Public savings in Africa : do sovereign wealth funds serve development?

Do sovereign wealth funds (SWFs) contribute to Africa's development? This paper assesses the objectives of SWFs (fiscal stabilization, productive investment, intergenerational saving) and discusses alternatives. We argue that fiscal stabilization funds are often necessary, but entail considerable opportunity costs. In the absence of a strong framework of multilateral financial assistance that would reduce 'self-insurance' needs, paying down sovereign debt during times of revenue windfalls may constitute a better option as the cost of debt servicing usually exceeds the rate of return on financial investments. Investing in human capital and infrastructure has higher developmental returns than the returns on financial assets in intergenerational SWFs. Capitalizing development funds or national development banks to fund productive investments for long term structural transformation, provided they have clear mandates and strong governance, may also be preferable to intergenerational SWFs.