Uche Orji, CEO, Nigeria Sovereign Investment Authority (NSIA)
Nigeria has, over the years, displayed lack of governance in the management of crude oil proceeds, which has, till date, become an albatross to the development of the economy, with the sector’s outlook constantly dictating the pace and direction of standard of living, fiscal and monetary operations and growth.
Despite being the largest producer and exporter of petroleum in Africa and one of the 10 largest producers in the world, Nigeria has failed to transform decades of oil earnings into sustainable development, particularly, in creating a well-invested Sovereign Wealth Fund, with encumbered operations like other countries.
For example, in the period spanning 1970 to 2014, Nigeria is now adjudged to have practically wasted five oil booms, conservatively estimated at a trillion dollars in revenue, but still making no significant savings, a report jointly done by Dr. Obiageli Ezekwesili, noted.
Certainly, these earnings did not translate to lasting or productive capital through human development, infrastructure and institution building, as the observed failure delayed the country’s transition from a developing economy to an advanced one.Rather than a proactive diversification across sectors, driven by transparent use of the oil wealth, the country was made to retain petroleum as the largest contributor to government’s revenue and therefore, a major influence on the capacity of government to deliver its socio-economic responsibilities to citizens.
Till date, as a major foreign exchange earner, the management of oil revenues has been entrenched as key determining factor of the exchange rate and general performance of other sectors of the economy, including the standard of living.Generally, the country has failed, till date, to manage the risks associated with natural resource endowments, as several attempts have been plagued by consistent legal and governance issues, lack of transparency, lack of consistency and poor management of resources.
In the report, titled: “Necessityof a Constitutional Savings and Stabilization Mechanism”, supported by Shehu Musa Yar’Adua Foundation, which included professors Adeola Adenikinju, Andrew Onyeanakwe and Mr. Bode Longe, noted: “Oil contributes over 90% of total government revenue and export. However, its relative share to GDP is on the decline. Markedly, oil revenue as a share of total revenue increased to 95.4 % in 2017, while total export of oil rose to 96.4%. Conversely, its contribution to GDP has been significantly low.”
The economy, now made responsive to crude oil price dictates, between 1993 and 2015, received an estimated N101.51 trillion, largely from oil, leaving all wondering the developmental impacts of these revenues on Nigerians, if they had been utilised efficiently.
Sovereign Wealth Fund
FOR the most successful crude oil endowed countries, the establishment of well-funded Sovereign Wealth Fund (SWF) received utmost attention in all ramifications. This involves the needed discipline, development of other critical sectors, value chains, enabling laws that are not encumbered by technicalities, commitment and determination to ensure a positive outcome for the economy.
In Nigeria, Ezekwesili noted that in a bid to remedy legal issues related to the Excess Crude Account (ECA), the Federal Government established the Sovereign Wealth Fund (SWF). So, the country’s version was a “child of circumstance”, a creation to address disputes from state governors and legislators over legalities of ECA.
Ordinarily, government’s decisions with regard to SWFs under their control affect the interests of four key groups- governments regulating their SWFs, citizens of the country, domestic and international financial market participants, as well as governments and citizens in countries where funds are invested.
From the political will to the development perspective, Nigeria seems to have lost the requires attention to details, save for the recent resurgence of interests, perhaps, elicited by the juicy 60 per cent profit distribution from the paltry investments.The Chief Executive Officer of the Nigeria’s Sovereign Investment Authority (NSIA), Uche Orji, said the fund’s components are three, as opposed to two of other countries. These include the Future Generation Fund, the Stabilisation Fund and the Infrastructural Fund. It is worth noting that while NSIA has long been operational, the ECA is being patronised.
Shortcomings
While NSIA Act 2011 mandated it to receive and manage a diversified portfolio of medium and long-term investment revenue in preparation for the eventual depletion of Nigeria’s oil resources, the extent of the receipt and frequency presents a great limitation to agency.The Act seeks to build a savings base for Nigerian citizens, contribute to the development of Nigeria’s infrastructure and provide stabilization support in times of economic stress. The initial funding of $1 billion was comprised of proportional contributions from Federal, State, Local Government and Area Councils in accordance with the formula for allocating Federation revenues.
A petroleum economist, Uche Nwaka, observed that the Act, which prescribed that subsequent funding for SWF would be derived from Federation Account’s residual funds and allowed the continued existence of the ECA is inhibitive.He agreed with the report that despite the existence of both funds, Nigeria experienced declining economic growth in 2015 and a subsequent recession in 2017, as both were not sufficient to serve as buffers for the economy during the oil price crash.
“Worse still, the ECA is a dormant account. There is observed structural Weaknesses in terms of lack of a constitutional provision for savings, stabilisation and spending of oil revenues. Saving and withdrawal rules are not precise, giving room for manipulation,” he said.The Chief Executive Officer of Cowry Asset Management Limited, Johnson Chukwu, said that a comparison of Norway and other bigger savers would make the policy look like a rocket science for government and we did not start together with them.
“We only need to cite Angola that started after us and what good they have made their own, in terms of size and continued investments. Surely, they now have asset size that is bigger than ours.“In Norway, almost, if not all oil proceeds go to SWF. Saudi Arabia has something similar to that. Ours is from hand to mouth. In fact, the legislation was hugely contested and the accretion is discretionary.. We must do away with ECA and focus on SWF,” he said.
Comparative Analysis
NIGERIA’S accumulated asset in the SWF that was established in 2011, is $1.5 billion. The savings rule states that oil revenue in excess of budget price and volume benchmarks should be transferred to the NSIA. The law prescribes that 60% of the fund be equally allocated to: Future Generations Fund; Nigeria Infrastructure Fund; and Stabilisation Fund, while 40% is to be allocated at the discretion of the board of the NSIA.
“Well, we just started. Look at Kuwait, they started in 1953, so you have to contextualise the comparison. In my previous career, I have done a research in London and was part of those managing part of Norway’s assets. It took a long time for Norway to get a $10 billion. When they finally got it and started putting money aside, they were very serious. In 2014 during the oil boom, the Norwegian government put $1 billion dollars a week into their Fund.“We invest in about 17 different countries. We invested in public equities from Japan to U.S. and China, among others. If you look at the private equities, we invested mostly in U.S. and Nigeria,” Orji said.
A check revealed that Norway established its sovereign wealth in 1990 and the current asset size is in excess of $1trillion. The savings rule that the country adopted and observed is “100 per cent of oil revenue” lodged into the fund.The withdrawal rule states that budgetary rule stipulates that drawdown must not exceed four per cent per annum, which is equal to the rate of return, ensuring that capital remains intact.
The control of the fund has been described as frugal and transparent, with unhindered information asymmetry as every investment is available online. It is protected as a separate unit within the central bank, overseen by the finance ministry and monitored passionately by the parliament.Saudi Arabia started in 1971 and the fund has accumulated approximately $800 billion (as at end of 2014) in foreign assets through ad hoc savings during previous boom periods.
The funds are invested in both domestic and foreign assets. To ensure success, standardised rules, procedures and guidelines were developed to govern investment decisions focused on building a diversified portfolio that will achieve attractive, risk-adjusted returns over time.
Work-in-progress
THE report: Necessity of a Constitutional Savings and Stabilization Mechanism”, noted that transactional nature of Nigeria’s politics undermines the effectiveness of a savings mechanism. Clientelism – the exchange of goods and services for political support – is the dominant culture. The political class remains under persistent pressure to satisfy an overwhelming demand for patronage in order to maintain power.
There is the prevalence of corruption in Nigeria’s public institutions, with its endemic status currently being contested. This has over the years, eroded confidence in government’s ability to manage any kind of stabilization policy. Rampant greed, bribery and nepotism have destroyed the public’s faith in governance. Compounding this challenge is a history of inept leadership that has weakened institutions and created a sense of fatalism. As a result, citizens prefer initiatives that deliver immediate gains rather than longer term benefits that are likely to be captured by the elite.
A financial analyst, Ayodele Akinwunmi, said the resource endowed countries with leading assets in SWF have strong institutions that check corruption levels and uphold agreed standards and where punitive actions are needed, they apply it without prejudice.He said that long term public investment does not thrive in a system that is festered with personal interest, poor accountability and lack of transparency.He also warned that dependency on oil is a real problem and failure to use its proceeds to develop other sectors, which can wither price shock, will continue to put growth and development backwards. Besides, there would not be enough to plough back to SWF, which a savings for the future.
Provisions of the Nigerian constitution for management of Federation revenues make no allowance for implementing a savings and stabilization scheme – rendering policy efforts vulnerable to legal action.NSIA chief, Orji said: “So the real lesson for Nigeria is that it is not too much to have a Sovereign Wealth Fund, it is the consistency and the discipline for future contributions to the fund that is more important than anything else. This is important, so that 20 years later, you can look back and say that you now have money that you’ve built up.”
“Can you imagine that we invested in the Sovereign Wealth Fund as early as in 1999, and that we were consistently putting in $1 billion a year, today we would have been at $19 billion. That’s how to do it. It’s about consistency of the contribution.“Another the most important thing for Nigeria at the moment is for us to be serious about operationalising NSIA law in terms of funding it and then, look at other asset that are not properly managed and put them into possible use or scheme. It is for the future.
“This organisation is one of those places you measure the success not in months, but only measured with what you are able to contribute to the fund base of the country. Let’s try and do that, then we might be able to be in a good position in the future to start to compare ourselves to the other countries.”
National and State Houses of Assembly will need to pass legislation to empower automatic funding of the NSIA by inserting relevant clauses into the Nigerian Constitution. Sections 162(1), (2) & (10) of the 1999 Constitution, which prescribe modes of sharing Federation revenue do not make provision for a savings mechanism and will therefore require amendment.
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