Regional Budget Reforms Open Way to Investment

Emmanuel Were

12 June 2011

Nairobi — Finance ministers across East Africa proposed reforms in their respective budgets, last week, opening up investment opportunities in their respective countries.

Reforms in the pension fund sectors are aimed at raising cash to meet long term obligations such as housing projects and to fund government deficits.

The pension industry provides cash, as the working population saves for retirement, with which fund or asset managers can invest in their local stock markets, abroad or channel to other investment avenues such as real estate or lend to the government through Treasury securities.

Kenya’s Finance minister Uhuru Kenyatta moved to lower the costs for pension funds which invest in guaranteed funds such as Government securities, which are seen as safe assets to hold, by eliminating the need for them to appoint fund managers.

Fund managers usually levy fees, depending on the size of the fund, to manage pension schemes. For small pension schemes with an asset base of about $230,000 charges from fund managers can prove to be costly.

“In order to lower the administration costs of these pension schemes and help them to grow their asset base, I propose to amend the law to remove these requirements for appointing fund managers for schemes that invest all their returns in guaranteed funds,” said Mr. Kenyatta.

However, the move to entice investment in guaranteed funds can be seen as an enticement for smaller pension schemes to invest in Treasury securities at a time when the government is looking to borrow from the local market to fund its budget for the next financial year ending June 2012.

Kenya’s budget financing shortfall is at $2.7 billion implying that the government will look to borrow funds through Treasury securities to finance the shortfall.

Kenya’s Finance minister, also proposed to amend the Capital Markets Act to facilitate the introduction of an over the counter market for bonds.

The measure has been on the cards for quite some time as commercial banks sought ways of reducing commissions paid to stock brokers to facilitate a bond transaction. Currently, brokers charge a commission of 0.035 per cent for a trade usually in millions of dollars and typically offer better margins than trading of shares at the stock markets.

Across the border, Uganda’s Finance minster Maria Kiwanuka said the government would undertake pension sector reforms aimed at increasing the savings rate and provide long term investment funds.

It is expected that with more long term funds being available interest rates in Uganda’s home loans market would decline making it more affordable for Ugandans to own a home.

Ugandan commercial banks have been increasing their exposure to the real estate sector. According to the Bank of Uganda the share of foreign currency loans to the building and construction sector rose to 17 per cent in February 2011.

However, Uganda’s mortgage rates remain high with interest rates at 22.02 per cent for residential mortgages while the commercial mortgages are at 21.81 per cent. Comparably, Kenya’s rates are as low as 9.9 per cent helped by competition from banks and also some key reforms in the pension industry.

If Uganda unlocks the availability of long term funds through pension sector reforms then analysts expect a likely drop in the mortgage rates as well as development of the building and construction industry as pension funds channel their money into real estate projects.

Rwanda’s Finance minister John Rwangombwa said the government will move to automate the collection of pension funds as one of the tax measures.

This will not only speed up collection of the funds but also provide a technology platform of tracking contributions as the country puts in laws to streamline public and private pension funds.

“In the pension sector the main priorities in 2011 will include the streamlining of the legal framework for both public and private pension funds by following up the enactment of the new pension law,” said Mr Rwangombwa in one of the policies set by the Rwandan government to develop its financial sector.

AllAfrica – All the Time