The fate of the
Excess Crude Account (ECA) speaks to the need for clarity on the
reasons why we held funds in the account in the first instance; and why
we should look forward to keeping it (or anything that looks like it,
including through a Sovereign Wealth Fund – SWF). Two things matter in
considering these dimensions of the ECA. First, was the seeming
hurriedness with which government ran through the accounts; and second,
the purposes for which it was run down. Both 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
thirty years during which the story of public infrastructure decay in
this country was 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”. 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 essentially 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 draft bill 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”.
