It helps to understand how the balance on Nigeria’s rainy day fund (the Excess Crude Account -ECA) moved from about US$20 billion as at 2007 to less than US$400 million 3 years later. Why did we keep the money in the first place? Why should we look forward to keeping it (or anything that looks like it, including through a sovereign wealth fund ― SWF)? Three considerations are essential to a proper response to these posers.
First, the constitution. It provides that all monies raised or received by the country shall go into one Consolidated Revenue Fund. And then forbids the withdrawal of any money from the fund “except in the manner prescribed by the National Assembly”. In this sense, therefore, the Obasanjo administration may have been in breach of the constitution in creating the national nest egg.
Second, was the seeming hurriedness with which government ran through the accounts.
Third were the purposes for which it was run down.
Against the background of a blighted political, economic, and social landscape, all these considerations have fed popular angst over the spendthrift policies of managers of the economy. Yet, the ECA started life as a fairly decent idea.
Convinced that the 51 years over which the story of public infrastructure decay in this country has been told, and the economic waste that accompanied the 1970s oil boom could have been avoided if managers of the economy had been more circumspect, the second Obasanjo administration (after 2003) agreed an “oil-price-based fiscal rule”. According to the then finance minister, the proximate goal of the rule “was to constrain spending by transferring oil revenues to the budget in accordance with a reference price, together with a ceiling on the non-oil deficit”. Basically, what remained of all revenues from crude oil sales after this, ended up in the ECA.
Part of the problem with the rule however, was that between 2004 when the rule was adopted, and the enactment by President Umaru Yar’Adua in November 2007 of the Fiscal Responsibility Act, the oil-price-based fiscal rule operated in a legal vacuum. In other words, until this enactment, the only defence all this time, against bad governance and entrenched corruption were the good intentions of those in power.
We have since seen that good intentions clearly would not do for managing an economy like ours. Nonetheless, the volatility of our main revenue source makes saving a portion of our earnings a wise choice. First (the stabilisation function) to address the volatility associated with oil prices and volumes in the international markets. Then (as part of a trans-generational compact), to ensure that future generations benefit from current consumption of what is after all, a non-replenishable resource.
Having agreed to save, the next query is what kind of instruments we should be looking to put the savings in. The stabilisation part of this responsibility recommends a short-term investment horizon, ensuring that funds are available as needed; while the trans-generational compact demands a longer horizon. Across this asset allocation spectrum, though, lies a plethora of instruments into which we could put our national savings.
A couple of arguments then matter. One, as argued by a recent IMF working paper on the “Investment Objectives of Sovereign Wealth Funds”, “If a country’s income is dependent on one (or even a few) real assets, it would be natural according to portfolio theory to diversify this dependency by investing in financial assets that have a negative or low correlation with the real assets”. In other words, we must seek to put our national savings in investment vehicles whose prices or yields move up when that for crude oil is down; and vice versa. Second, given that national savings of the type contemplated here would be funded almost 100% from crude oil sales, asset allocation decisions would have to factor in the country’s proven reserves of crude, the risk outlook for oil prices on the international markets, and oil market cycles.
Worried by all of this, it became important to understand what government is proposing to do through the sovereign wealth fund (SWF). If the act to establish the Nigeria Sovereign Investment Authority serves any purpose, the SWF has been set three investment objectives: a “Future Generations Fund”; the “Nigeria Infrastructure Fund”; and the “Stabilisation Fund”. In this sense, the proposed sovereign wealth fund is everything that an SWF should be, bar being a pension reserve fund. It aims in this regard to “establish a diversified portfolio of appropriate savings and growth investments for the benefit of future generations of Nigerians”; a “portfolio of investments specifically related to and with the object of assisting the development of critical infrastructure in Nigeria”; and a “portfolio of liquid investments to provide supplemental stabilisation funding based upon specified criteria and at such time as other funds available to the Federation for stabilisation need to be supplemented”.
Alas, all of this is threatened by the provisions of a constitution that would rather have its people live from hand to mouth, and some of the most tunnel-visioned politicians in history.
Do we change the constitution, and allow for some level of savings? Although one could argue that just by running its budget in balance government improves the domestic savings rate.
Does the federal government go ahead and save from its own share of the consolidated funds, and hope that sub-national governments will take their cue therefrom?
The questions just go on.