What Nigeria Stands To Benefit From Its Sovereign Wealth Fund

By

Shafii Ndanusa   Abuja, Nigeria

shafii@accamail.com

 

Introduction

Having so far pushed the decision to establish the Nigerian Sovereign Investment Authority, the Nigerian Federal Government has no doubt made a bold statement that it is willing and ready to subscribe to global best practice in the management of its economic and financial resources. The Nigerian Sovereign Investment Authority (NSIA) is replaces the Excess Crude Account (ECA). The ECA had been widely held to be inappropriate,  in view of recent global trends. The ECA was also adjudged to have fallen short of meeting the basic standards for transparency and accountability. Beginning from the 27th of May 2011 when the Nigeria Sovereign Investment Authority Bill received presidential assent,  it is envisaged that excess income (income beyond the annual budgetary benchmark) from the exploitation of Nigeria’s hydrocarbon resources (mainly crude oil for now) will be channeled to the Nigerian Sovereign Investment Authority.

 

The Nigerian Sovereign Investment Authority is to act as an investment fund meant to promote the achievement of multiple economic objectives for the country. This in turn is expected to serve as an economic transformation mechanism impacting positively either directly or indirectly on most of the nations’ citizenry. From the moment crude oil was discovered sometime in 1956 in a community called Oloibiri in Nigeria, adequate measures would have been put in place to ensure the nation was not unduly exposed to the resource curse syndrome. Kuwait, in 1953 while still under British rule had the first Sovereign Wealth Fund. The Kuwait Investment Authority today is reported to be worth approximately USD300 billion (Three Hundred Billion United States Dollars). Some good fifty-five (55) years down the line following crude oil discovery in Nigeria, the idea of the Nigerian Sovereign Wealth Fund has gathered enough steam such that at the moment, the executive bill for the establishment of the Nigerian Sovereign Investment Authority scaled Parliamentary scrutiny and has been signed into law by President Goodluck Ebele Jonathan.

 

Although the effort to pursue the establishment of the NSIA has not been without its challenges, a flashing thought on what might be the opportunity cost of the decision coming in this late is enough to cause some real deep sober reflection. Imagine how much financial savings, investment opportunities and capital growth potentials that have been lost in the last fifty-five (55) years of the existence of the Nigerian oil industry. Without argument, it is far better to be late rather than never. Nevertheless, it is instructive to highlight that a nation such as Ghana that has just recently begun the exploitation of its crude oil reserves is already putting in place the necessary framework to avoid the late hour scenario.

 

As at today, some of the biggest Sovereign Wealth Funds belong to the Gulf and Middle Eastern states. The largest of them is the Abu Dhabi Investment Authority (ADIA) and is currently reported to be worth approximately USD600 billion (Six Hundred Billion United States Dollars). With a cumulative total financial assets base of over four (4) trillion United States Dollars under management of the Global Sovereign Wealth Funds, they have become a force to reckon with in the international financial and capital markets.

 

Nigeria’s Journey So Far!

The bill for the establishment of the Nigerian Sovereign Investment Authority is a masterpiece of legislation with inbuilt provisions to guarantee and protect the independence of the Nigeria Sovereign Investment Authority. It is undeniable that the erstwhile Federal Minister of Finance; Dr. Olusegun Aganga did an excellent job in preparing the grounds for the establishment of the NSIA. At the public hearing held by the Nigerian Parliament on the Bill, he defended the proposal on the NSIA. Questions and issues raised at the public hearing and even after the public hearing were adequately responded to. The outcome of all the above efforts led to passage of the NSIA Bill into law. This particular step is necessary to ensure that the Nigerian Sovereign Investment Authority is established on a safe, sound and robust legal framework.

 

A Sovereign Wealth Fund (SWF) is an investment fund owned by a sovereign state/nation with the mandate to invest in financial assets such as stocks, bonds, precious metals, property and other financial instruments. The basis of investments is for financial and economic benefit. The Risk-Return profile of each investment proposal is to serve as the key determinant in any investment situation. Due to the international scope in the nature of their investments, Sovereign Wealth Funds often need to comply with the local and national laws of recipient nations. This is in addition to the bilateral nature of the relationships that may need to be established prior to the injection of significant capital investments into recipient countries.

 

The Nigerian Sovereign Wealth Fund: An Idea whose time has come

 

The SWF idea has everything going for it at this time. Especially now, that the nation is determined to chart a new path of fiscal prudence and discipline in the management of scarce resources. As the nation prepares for a new wave of economic transformation following a particularly expensive general election, the role of the NSIA in this wave of transformation is most critical.

 

The risk associated with crude oil production will have to be kept in check through the continued sustenance of the Amnesty Program. Inflation Risk is also being targeted by the monetary and fiscal authorities in the current year’s budget. The Central Bank of Nigeria intends to strengthen monetary tightening while the fiscal authorities plan to implement a budget that is not expansionary. These measures would collectively contribute to reducing the risk level inherent in the economy.   

 

Transparency and Accountability at the Heart of the Sovereign Wealth Fund Debate

 

Due to the inappropriate nature in the management of Nigeria’s Excess Crude Account, it became obvious that the issue of transparency and accountability is at the heart of the debate for the establishment of the Nigerian Sovereign Wealth Fund. To address issues relating to this, Nigeria has decided to subscribe to the Santiago Principles in the management of its Sovereign Wealth Fund.

 

The Santiago Principles of the International Forum of Sovereign Wealth Funds (IFSWF)

 

In the month of October 2008, the International Monetary Fund (IMF) in collaboration with the International Working Group of Sovereign Wealth Funds (IWG SWF) now known as International Forum of Sovereign Wealth Fund (IFSWF) proposed the Santiago Principles for Sovereign Wealth Funds.

 

The Santiago Principles also known as GAPP (Generally Acceptable Principles and Practices) is a set of twenty four (24) voluntary principles designed to promote global best practice in the management of Sovereign Wealth Funds.

 

The International Forum of Sovereign Wealth Funds is a voluntary group of Sovereign Wealth Funds who meet regularly, exchange views on areas of common interest and facilitate an understanding of the Santiago Principles and Sovereign Wealth Fund activities. Twenty three (23) nations have presently subscribed as members of the IFSWF. Botswana, Equatorial Guinea and Libya are currently the African nations in the group.  

 

Benefits for Nigeria

 

  1. Economic Competitiveness: The Nigerian economy will certainly become more attractive for Foreign Direct Investments (FDI). The high level seriousness which the establishment of the NSIA will signal will be a good yardstick for measuring Government’s commitment to the global standards of transparency and accountability in the management of natural resources.

  2. Prudence in Resources Management: The culture of unrestricted spending of unanticipated income will be curtailed. Investments will be based on sound, clear and beneficial economic/financial parameters.

  3. Availability of a Pool of Savings or Back-up Funds for future generations.

  4. Availability of a Counter-Cyclical Economic Stabilization Fund: This will assist in smoothening budget variations in income over a period of time.

  5. Availability of an Infrastructure Fund to provide intervention in critical areas of the Nigerian economy. The infrastructure deficit of Nigeria is a major challenge that requires massive investments in resources. This benefit will cut across different sectors in line with due to the multidimensional nature of the potential/actual interventions.