Nigeria: Saving For A Rainy Day

The Nigerian government has finally followed the example of other members of OPEC by launching a sovereign wealth fund (SWF) to encourage savings from crude oil earnings, despite stiff opposition from the state governors.

In his timeless classic, The Richest Man in Babylon, George S. Clason stresses the need to set aside a part of one’s earnings to secure one’s future. This time-honoured law applies not only to individuals, but also to nations that desire to create wealth and prosperity for their citizens.

The Nigerian Government must have had this in mind when it launched the Sovereign Wealth Fund (SWF) with N150bn ($1bn) seed capital in October. The ultimate beneficiaries of the Fund, according to the government, are the ordinary Nigerians, who have yet to feel the impact of the billions of dollars that have accrued to the country, 54 years after oil was first discovered in Oloibiri, a sleepy community in the Niger Delta region.

Nigeria, Africa’s largest oil producer, and member of the Organisation of Petroleum Exporting Countries (OPEC), currently exports about 2.2m barrels of crude oil a day. But the accruing revenues are often frittered away by the government. President Goodluck Jonathan’s government hopes to break with tradition by improving on savings of the mismanaged crude oil revenues, through the SWF.

A SWF, a government-owned investment fund, is usually set up by countries with mono-cultural product, such as crude oil, as their main revenue-earner. Nigeria is an example of such a country, relying predominantly on crude oil as major source of revenue.

The Nigerian SWF, expected to be funded and owned by the three tiers of government (federal, state and local) in the country, will replace the Excess Crude Account (ECA), into which Nigeria saves oil proceeds above a benchmark price set each year in the budget.

The government had transferred an initial $1bn from the ECA, which now contains $5bn, to the SWF, to kick-start this all-important process of encouraging savings of crude oil revenues. It is expected that with time, the remaining fund in the ECA would be transferred to the SWF.

Jonathan had earlier, in May, signed the National Sovereign Investment Authority Bill into law. This gave legal backing to the implementation of the SWF. The government proposes to fund the SWF monthly from excess oil revenues from the Federation Account.

No time to waste

Unveiling the SWF in Abuja, the nation’s capital in October, former World Bank chief and Coordinating Minister for the Economy and Minister of Finance, Dr Ngozi Okonjo-Iweala said: “We are proceeding with the implementation of this very important programme following consultations with the Governors’ Forum because the feedback we have is that Nigerians strongly support savings for the future and the other core objectives of the Fund. It is also clear given the current challenges facing our economy and the global financial crisis we cannot afford to waste any time.”

According to her, the SWF would be managed by KPMG, the international audit firm, which she said had already started the process of recruitment to constitute a board to manage the Fund.

The board will be composed of highly qualified Nigerians, both within and outside the country. There are reports that Goldman Sachs, JPMorgan Chase and Morgan Stanley have indicated interest in managing the Fund on behalf of the Nigerian government.

Before now, Nigeria was one of only three member states of OPEC that did not have a SWF. The Fund will serve three main objectives: provide savings for future generations, ensure prudent financing for critical infrastructure and create a stabilisation fund to protect the economy against external shocks such as the global financial meltdown that had affected many economies across the world.

Brain behind the SWF

The immediate past Minister of Finance, now Minister of Trade and Investment, Olusegun Aganga, who is credited with initiating the process that finally culminated in the launching of the SWF, has described the decision to establish the Fund as “the best economic decision of the government.”

Aganga, a former managing director/chief executive of Goldman Sachs International, London, is confident that the SWF will place Nigeria on the path of economic stability and growth. He expressed regret that Nigeria is just setting up the Fund, a tool for diversifying the economy, way behind other OPEC members, saying that the country could have achieved a lot if it had the Fund in place before now.

He said the launch of the SWF was inevitable because it had become obvious that the ECA had failed to achieve its objectives. He added that it was important for Nigeria to imbibe a savings culture, since it relies heavily on oil, a rapidly depleting asset, as the only source of revenue.

With the SWF, he said Nigeria would not only save money, but would also make interest on the invested fund, which would be shared among the three tiers of government for development of the country.

Another advantage of the SWF over the ECA, according to him, is the fact that only private individuals would manage it, thereby eliminating undue political interferences that had in the past undermined the effectiveness of government-owned parastatals.

The Minister, who gave an indication of the likely structure of the management of the SWF, said it would be composed of two structures: the governing council, which will consist of all the shareholders, including the three tiers of government, and the day-to-day-management.

Governors’ grouse

Though Jonathan had signed the SWF bill into law in May this year, political bickering had delayed its implementation as the powerful Nigeria Governors Forum (NGF), an umbrella of the nation’s 36 states’ chief executives, kicked against it because they feared it would reduce allocations to states.

The governors had earlier issued a communiqué after meeting on the matter in August and had called on the federal government to put off the launch of the fund until all the grey areas they had identified were addressed. But the federal government appeared to have swept their fears under the carpet as it went ahead to launch the SWF.

Following this development, some of the governors went to the Supreme Court to challenge the federal government’s decision, which they alleged is unconstitutional.

The feuding governors insist that excess crude revenues should be split among the federal, state and local governments, rather than all of it going into the new SWF.

The Chairman of the NGF and governor of Rivers State, Chibuike Amaechi, has said his colleagues are willing to collaborate with the federal government in the implementation of the Fund on the condition that they are able to freely access their funds and are permitted to contribute individually to a common purse, in this case, the Federation Account.   

The governors further argue that the lion’s share of allocations accruing to the Federation Account goes to the federal government (52.6%), leaving the 36 states and the Federal Capital Territory (FCT) with 26%, and local governments with the remainder.

Some analysts believe the federal government erred by going ahead with the implementation of the SWF in spite of the governors’ opposition, while others feel it acted within the ambit of the law.

Despite the opposition to the SWF and other seemingly controversial policies of the government such as the proposed fuel subsidy removal by January 2012, the Jonathan economic team, made up of both private and government officials, appears to be winning accolades. Only recently, Fitch Ratings, a leading global rating agency, upgraded Nigeria’s economic outlook to stable from negative.

In October 2010, Fitch Ratings lowered Nigeria’s sovereign credit outlook from stable to negative, citing rapid depletion of the country’s oil savings and political uncertainty that had characterised the build-up to the general elections in April this year as predisposing factors.

Analysts share the view that the upgrade reflects the growing confidence of the international community in the country’s ongoing economic reforms, being spearheaded by the Jonathan administration.
Reacting to this development, Okonjo-Iweala said this was “concrete evidence that the President’s economic transformation agenda is being appreciated”.