•Threat to fiscal consolidation •Modest increase in capital expenditure long journey to growth
The call by the ‘Governors’ Forum’ for the suspension of the implementation of the Sovereign Wealth Fund (SWF) in Nigeria , has been roundly condemned by analysts.
The analysts say that suspending the Sovereign Wealth Fund would pose a threat to the huge benefits to be reaped in the long run, from the fiscal consolidation advocated by Ngozi Okonjo-Iweala , Nigeria ’s finance minister.
Local and foreign analysts have posited that suspending the implementation of the Sovereign Wealth Fund, as the governors’ request, would lead to a negative perception of the economy, by the both local and foreign investors, and demonstrate government’s lack of commitment to cutting public spending.
They further posited that considering the deteriorating global economic environment, and attendant lower oil prices, the country was not likely to witness any improvement in foreign capital inflows, until she rebuilds her foreign reserves and the fund, to sustainable levels.
The analysts added that both the Sovereign Wealth Fund and the ongoing agitation for a tighter fiscal policy stance, have the potential to reduce the systemic liquidity overhang that has manifested in increased demand for foreign exchange, at both the official and interbank markets. This, they said, would put more pressure on the naira.
Interestingly, the analysts took a swipe at the proposed marginal cut in recurrent expenditure from 74 to 70 percent, saying that it portends long and complicated fiscal consolidation, given the stickiness in the wage bill and government operating expenditure. This also means fiscal policy will probably remain somewhat loose in the short-to-medium term, placing continued pressure on the exchange rate via the liquidity channel
Razia Khan, analyst with Standard Chartered Bank, London, called for the institutionalisation of oil savings and also making it less susceptible to political influences. She observed that the brewing disagreements over the fund were suggestive of the fact that its initial policy objective was short-sighted.
Johnson Chukwu, managing director, Cowry Asset Management Limited, is of the opinion that the agitation could be due to a shortage of information on the structure and impact of the fund. Chukwu said the argument that the SWF implementation will affect their monthly allocations and thereby constrain their infrastructure development plans were unfounded, considering the fact that the fund takes care of all infrastructural needs of both private and public sector organizations, through equity participation.
Chukwu further said that other provisions in the SWF that should assuage the governors, include the stabilisation fund, and future generation fund, stressing that given the fact that transfers to the SWF would be from crude oil earnings above the budget benchmark. It will instill discipline and standards in the selection of projects for funding
Samir Gadio, a strategist with Standard Bank, London , said the development suggests that fiscal consolidation will be a slow process, rather than a sharp short-term improvement in the public spending framework.
Gadio said further delay would be perceived negatively by domestic and international investors, while capital inflows would be impeded until there is significant progress in the level of foreign reserves and the Fund.
The SWF was set up by the Federal Government as a replacement to the Excess Crude Account (ECA) whereby earnings above the budgetary benchmark price of crude oil are expected to be transferred. Three months after it was signed into law with a seed fund of $1 billion, the governors are pushing for suspension of its implementation on the grounds that it is unconstitutional, while also claiming that its operation would short-change their revenue flows and make them unable to meet the new N18,000 minimum wage. Some analysts said last night that the governors’ action amounts to calling for total cancellation of the fund.
The decision of the Federal Government of Nigeria to establish the Fund is perceived by many economists as one of the most significant economic policy decisions taken in recent times.
Speaking further Khan said “It is a concern, because after the running down of the excess crude account last year, and the continued withdrawals from the ECA this year in order to make FAAC payments, Nigeria needs to do much more to demonstrate the institutionalisation of its oil savings. How can it make the saving of any oil windfall less susceptible to political influences? Nigeria remains disproportionately dependent on oil for its fiscal earnings. In order to boost the longer term health of the economy, some mechanism to create a rules-based system for the saving of its oil revenue was needed – one ring-fenced of political influences – but that is now in doubt.
If agreement around the Sovereign Wealth Fund falters now – it may be because policy ahead of the elections, and subject to the political cycle, was very short-sighted in terms of what it set out to achieve. In the absence of any institutionalised oil savings, in the absence of any new future streams of income, Nigeria ’s fiscal sustainability will increasingly be in doubt.”
Chukwu said, “I believe that the agitation by state governors for the Federal Government to suspend implementation of the Sovereign Wealth Fund (SWF) Act, may have been based on lack of information on the structure and likely impact of the SWF. When the SWF act is fully implemented, the managers of the Infrastructure Fund will avail funds to both public and private sector organisations engaged in infrastructure development by way of equity or debt participation. The only difference is that such infrastructural projects will be subjected to greater scrutiny in terms of their social or economic value to the state before they will qualify for funding from the Infrastructure Fund.”
Gadio said “Further delays in the launch of the SWF will be negatively perceived by domestic and international investors, although local and foreign accounts have probably increasingly factored in this possibility. It is unlikely we will see a significant turn-around in foreign capital inflows, until Nigeria rebuilds its foreign reserves on a sustainable basis (including ECA or SWF reserves), especially as the global economic environment has deteriorated and the likelihood of lower oil prices is actually tilted to the upside going forward.
Speaking on the Okonjo-Iweala’s blue print, he said the focus on infrastructure development in sectors such as power and roads, as a turnaround in order to drive economic growth, may not come in a hurry. “Given the modest increase in capital expenditure implied above, one might assume that this shift will take time to unfold. Meanwhile, the main issue in terms of capital expenditure, has been the low level of execution in recent years, which is also set to remain the main challenge going forward.”
