Tough lessons for those opposed to SWF

Nigeria’s state governors are reportedly asking for $2 billion out of the $4.1 billion remaining in the Excess Crude Account (ECA) to augment revenue shortfalls as a result of rapidly declining oil prices.

Oil sales account for 80 percent of Nigeria’s consolidated government revenue. However, oil prices are down 28 percent since June 2014. This should be a sobering lesson for the governors and those previously opposed to any plans to set up a Sovereign Wealth Fund (SWF) and had instead canvassed for a situation where all monies coming into the federation account must be shared and spent.

The emerging crises in state government resources are compounded by the fact that most states are solely dependent on federal allocations to pay salaries. The National Bureau of Statistics (NBS) recently released data on the 2013 internally generated revenue (IGR) of 14 states, which showed that of the N590.60 billion generated by the 14 states, Lagos alone accounted for 65 percent of the total figure or N384.26 billion. Some states like Zamfara, Taraba, Plateau, Niger, Kogi, Katsina, and Anambra recorded less than 1 percent each of the total IGR of N590.60 billion.

It is exactly at times like this that the SWF would have intervened to smooth over the shortfalls in revenues to all federating units in Nigeria, helping to prevent drastic cuts in services and infrastructure spending. Unfortunately, the states had connived to starve the SWF of funds while also taking the Federal Government to court over the setting up of the fund.

Right now, the counter-cyclical rainy-day portion of the SWF has assets of just under $350 million, while the fund as a whole has assets of $1.55 billion under management. To put that in perspective, Kazakhstan, an oil producer with similar production volumes to Nigeria, has about $75 billion in its oil fund, while Norway that produces less oil per day than Nigeria has over $850 billion in its SWF.

We have always argued at this paper that Nigeria’s SWF is grossly inadequate and underfunded, given the size of our economy. The reasons for setting up an SWF go beyond saving for a rainy day. As opposed to the ECA, the assets of the SWF are invested and are expected to make returns; in essence, the fund grows over time.

The Nigerian SWF also catalyses private capital for investments in infrastructure in the country. The fund is currently investing in infrastructure in agriculture, health, roads, and power, which is critical for Nigerian states hoping to attract investments.

One of the most important aspects of the fund is that it invests a portion for the unborn generation of Nigerians. As everyone can see with today’s fluctuations in oil prices, the end of the oil age and perpetually high prices may be coming sooner rather than later. It therefore makes sense to leave some benefits of oil to future generation of Nigerians, long after the oil wells run dry.

The SWF is a disciplined platform for saving, investing and distributing (when necessary) excess earnings from oil. It is neither arbitrary nor opaque, like the current ECA process.

In 2007, Nigeria had about $20 billion in its ECA. If a Nigerian SWF had been set up then and the ECA assets transferred to it, the fund should have almost doubled by today, assuming a tracking of the S & P 500 which has more than doubled from its 2009 lows. Instead, the ECA funds were shared by the states and the FG, with not much to show for it, and today the country is left unprepared for a fiscal and monetary crisis. Little wonder the naira is under pressure.

We hope the lessons of these times are learnt by all, and if oil prices were to rebound above the benchmarks set in the budget, then all excess earnings must be transferred to the SWF.