Thursday, October 31, 2013

Sovereign Wealth Fund
On the 18th of September, the Nigerian Sovereign Investment Authority invested $200 million  of the $ 1 billion allocated to it in US bonds. NSIA is the organization that is responsible for Nigeria’s Sovereign Wealth Fund (SWF). Most SWFS are investments by countries and are funded by budget and/ or balance of payment surpluses. They have their origins in commodities (additional profits from natural resources. An example is Nigeria and the commodity is oil) or non-commodities (such as transfer of assets from foreign reserves). 
The  main purpose of a SWF is to act as a rainy day fund for countries.It can be likened to  University endowment funds. The difference is the source of funds. For University endowments it is donations but for countries, it is out of pocket. The objectives of the Nigerian SWF are to: receive, manage and invest in a diversified portfolio, save oil revenues, develop infrastructure that would aid growth, provide stabilization in times of economic stress and be a last resort for budget deficits. SWF was established by an act of the National Assembly in 2011. 
The fund is divided into: Stabilization fund, future generation fund and infrastructure fund. SWF is a good policy because it creates rules and structure around the additional revenue the government gets from oil. Presently, all excess revenues derived from oil go into the Excess Crude Account (ECA)  set up in 2004 by President Obasanjo. Usually, for a financial year, the government sets a benchmark price for oil. For instance, in 2013 oil would sell for $70 per barrel. If oil sells above that, e.g $200, the extra $130 goes into the ECA. In 2004, ECA had about  $5billion and grew to about $20 billion in 2006. That account now has approximately $3.6 billion. Earlier this year, the minister of Finance stated that about N606 billion from ECA was used to supplement the shortfall in the Federation account (account where all the tiers of government share revenues). 
There are 2 issues with ECA. The president set up the fund  without the consent of governors and the president exercised (still exercises) discretion on how the money is spent. i.e there is no transparency around the funds. The lack of transparency on how the ECA funds have been spent means that Nigerians cannot  pinpoint the benefits from the profits of crude oil in the past 9 years.  Therefore, SWF is a step in the right direction. 
SWF is also a good idea because it offers an avenue to use oil wealth to develop the nation before it no longer generates revenue. If funds are properly invested, are profitable and used for stated purposes,Nigeria may in for good times
However, the problem with NSIA is the nature of the investments made. If the country incurs losses on her portfolio, she is the poorer for it. For instance, Nigeria has invested $200 million in US bonds, if US had defaulted on its debts on the 17th October, Nigeria would have lost some money though the country would not have been impacted like China and Japan. Thus, the structure around NSIA should focus on the type of investments to be made and the country’s risk appetite. Other countries use their funds to create State Owned Enterprises but we have tried that before and it failed (remember Nigerian Airways and Virgin Nigeria).
For the fund to function properly, the Federal government needs to get the consent of State governors. Some State governors have kicked against the fund and are in court over it. The additional profits from oil belongs to all tiers of government. It is against the principles of federalism if States are “forced to save” and SWF may not get beyond the $1 billion initial allocation given to it if  the court agrees with the state governors.
The impacts and successes of NSIA/ SWF remains to be seen and hopefully it would be an agency that truly benefits Nigerians

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