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Sovereign wealth funds are gaining ground in Africa, although urgent financial reforms are needed to boost foreign investment in the wake of the COVID-19 pandemic, economic experts said on day two of the 2021 African Economic Conference .

Studies presented at one of the sessions on Friday, December 3 highlighted the progress made in some countries over the past decades to improve policies. Experts argue that more work is needed to diversify and deepen financial markets in order to expand beyond commercial banks.

Munashe Matambo, associate researcher at the Zimbabwe-based Scientific and Industrial Research and Development Center, said there are currently at least 117 SWFs in operation or in development around the world, managing $ 9,100 billion, or 10% of world GDP.

Matambo said that currently 24 African countries have created or are considering establishing sovereign wealth funds, but the process is not advanced. He referred to funds established in Botswana and Zimbabwe. According to Matambo, the Pula Fund in Botswana has strong management and is well governed. In Zimbabwe, the sovereign wealth fund has been “unable to fulfill its role” given the existing governance framework.

For his part, Moses Nyangu, researcher at the University of Strathmore, presented an article entitled “What drives financial stability?” The link between market power and bank efficiency in the East African Community. “

“Financial systems remain underdeveloped in the East African Community region, with concentrated banking sectors and inefficient financial intermediation functions. However, most of the banks remain profitable… At the same time, non-performing loans are on the increase in the region, ”he said, adding that there is still a heated global debate on the implications of power. increased market.

Naomi Koske from Moi University in Kenya presented the results of her research on financial distress among listed companies in Kenya. It examined in particular the impact of the novelty of the installations and equipment and the negotiability of the shares. She said listed companies continue to experience financial difficulties, resulting in increased write-offs and some companies being placed under statutory management. Its definition of “financial distress” refers to a situation where cash flow is less than contractually required payments.

Koske concluded that the novelty of factories and equipment greatly increased the likelihood that companies listed on the Nairobi Stock Exchange would experience financial difficulties. In addition, the negotiability of shares considerably moderates the relationship between the novelty of installations and equipment.

According to the World Investment Report, global foreign direct investment fell by 35% in 2020. This decline was concentrated in developed countries, where FDI inflows fell by 58%. The distribution was uneven across regions, with Africa recording a 16% reduction.

An important effect of the development and expansion of the financial sector is increased competition and contestability in all economies, the panelists said. Institutions should focus their efforts on building a climate of trust at all levels in order to mobilize funding. Failure to do so will result in poor absorption of funding in many African countries.

“Tax policy is also key to mobilizing FDI,” said session moderator Dr Eric Ogunleye, adviser to the chief economist of the African Development Bank. Experts recommended setting a tax threshold. “Policymakers must set a clear limit for taxation,” said Dr Ndungu Adamon Mukasa, consultant in the Department of Macroeconomic Policy, Forecasting and Research at the African Development Bank.

Property rights and procedures must also be taken into account in terms of investment agreements. While experts appreciated the role of incentive policies, they recommended caution in determining how an investor can benefit from such measures.

The 2021 African Economic Conference is being held in a hybrid format, with key delegates meeting on the island of Sal in Cape Verde, as well as virtually. The event attracts a wide range of stakeholders, including policymakers, development institutions, the private sector and researchers, to discuss ways to sustainably develop the continent’s sources of development finance. The conference is organized by the African Development Bank, the United Nations Development Program and the Economic Commission for Africa.

By Ibrahim Oredola Falola, Bernadette Namata Umutoni and Frederick Nwabufo and edited by Neil Ferguson.

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