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Africa woos domestic savers as a buffer against fickle foreign capital

By BusinessNews Staff on July 26, 2014

African economies seeking to diversify away from foreign aid or borrowing to fund urgent infrastructure needs are increasingly turning to their burgeoning pool of domestic savers.

The continent needs billions of dollars in financing to be able to build roads, bridges, airports and power in order to accelerate economic growth, currently hovering around 5.5 per cent annually, and create jobs.

Long-term funds are scarce so pensions, long-term plays by nature, are seen by governments as potentially a major source of financing, although a lack of pensions’ cover is for now a capital constraint.

“The contribution of African pension funds to the growth of African economies is still rather low. It’s a low per cent of GDP in many countries but it’s improving,” Nigeria’s Coordinating Minister for the Economy/Minister of Finance, Dr. Ngozi Okonjo-Iweala had said recently.

According to Reuters, the 2008 financial crisis, and market volatility in the past year on signs the US Federal Reserve would start cutting back on the cheap dollars that had flooded emerging markets, served as a reminder to African governments to build up its domestic savings: the continent badly needs more domestic savings if it wants to stop being beholden to the whims of faraway financial centres.

“There’s general growth in savings…around Africa and I think that the drive for infrastructure is making governments realise that we need to grow our own local savings,”, Chief Executive of Kenya’s pension regulator, Retirement Benefits Authority, Edward Odundo, said on the sidelines of the recently held Africa Pensions summit.

Savings are coming from a low base, compared with more mature economies, but growth rates are fast, especially as economic growth deepens and the continent’s bulging youth population starts to enter the workforce.

Nigeria has pension assets of about N4.3 trillion which make up only five percent of its recently rebased GDP and cover less than 15 per cent of the workforce.

Pension contributions make up around 20 percent of Africa’s GDP, Odundo said, with Kenya itself seeing the same ratio.

This is contrast with the West, where in 2012, pension assets were 155 per cent of GDP in the Netherlands, 104 per cent for Britain and 74.5 per cent for the United States, according to Nigeria’s Okonjo-Iweala at the summit.

“Coverage in Africa is still very low because most of the people are in the informal sector,” Odundo, who also doubles as president of the International Organisation of Pension Supervisors (IOPS), an independent body involved in the supervision of private pensions, said.
Several African countries, including Nigeria, Kenya and Uganda have seen companies set up contributory schemes, moving away from government schemes, as part of reforms meant to boost savings in a bid to mobilise long-term funds for the economy.
Nigeria reviewed its pension law this month to expand coverage to include companies that employ more than three people, to boost the savings’ rate and deepen long-term investment. Those companies would include small proprietorships, many of which do not even pay tax.
“We need to capture a significant proportion of our workforce, especially those in the informal sector. We need to encourage countries to switch to contributory schemes,” Okonjo-Iweala added.
Uganda announced plans last month to end a state pension monopoly and make civil servants contribute to private retirement funds.

Foreign direct investment into Africa peaked in 2008 at $72 billion, according to a United Nations report, and then dropped to $59 billion the following year, when the financial crisis set in. It has started to pick up again but fickle portfolio investors buying equity, debt and commodities remain a much larger contributor to investment figures.

[This Day]

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