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Beyond Rhetoric: Refocusing The Nigeria Sovereign Wealth Fund Agenda By Shafii Ndanusa, FCCA
Background
Sometime in the year 2010, the Central Government in Nigeria decided to spearhead the advocacy for the establishment of the Nigeria Sovereign Wealth Fund. Having realized the growing importance of sovereign wealth funds across the globe, particularly with regards to their economic stabilization roles following the incidence of the 2007/2008 global financial crises, this was a globally-welcomed decision of the Government. Prior to then, it had been severally argued, and indeed proven that Nigeria suffers from the resource curse syndrome. The resource curse syndrome is used to explain the paradox where some nations and societies that are naturally endowed with unique environmental resources, still have a large percentage of their populations living within the poverty bracket. In the National Bureau of Economic Research Working Paper 9804 titled; Addressing the Natural Resource Curse: An Illustration from Nigeria, Sala-i-Martin and Subramanian (2003) concluded that Nigeria’s oil and mineral resources exert a negative impact on its economic growth and development.
In order to reverse the undesirable effect of the resource curse syndrome on Nigeria, the Central Government engaged and consulted with stakeholders, ensured that cutting edge research on sovereign wealth funds was carried out, prepared a draft Bill that was submitted to Parliament, and commissioned an intensive advocacy campaign that was efficiently implemented. The result of all these culminated is the Nigeria Sovereign Investment Authority Act (NSIA) 2011. The NSIA Bill was passed by both chambers of the Nigerian Parliament in the month of May, 2011 and it was duly assented to and signed by the Nigerian President on 26th May 2011. By any meaningful standard of evaluation, the process that ended in the enactment of the NSIA Bill within a relatively short period of time was considered a remarkable achievement.
Sovereign nations and states that desire to entrench the highest standards of transparency, accountability and socio-economic consciousness in the management of their financial resources opt for the sovereign wealth fund model. This perhaps explains why in the last fifteen years (2000 – 2014), the world has witnessed a surge in the number of new sovereign wealth funds. The first sovereign wealth fund is the Kuwait Investment Authority (KIA) and it was established with oil revenues in the year 1953.
According to the Sovereign Wealth Fund Institute (SWFI); as at March 2015, KIA’s asset under management was reported to be in the region of 548 billion US dollars. The largest SWF is the Government Pension Fund of Norway with an estimated asset base of 863 billion US dollars, as at March 2015. Nigeria and many other countries in sub-Saharan Africa opted for the sovereign wealth fund model. African nations with SWFs larger in asset base than Nigeria include; Algeria, Libya, Botswana, and Angola. The most recent data on Sovereign Wealth Fund Rankings published by the SWFI includes a listing of seventy-eight (78) SWFs. Out of which this number, fifty (50) SWFs were established between the year 2000 and 2014.
The Nigeria Sovereign Investment Authority as at today
The Nigeria Sovereign Investment Authority was established to oversee the management and operation of three Nigerian sovereign wealth funds. The NSIA Act 2011 provides for the operation of three ring-fenced funds namely; Future Generations Fund, Nigeria Infrastructure Fund, and Stabilization Fund. The Act further provided for a take-off seed capital of One (1) billion US dollars. The Board of Directors was inaugurated in October 2012 and the NSIA has since commenced operations. A review of the growth in NSIA’s total assets under management between 2012 and 2015 reveals a less than impressive growth rate. The latest publication of the SWFI puts the total assets under management of the NSIA at 1.4 billion US dollars as at March 2015. Noting that the cumulative total assets under management of all sovereign wealth funds as at March 2015 is approximately 7.106 trillion US dollars, Nigeria’s 1.4 billion US dollars is therefore insignificant, in view of the fact that it represents only about .02 per cent of this global pool of funds.
A lot of reasons appear to be responsible for the dismal record in terms of total assets base as exhibited by the NSIA between 2012 to date. Chiefly, the Excess Crude Account (ECA) which was initially established by the Nigerian authorities to warehouse excess crude revenues ought to be have been set aside with the coming into force of the NSIA Act in May 2011. It is argued that beginning from 26th May 2011, all excess crude oil and gas revenues (over and above the annual budgetary benchmark) ought to have been channeled to the NSIA in order to provide additional capital for the three Nigeria sovereign wealth funds. This was not the case as throughout this period (2011 – 2015), the ECA was not only maintained it continued to receive the funds that were subsequently disbursed to all the three tiers of governments (Federal, State and Local) in Nigeria. The net effect was that the NSIA was starved of the necessary stream of capital inflows that would have enabled the organization pursue its mandate more vigorously. Consequently, it is important to note that the net balance of funds outstanding in the excess crude account as at the end March 2015 leaves much to be desired. The IMF Executive Board 2014 Article IV Consultation with Nigeria states that Nigeria’s fiscal buffer in the ECA is limited to the sum of 2 billion US dollars as at the end of 2014. It is doubtful if this figure has appreciated recently in view of the dwindling oil revenue occasioned by price and supply volatility. Kudos for the much-touted financial, fiscal and economic discipline that was meant to have been ushered in by a new regime of sovereign resource management!
Secondly, shortly following the establishment of the NSIA, some State Governors (who are equally crucial stakeholders), raised strong objections over financial deductions from the Federation Account with regards to the implementation of the NSIA Act. Unable to resolve fundamental differences in opinion, the matter went to Nigeria’s Supreme Court for adjudication. The legality of the Nigeria Sovereign Wealth Fund Framework (as presently constituted) was put up for adjudication. So far, administrative attempts to arrive at out-of-court reconciliation of differences between the major stakeholders have been unsuccessful. This legal stalemate provided the convenient cover for the continued maintenance and operation of the excess crude account. However, I am of the opinion that having duly enacted the NSIA Act, it is therefore imprudent to continue to maintain the excess crude account under any guise. I am convinced that only a judicial pronouncement to the contrary should prevent the relevant authorities from carrying out a full scale implementation of the NSIA Act.
Furthermore, a closer scrutiny of the progress of the this initiative in Nigeria leads to one conclusion and that is; it is one thing to establish a promising institution, it is another thing to provide it with all the necessary tools that will unlock its true potentials for making solid contributions to the national economy. In Working Paper No. 142 of the African Development Bank Group titled; ‘Africa’s Quest for Development: Can Sovereign Wealth Funds Help?’ Triki and Faye (2011) concluded that the long term economic development impact of African SWFs is limited by factors such as smallness in size, poor governance structures, and the fact that they are mainly focused on stabilizing local economies. While I am a strong advocate that SWFs in emerging economies should primarily focus on developing their local economies, I do not subscribe to the notion that they should remain small in size. In a global economy that has become more competitive, the SWF model of sovereign resources management remains one of the best options for the management of scarce national/state resources.
The Nigerian Economy of Today
Prior to the incidence of the 2007/2008 global economic crises, Nigeria had amassed significant savings from excess crude revenues in addition to having good external reserves position. With these instruments in place, the economy was well-safeguarded when government revenues dived due to volatility in global oil prices. The picture is radically different today. The Nigerian economy still remains heavily dependent on oil and gas with the largest portion of government revenues coming from crude oil sales. The government is still the largest single employer of labor and therefore the most crucial driver of economic activities.
The Nigerian economy of today is characterized by dwindling government revenues, high interest rates, unfavorable local exchange rate regimes, inflationary pressures, and low GDP per capita. This is in addition to having a visibly struggling manufacturing sector that is constrained by epileptic power supply and the near absence of critical economic infrastructure. Youth unemployment is on the increase and the industrial sector is almost comatose.
The IMF Executive Board 2014 Article IV Consultation with Nigeria, published on 4th March 2015 reports that Nigeria has high poverty rates, lags behind in critical infrastructure and also has high rates of income inequality. Inflation is projected to rise to double digits (11.5%) at the end of 2015, from single digit figure (8%) recorded at the end of 2014. The report asserts that Nigeria’s development challenges will likely increase due to sharp decline in oil revenues which is still the mainstay of the economy. It is against this backdrop that Nigeria faced the most keenly-contested general elections in the history of the country.
The high political risk occasioned by the general elections escalated the already complicated business and economic risk scenario. Furthermore, with Nigeria as an import-dependent economy, the additional pressure on the local currency led to currency devaluation and a weaker external reserves position. Comparatively, the Nigerian economy appears to be faring less-better than some other African economies that are less endowed. More than ever before, Nigeria is dire need of a more prudent, financially-disciplined and commercially-aware regime of sovereign resources management. This is why the agenda behind the setting up of the Nigeria sovereign wealth funds remains valid to date. In a world characterized by increasing complexity, competition, and corporate dominance, the adoption of the sovereign wealth fund model is one of the best strategic tools that could be used to safeguard national/state resources, guarantee economic survival, growth and development.
In an article published in the January – February 2014 issue of Bankers, Markets & Investors with the title; ‘Optimal Asset Allocation for Sovereign Wealth Funds: Theory and Practice’, Bodie and Briere (2013, p. 53) state that; “A complete approach to the sovereign balance sheet is necessary to fully understand the country’s risks and determine how it can best manage its wealth”. Nigeria must take a very hard look at its sovereign balance sheet, and decide what its key priorities are for the short, medium and long term.
Beyond Rhetoric
Granted that the three Nigeria sovereign wealth funds have been established, however, their growth and impact is constrained by the key factor of limited capital inflows. The continued existence and operation of the excess crude account in addition to the legal quagmire between State Governments and the Federal Government have reduced the funds to the status of sleeping giants. Such valuable national institutions ought to rank high on the priority list of public governance.
In view of the above, I am strongly convinced about the following;
1. Nigeria should not discount the crucial importance of the SWF Initiative, particularly now that the nation is in dire need of prudent, professional and more effective ways of managing scarce financial resources 2. As a matter of urgent national importance, Nigeria needs to refocus the SWF Initiative with a new Agenda that is more pragmatic and more aggressive in terms of providing funding/support to the Nigerian sovereign wealth funds 3. Nigeria needs to note that the sovereign wealth fund model is applicable and practicable at all levels of public governance in Nigeria. An advocacy to this effect is considered to very important 4. Nigeria needs to design and implement other measures that will enable the country build upon the positive performance that has already been recorded by the NSIA. It is worthy to note that within the short period of its existence in overseeing the three Nigeria sovereign wealth funds, the NSIA has not only safeguarded the value of its 1 billion US dollar seed capital, it has also earned additional profits despite shouldering the initial Funds set up, administrative and operational expenses. This is evident in the content of Annual Report and Accounts published by the NSIA.
Conclusion
In a paper titled; ‘Sovereign Wealth Funds: Form and Function in the 21st Century’, Clark and Monk (2010) are of the opinion that following the global financial crises, sovereign wealth funds may either become financial goliaths that dominate global markets or metamorphose into national development institutions. In this regard, it is concluded that SWFs offer a sneak preview into the emerging dynamics of a world that is characterized by financial and economic globalization, cross-boundary socio-cultural integration, and increase in the demonstration of the concept of shared state sovereignty. In the final analysis, SWFs are perfect candidates for the observation of the confluence of national business, public leadership ethics, economics, diplomacy and politics.
The Way Forward
Bold and timely decision making is crucial to the way forward. To begin with, there is need for a strong recommitment to regularly fund the three Nigerian sovereign wealth funds, in line with the provisions of the NSIA Act. The mechanism for achieving this is not rocket science, as it is something that could be easily worked out with the relevant organs of government.
Secondly, the disagreements between the States and the Federal Government must be courageously addressed. At the heart of this acrimony is the effective control over the portion of excess crude revenue that belongs to the State governments. I do not foresee how a lasting solution can be achieved for all stakeholders without a comprehensive review of the NSIA Act, particularly with regards to those provisions that deal with control over capital contributions. I believe that Nigeria’s SWF Policy can be decentralized by allowing the constituent elements (Federal, State and Local Governments) to independently establish and then manage their own separate SWFs. Unless, these issues are progressively addressed, the Nigeria Sovereign Wealth Fund Initiative would remain rhetoric. At the moment, the NSIA is most-likened to a sleeping giant whose potentials are crucially-needed for the economic re-engineering, reformation, and re-focusing of the emerging Nigerian society. |