Daily Trust (Abuja)

28 June 2010

Nigeria: Country's Sovereign Fund

analysis

Nigeria's financial status is going downhill. Government thinks a National Sovereign Wealth Fund would reverse the trend.

The Excess Crude Account (ECA) is gradually being eclipsed. It would be replaced with a National Sovereign Wealth Fund (NSWF). A Federal Government team is already working on that.

Legal question

Expectedly, the new NSWF will finally settle the on-again-off-again constitutional crisis that has characterised the ECA since it was created by the Olusegun Obasanjo government. The ECA has no legal backing. The NSWF is thus seen as a slow but sure departure from profligacy of the past.

The new idea of having a legal Sovereign Wealth Fund is predicated on what government officials say is the plan by President Goodluck Jonathan to gee things up by raising the country's financial profile. This stems from concerns that the country's earnings are not sufficient to revive its rickety economy and patchy infrastructure. Nigeria is also said to be the only oil producing country that has no Sovereign Wealth Fund.

The ECA had of recent created a wall between the federal government, on the one hand, the states and local governments, on the other. But the Obasanjo government created the account to enable Nigeria save for the raining days as the country's monolithic economy sits on a time bomb ticking beneath in the face of dwindling oil prices.

Having kissed a record $20 billion early last year, the ECA now stood at $3.2 billion. It was depleted to mitigate shortfalls in revenue accruals to the federation account. The fund also helps stabilize budget deficit arising from oil prices volatility.

In the interim, the Jonathan government has created a fresh account where unshared revenue is being kept. The new Excess Revenue Account (ERA), according to the government is a window that would enable Nigeria prepare for unforeseeable financial crisis. It caters for extra cash accruing to the federation account above the monthly projected revenue.

According to the Accountant General of the Federation Ibrahim Hassan Dankwambo at the last FAAC meeting, the newly created ERC now has about N40 billion.

"Any month where there is an excess, it is put into that account. Last month, the revenue generated was N400 billion, so the excess that arose was the N41.8 billion that was set aside in the excess revenue fund. If there is any shortfall in revenue approval, the Excess Crude Account is first solution before any other alternative avenue is sought," he said.

Experts describe the move as timely but faulted the rationale behind keeping huge fund while the country's infrastructure is in bad condition.

Rationale

At a meeting of the National Economic Council recently- an umbrella body for the Governors of the 36 States of the Federation and federal economic managers -Finance Minister Olusegun Aganga said the NSWF was meant to be a robust institutional framework and strong fiscal policy for managing excess crude earnings.

He said the fund is central to the future development of Nigeria as it does not make any economic sense for any country to spend its earnings especially from crude oil.

Modus operandi

In Nigeria however, Sovereign Wealth Fund is little known. In other climes, it is responsible for managing extra money from oil, just as in the case of Excess Crude Account but with broader mandate.

Some sovereign wealth funds are held solely by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.

Other countries

In some oil producing nations, a sovereign fund is seen as an investment for the future generation. It helps to ensure that the future generation also benefits from the exploration of hydrocarbon because crude oil is an exhaustible resource. Nigeria, according to geologists, would cease to be an oil producing nation by 2040. This is unlike a country like Saudi Arabia that would still be in the league in the next 300 years or more. In some countries it is managed by the central bank, and in others independent institutions are set up to manage the fund. The United Arab Emirates Abu Dhabi established the Abu Dhabi Investment Authority to manage its SWF with asset currently valued at US$627 billon. The Libya Investment Authority was established in 2008 with an asset value of US$70 billion. In the same vein, the Algerian Revenue Regulation Fund was established in the year 2000 and has US$47 billion under its custody. In Russia, the Russian Sovereign Wealth Fund is managed by the Russian Ministry of Finance. Some other countries also employ the service of global investment fund managers such as: Ciitigroup, Merri Lynch, Morgan Stanley.

Challenge

Experts say the only challenge that may affect the fund is mismanagement, as Nigeria, over the years, has become a killing field for vibrant policies that work perfectly in other countries. However, the general consensus is that the NSWF is an idea whose time has come.

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