investissements Stratégiques (FONSIS), a national strategic investment fund.

So far, the FONSIS has made investments in a number of Senegalese SMEs and projects, mostly in the health, agriculture, and renewable energy sectors. The investments made by the FONSIS notably contributed to financing the two photovoltaic power plants in Senegal with a total production capacity of 60 MW – Kahone and Kaél Solaire SA -, thereby strengthening the diversification of Senegal’s energy mix and promoting cleaner and more affordable energy.

As such, countries should invest the income generated from their resources in ways that create long-term benefits and economic growth. Senegal and Mauritania may learn from Botswana, which has effectively implemented this guideline by spending its diamond riches in sectors such as education, infrastructure, and healthcare to guarantee long-term development through the Pula Fund.

The opportunities associated with SWFs will be further explored at the upcoming MSGBC Oil, Gas & Power 2023 conference, scheduled to take place from November 21-22 in Nouakchott. The conference takes place under the theme, ‘Scaling up Investment Opportunities in Africa’s New Energy Frontier,’ and is aimed at determing the region’s best strategies to maximize oil and gas revenues.

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Onur Yilmaz

Onur Yilmaz