Nigeria ranks along with Angola and Ghana as countries that have not made any appreciable progress with their SWFs. While Angola and Ghana are relative new comers in oil production, and are in the process of establishing their own SWFs, Nigeria has been producing crude oil since 1958, longer than all the SWFs except that of Kuwait, which has saved $292 billion since 1953 from its oil earnings.
Nigeria is estimated to have earned over $400 billion from crude oil sales since the 1970s, but the only attempt to save part of its oil earnings started as late as 2003 when the Obasanjo government set up the Excess Crude Account (ECA).
By 2007, the ECA had more than $20 billion in savings. However, the oil price slump in 2008 and pressures from state governors to share the money, have seen the total depletion of the ECA, which is expected to replace the SWF.
Some analysts are of the opinion that the paltry sum of N1billion take-off fund, the insistence by state governors for the concurrent running of the fund from the Excess Crude Account (ECA) and low savings culture, among other factors, would serve as hindrances for the fund to be run according to the Santiago principles, with 24 voluntary guidelines which assign best practices for its operations.
The principles were proposed in 2008 through a joint effort between the International Monetary Fund (IMF) and the International Forum of Sovereign Wealth Funds (IFSWF) with over 25 nations signed onto the principles, with the objective for monitoring three areas of legal framework, institutional and governance framework, and investment policies and risk management.
Some of the principles include that, “The legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s), policy purpose of the SWF should be clearly defined and publicly disclosed, and where the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely co-ordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies.”
Ken Iwelumo, Former Senior Vice President – Investments, Bank of America/Merrill Lynch said Nigeria does not need the Norwegian, Swiss, State of Wisconsin, State of California SWF models, which primarily focus on portfolio investments (actively managing a diversified portfolio of stocks, bonds, ETFs, mutual funds, options and futures),but rather copy the Chinese, Singapore, Hong Kong, Malaysia and UAE models, where the focus is on aggressively attracting and driving high tech, low tech, labour intensive industries into their countries.
Iwelumo said the country needs an SWF that will use its offshore investments to drive critical Foreign Direct Investments (FDI) and infrastructural investments (power, petrochemicals, food processing, steel etc.) into Nigeria, rather than patronising portfolio managers.
Samir Gadio, emerging markets strategist, Standard Bank, London said, “There is still an imbroglio over the current status of the SWF since the latter will be launched with an initial fund of only $1bn, while the ECA will continue to exist separately. Should this be the case, the SWF structure proposed by the authorities would actually fall short of expectations. Indeed, the idea is to incorporate the ECA into a codified SWF, in order to ensure a more sustainable fiscal savings framework, prevent uncontrolled disbursement of funds to the three tiers of government and ease the reliance on the ECA to service above-the-line expenditure.
The big issue is that the ECA proceeds are continuously shared at the three tier-level and depleted for a variety of reasons, limiting the accumulation of fiscal savings. Even though the gross ECA balance seems to have increased lately to USD7.5bn, this amount would only represent 2.9% of GDP, an insignificant ratio, compared to the relative fiscal savings of other major oil producers (a median of around 65%).
Additionally, mainstream SWFs typically save hard currency proceeds for future generations, and have a less pronounced focus on domestic infrastructure programmes. The mix in Nigeria may be somewhat different, given the country’s immediate infrastructural needs, but there is always a risk that inefficient projects may be financed, with the potential to affect the overall return of the SWF.”
Bismark Rewane, chief executive of Financial Derivatives Company Limited, in the current Lagos Business School Breakfast meeting, who regarded the SWF as a praradox of thrift said, “SWF is to ensure fiscal consolidation and discipline. High savings in a recession is contradictory. Current fiscal savings as percentage of GDP is 2 percent, compared to average of 98 percent for oil producers, state governors have not given up yet.”
Globally, sovereign wealth funds, as an investor class, have grown to over $ 5 trillion and have gained prominence in the allocation of resources or gaining political power. For instance, it is being currently discussed how SWFs will fair if Republican nominee Mitt Romney wins the 2012 U.S. presidential election or how they will fare under a second term of President Barack Obama.
In fact, on February 7, 2008, when Barack Obama was gunning for U.S. president, he informed reporters on a flight from New Orleans to Omaha, Nebraska, that “I am concerned if these … sovereign wealth funds are motivated by more than just market considerations, and that’s obviously a possibility.” He further added, “If they are buying big chunks of financial institutions and their board(s) of directors influence how credit flows in this country and they may be swayed by political considerations or foreign policy considerations, I think that is … a concern.”