The controversial Sovereign Wealth Fund (SWF) has kicked off last week despite the deafening opposition of? the governors to the dedicated account. BAYO OLADEJI reports.
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The administration of President Goodluck Ebele Jonathan has not been synonymous with controversies since it was inaugurated on May 29, 2011. Five months into his administration, the controversy deepens as it keeps jumping from one storm to another without denouements sometimes in the interest of Nigerians and vice-versa.? From Jonathan’s handling of the security situation in Nigeria, his hasty endorsement of the Libyan National Transitional Council (NTC) to the president’s moves to remove oil subsidy, not a few Nigerians believe the president is becoming controversial by the day!
While the polity remains polarized over the single tenure proposal with the Presidency dilly-dally on the details of the proposed law, another one reared its ugly head. Welcome to the world of Excess Crude Account (ECA) which was unconstitutionally imposed on the polity by former President Olusegun Obasanjo.
Although the ECA has been renamed Sovereign Wealth Fund (SNF), this time around with the law backing its establishment, the opposition against it is as strong as the one that stood against the historic aborted third term agenda sponsored by Obasanjo. The National Governors Forum (NGF) which endorsed it has made-a dramatic u-turn
describing it unconstitutional and asked the Presidency to suspend action on it.
But from all indications, the governors have slept on its right for too long and the Presidency seems to have made up its mind not to go back on it especially with the immediate President of the World Bank and current Minister of Finance, Ngozi Okonjo-Iwealla defending SWF with all the sophistry she can muster.
Nigeria, rated Africa’s top oil producer, has begun the sovereign wealth fund with an initial capital of $1 billion, as stipulated by the law that midwifed it and hired KPMG to select its management team which would include some officials of the Presidency, the NGF representative, representatives of the youth, women, labour and the
organized private sector. This, however would have to wait until mid-December after the resolution of the controversy.
“It is clear that given current challenges facing our economy and the global financial crisis, we cannot afford to waste any more time. What we have done can be compared to opening an account for the sovereign wealth fund and commencing with other necessary procedures in preparation for full implementation,” Ngozi Okonjo-Iweala told reporters last week.
The Nigeria Sovereign Investment Authority would be split into the Nigeria Infrastructure Fund, the Future Generations Fund and the Stabilization Fund, according to the bill signed into law by Jonathan in May. Each component will represent at least 20 percent of the total. The fund is designed to ensure some of Nigeria’s oil wealth is saved and can’t be tapped on a regular basis to finance the
government’s running costs. The fund will help the country save for the future, invest in strategic infrastructure projects in Africa’s most populous nation and act as a “buffer” against volatile oil prices.
Okonjo –Iweala said oil is currently trading at just above $110 a barrel, compared with the $75 anticipated in Nigeria’s 2012 budget. Nigeria’s excess crude-account balance will be about $5 billion after $1 billion is used as initial capital for the wealth fund.
According to the presidency, Nigeria relies on crude exports for about 95 percent of its foreign-currency earnings. It’s the only member of the Organization of
Petroleum Exporting Countries (OPEC) without a sovereign fund.
But shortly before the opening of the SWF account, the NGF had called on the federal government to suspend the operation of the SWF, saying it is unconstitutional. The governors made the call in a communiqué issued at the end of one of its meetings held in Abuja. It was read by the forum’s chairman, Gov. Rotimi Amaechi of Rivers State.
“Members resolved to call on the federal government to suspend the operation of the Sovereign Wealth Fund until all issues are resolved because it is unconstitutional, ‘’ the communiqué stated.
What came as a surprise was how the governors made a volte face on the planned fuel subsidy removal, and the SWF. Recalled that it was after a meeting of the National Economic Council (NEC) presided over by Vice-President Namadi Sambo on October 6, that the governors threw their weight behind the planned subsidy withdrawal.
“One of the most important issues that we canvassed and decision reached on was the support for the federal government’s move to remove subsidy because we believe it is in the interest of the country. We will save money for the development of the economy and at the end of the day, we will provide opportunity for the greater number of people”, they said.
They, however, did not reach consensus on the SWF, saying it was constitutionally wrong for the federal government to contemplate operating the fund with money expected to be shared by all tiers of government from the federation account.
The governors position on subsidy attracted condemnation nationwide, especially since many of them are claiming that they cannot pay the N18,000 minimum wage.
They have, however, listed four conditions to be met before backing the SWF.
The conditions are: transparency in oil revenue receipt; adjustment of revenue allocation formula to set aside a percentage for SWF savings; stoppage of deduction of shares of states from the federation account to fund SWF; and all sectors of the economy which are benefiting from the budget should contribute to the SWF.
The presidency and the governors may still meet again in two weeks to iron out the grey areas in the operation of the SWF.
It was learnt that the decision of most of the governors not to go to court informed why Okonjo-Iweala launched the Fund last week with a seed capital of $1billion.
Reports have it that the governors are however opposed to deductions from their monthly allocations from the federation account to fund the SWF. Instead, they are asking the Federal Government to allow all the sectors to contribute to the SWF.
They prefer the fund being treated the way other special projects are being handled where the funds are allocated directly from the revenue sharing formula. They want the SWF to be funded like the Universal Basic Education Scheme, the Education Trust Fund; Ecological Funds; and derivation funds.
Co-incidentally, this was how the governors kicked against the Excess Crude Account (ECA) when President Obasanjo came with the idea in 2003. They argued it was unconstitutional and the National Assembly threw their support behind the position of the governors because there was no law backing it then. But, Obasanjo would not listen to the cacophonous voices of the prodigal governors who wanted to spend every kobo in the national treasury.
The ECA was established to help stabilize the budget. It was started in 2004 with $5.1billion and rose up to about US$ B57.The rationale behind the ECA was to act as a stabilization fund, closing budget deficits that are a product of oil price volatility, and to potentially fund domestic infrastructure investments.
The ECA is now replaced with a National Sovereign Wealth Fund (NSWF).
The NSWF will manage Nigeria’s excess earnings from crude oil. The current administration reverted to SWF because the then ECA has no real legal backing since it was formed under the Obasanjo government.
Analysts note that SWF is a global phenomenon and why the governors are kicking against it cannot be tenable if the on-going global meltdown is put into consideration. Many economists believe but for the ECA, the country would have been in hell with the economy. It was the account that has been sustaining the economy. By implication, the governors are beneficiaries of illegality and yet they don’t want to replace what they are taking.
According to Wikipedia, “A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial firms including Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from mismanagement and the sub-prime mortgage crisis. Most SWFs are funded by foreign exchange assets.
Merrill said Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation’s banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.
“The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings.
These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.
“There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long term return, with foreign exchange reserves serving short term currency stabilization and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management…’’
In his opinion column, Simon Kolawole did not spare the governors for daring to oppose the SWF for being unconstitutional. He asked them whether Nigerian Governors Forum was recognized in law.
His words, “So what are the governors saying? Their strongest point, from their public posturing, is that SWF is unconstitutional. Pardon me! I challenge all the lawyers in Nigeria to come and point to any single provision in the Nigerian
constitution that forbids the states and the federal government from co-operating to save money for the future. Right, the law says all federally collected revenues must go into the Consolidated Revenue Account from where they would be shared. Tell me where it says all federally collected revenues MUST be spent! Show me where it says “the federal government and the states shall NOT agree to save for the future”. Show me! It is a self-serving argument that comes up whenever the interest of the future generations is a topic of discussion.
“Some governors say states should be allowed to save the money by themselves. For me, that is fine as long as they will actually save the money. But how many states are saving as we talk? Save for the central port of Excess Crude Account (ECA) which has been serving us for years now, I am not aware that individual states have dedicated accounts for the future (I know of Rivers, only one of 36 states, which means Rivers is commendably making double savings—one at the federal level, the other domestically). If the fears of the governors are about transparency in the management of SWF, is every state not on the board of the Fund? What else will suffice?
“I’ve also heard a different form of argument. We’re told the states need the money to attend to the needs of the “poor citizens” who are yearning for the dividends of democracy. You would think our governors love the poor so much. ECA, the precursor to SWF, had $20 billion in reserve until sometime in 2009 when the governors started agitating that the money should be shared to address the needs of “the poor”. In fact, there was a global food crisis then, and our governors were quite humorous, promising to use the money to address the “food crisis”.
The account went down to less than $300 million along the line.”
Contributing to the debate over the legality or otherwise of the fund, a public analyst, Iheanyi Nwachukwu wonders where were the governors when the Bill was sent to the National Assembly before it becomes a law even as it asked the fund to bail out the Nigerian stock market as its first assignment.
He described the action of the governors as “self serving campaign” in their bid to have the law repealed. “Where were these governors when the bill was proposed and passed into law last year?
I have no problem with their challenge. If it is a good law, it will stand the test of this challenge. My advice to the government is for it to immediately start executing the law as it is now, direct that all monies currently in excess of the budget benchmark be credited to the SWF.
“Anyone who does not like it should go to court.
The fact is while the law exists, it has already started accumulating money for its take off. There is also an opportunity that the stock market has created for the SWF to establish itself quickly and become relevant to Nigeria and its numerous stock market investors.
“The SWF represents the best intervention instrument that can turn the market around and avoid the moral hazard of direct government intervention in the stock market. The SWF on the other hand, as a huge institutional investor, can invest within a market setting that is both necessary to do and the right action.
“There is also the urgency for the Fund to take off with the aim to stabilise the stock market.
This is important for many reasons, as I said in this column two Thursdays ago that despite the various reforms going on in the capital market and the stock market in particular, unless there is a massive infusion of liquidity to buy up the excess supply of securities now been dumped on the market, the recovery of the market may take a long time to come.
“Doing this will not be outlandish, as not doing anything will put our stock market in danger, just like what happened to the Japanese stock market that is yet to fully recover 20 years after.
The SWF buying large positions in the Nigerian stock market will be the right set of assets to start with, and the easiest to create.”
Nwachukwu argued that if the SNF intervened, it would be doing what the 2004 banking industry consolidation did in opening up the stock market to the average investor and creating several millionaires when it lasted. He however regretted that we were unable to manage the success that followed. According to him, “Buying up Nigerian companies’ equities will be a good way to start off the Fund.
The Fund can buy these equities and hold forever, if it so chooses, this can become a major source of future dividend income and new resources it will need to help transform the nation.”
Writing further, he said, “Let us create this fund, and let it shield part of the oil revenues, to make sure we put it beyond the reach of those who want to waste it and mortgage the future of our child. We need to spend the money saved in the SWF to diversify our economy, especially looking at the theoretical benefits of a multiplier effect of such large spending on the economy.
“We need to take into consideration the significant problems we have with capacity to execute, together with the corrupt environment and weak infrastructure, compounded by an ineffective and corrupt civil service. A well run SWF will help create the investments that will provide a soft landing for the economy when we finally run out of oil, because oil is a wasting asset that will run out someday.
We need to make haste in developing the economy and this will mean having to overcome our capacity and infrastructural problems quickly by borrowing capacity elsewhere.
While stressing that the Gulf states have successfully used sovereign wealth funds to uplift their development Nwachuckwu said the proposed Nigerian SWF will go a long way in achieving the twin objectives of providing for the raining day in the form of long-term investment. He also believes SWF would smoothen out the problems associated with the boom and burst of oil prices, which necessitated the creation of the Excess Crude Account (ECA) to where the government credits the difference between the oil price budgeted and the actual receipts.
He regretted that from ECA balance of about $20 billion only three years ago to almost nothing today is enough reason to evolve SWF. An SWF properly funded and managed will not only smoothen out the price fluctuations in our oil receipts, it will also provide us with solid investments with growth potential for the future.
On the thorny issue of SWF, the president seems to have aligned with the Nigerian masses and may have defeated the defiant governors who are stoutly against SWF. But the president’s insistence on removal of oil subsidy, analysts say may turn out to be suicidal for Jonathan at least politically!
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