Sovereign wealth funds and macroeconomic stability in oil‐exporting African countries

Abstract

This paper investigates the effectiveness of sovereign wealth funds (SWFs) in reducing macroeconomic volatility occasioned by oil price shocks in oil‐exporting African countries. The oil price boom‐bust cycles complicate fiscal operations, distort budget implementation and trigger macroeconomic instability in oil exporting African countries. We formulate and simulate a dynamic stochastic general equilibrium model that features SWFs and the fiscal sector. We compare a baseline model without the SWFs to a model with the SWFs. The simulation analysis suggests that the establishment of SWFs can mitigate the vulnerability of oil‐exporting African countries to oil price shocks. In particular, SWFs can reduce fiscal expenditure and real exchange rate volatility. Furthermore, SWFs can stabilise the level of external debt and reduce the level of money supply thereby sterilising the oil revenue. Since oil price shock is one of the important external shocks inducing economic instability in oil‐exporting African countries, the creation of SWFs can insulate these economies from external shocks.

The Sovereign Wealth Fund and Nigerian Economic Development

“…Empirical findings on the stabilization role of SWFs present a mixed picture (Frynas, 2017 andMami, 2023). Notably, Rasaki and Malikane (2018) Adonu (2021) argues that both domestic and foreign SWFs can play a leading role in the developmental process in Africa. Additionally, Megginson, Malik, and Zhou (2023) argue in this context that partnerships between countries in the 'global South' can indeed assist in the development of developing nations, although further research into their outcomes is warranted.…”

The impact and implications of SWFs: a systematic review of literature

“…A common finding is that a soundly managed SWF, can in fact absorb excess liquidity during times of high commodity prices and support government expenditure and budgets during periods of low commodity prices, thus insulating the economy from commodity price shocks (Aizenman et al, 2019;Coutinho et al, 2013;Dagher et al, 2012;Kinda et al, 2018;Mohaddes and Raissi, 2017;Rasaki and Malikane, 2018;Shabbir, 2009;Urban, 2011;Van der Ploeg, 2014;Youssef et al, 2018). The fund can also dampen the effects of commodity price volatility on exchange rates, and therefore, insulate the balance of payments as well (Aizenman and Riera-Crichton, 2014;Rasaki and Malikane, 2018;Raymond et al, 2017;Shehabi, 2015;Zeufack et al, 2016). It can also facilitate the redistribution of tax revenues generated from the energy sector and orientate the economy towards a sustainable future (Heffron, 2018).…”