Algerian officials reject investing wealth in sovereign funds

30/07/2008

Algerian officials say investing rising oil revenues in sovereign funds is a risky move.

By Achira Mammeri for Magharebia in Algiers – 30/07/08

[Getty Images] Energy minister Chakib Khelil said last week that creating overseas sovereign funds for Algeria's oil wealth is currently premature.

With oil prices skyrocketing, Algeria has seen its foreign exchange revenues increase steadily over the last two years. The issue of how to manage the country's wealth has set off a new debate in the local media on whether setting up government-owned investment entities known as sovereign funds offers the best solution.

Algerian reporters have repeatedly asked officials whether Algeria would copy other OPEC states and create its own sovereign wealth fund.

OPEC President and Energy and Mines Minister Chakib Khelil became the latest Algerian official to say that creating such funds, while being a "valid option" for the future, is premature.

"Algeria’s financial resources should be devoted exclusively to internal investment," Khelil said July 26th at an Algiers press conference announcing Algeria's Energy Week set to begin November 15th. One reason he cited for this objection is that Algeria, where oil has generated most of the revenue, cannot rely on the commodity's continued price climb.

"Even if oil prices are currently high, they will stabilise in the 140 dollars / barrel [range]," he said.

Other Algerian officials mirror Khelil's concerns. Economy Minister Karim Djoudi said global economic indicators make creating sovereign funds a high-risk move for Algeria.

"Because of the world financial crisis and the subprime affair, which has not yet finished doing damage, the sovereign funds are recording enormous losses. To launch a sovereign fund in an international situation so unfavourable is really inadvisable," El Watan quoted him as saying earlier this month.

Mohammed Laksaci, governor of the Bank of Algeria, said that although revenues are climbing, it would be very risky for Algeria to invest its foreign exchange reserves in banks abroad.

"The increase in our foreign exchange reserves means that we need to manage them very carefully," Laksaci said. Without specifying the exact sum already invested, he said, "We get a return of 4% on this money."

According to Laksaci, Algeria's reserves are now $126 billion. He predicts that the number will reach $160 billion by the end of the year.

Former Algerian Prime Minister Ahmed Benbitour is also reluctant to advocate the sovereign funds idea. "First we need to prove we can manage our own economy before we go making investments abroad," he said in an interview with Algerian daily L’Expression, "which requires an entirely different kind of skill."

"We’re a long way off from achieving that," Benbitour added.

Economist Abdelmalek Serrai concurs, noting that it is still premature to discuss the investment of sovereign funds. Algeria should shore up its financial position and acquire experience in managing its finances before embarking on such a step, he said.

Indeed, accountant Djamel Djerrad told Magharebia, the country would be better off investing in its manufacturing sector "rather than getting involved with foreign businesses".

Economist Hachemi Siagh disagrees. He believes the creation of a sovereign fund will help Algeria and assist Sonatrach in branching out into the international market.

Algeria’s foreign exchange reserves are kept in banks where they are protected by guarantees from the US Treasury, and can be withdrawn by the Bank of Algeria at any time.