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Analysis: Oil Revenue Surpluses will Embolden Saudi’s PIF in 2023

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By Matt Smith

Saudi Arabia’s Public Investment Fund (PIF) is expected to again spend big in 2023 to diversify the kingdom’s hydrocarbon-based economy as a record budget surplus provides the financial firepower to further swell its assets under management.  Crown prince Mohammed Bin Salman (MBS) has transformed the PIF since he became chairman in 2015, moving numerous government-owned assets to an entity that now spearheads Saudi Arabia’s efforts to modernise.

The PIF made an annual return of 25% last year, according to its recently published 2021 annual report, while its domestic assets include stakes in Saudi National Bank, Saudi Telecom Company (STC) and ACWA Power. “The PIF serves as the financial enabler and facilitator of Vision 2030,” said Dr. Robert Mogielnicki, Senior Resident Scholar, Arab Gulf States Institute in Washington. “(Its) strategy seems to be to move as quickly as it can in all directions and see where it ends up. It’s a strategy that’s very much still in the process of coming into being.”

Saudi Arabia posted a budget surplus of 149.5 billion riyals ($39.9 billion) in the first nine months of 2022 as a result of surging hydrocarbon revenues, far exceeding its previous forecast for a surplus of 90 billion riyals in full-year 2022. Brent crude hit a 10-year peak in June and natural gas reached a 14-year high in August.

“This makes the operating environment for the PIF much easier. It takes pressure off the governments and sovereign wealth funds, like the PIF, to redirect financial resources into the domestic economy,” said Mogielnicki. “The PIF is already doing that, but when things are really tight – as they were previously with deficits year after year – there’s much more pressure to scramble for resources to plug budget shortfalls.

“That won’t be the case for the foreseeable future. It gives the PIF more room to operate and direct financial resources into the avenues it wants, whether that’s in the domestic economy, across the region or internationally.”

Saudi’s demographics underline why the kingdom must create more jobs. According to a 2016 government survey, 30.4% of the 20.1 million Saudi nationals were under the age of 15. As of June 30, 2022, excluding military personnel, just 3.64 million Saudis had jobs, of which 1.54 million – or 42% – were government employees. Vision 2030 aims for 20% of employed Saudis to be working in the public sector.

The PIF, which did not respond to requests for comment, leads efforts to expand the private sector, launching several companies in the past few months. These include Saudi Downtown Company (SDC), which will build downtown areas and mixed-use destinations in 12 second-tier Saudi cities such as Najran and Jizan.

Another firm, National Real Estate Registration Services Co will create a real estate registration database that will include all property units in the kingdom. Halal Products Development Co will invest in the domestic halal food industry.

Regional Voluntary Carbon Market Co will help businesses transition to net zero carbon emissions, according to the PIF. In all, it has established at least 55 companies since 2017.

“I expect to see more of these kinds of investments,” said Alexis Montambault Trudelle, a PhD candidate at the University of Edinburgh whose research focuses on the PIF. The fund created 77,000 jobs last year. By 2025, it aims to help create 1.8 million direct and indirect jobs from 2021 to 2025.  The Saudi state long featured a system of segmented power centres – ministries or agencies controlled by different factions of the ruling family. These also had overlapping jurisdictions that often resulted in disputes over economic policymaking.

“With Vision 2030, there’s so much at stake for MbS’s regime to deliver and make it a success story. The PIF offers a nice solution to this problem, enabling MbS to circumvent the constraints of the existing fragmented state apparatus to centralize decision making,” said Montambault Trudelle. “Previously, many big projects have stalled or even failed because of inter-agency disputes, but now the fund is the sole driver of these projects.”

REGIONAL INFLUENCE

On October 26, MBS announced the PIF would launch five companies to invest in Bahrain, Iraq, Jordan, Oman and Sudan. Combined, this quintet will invest up to $24 billion, across various sectors including infrastructure, real estate, mining, healthcare, financial services, food and agriculture, manufacturing and technology. The PIF, which had $620 billion of assets under management as of March 31, aims to increase this to $1.07 trillion by the end of 2025.

“It’s also important from a reputational viewpoint that the PIF’s assets under management continue to grow, so there will be further transfers of financial resources – of equity stakes in companies – to the PIF,” added Mogielnicki. “The Saudis want to project the notion that the PIF is maintaining steady growth as 2030 nears. To do this, it looks like the PIF is going to be selling some of its stakes in key companies and also pushing for listings of other state-owned assets.”


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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