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Discordant voices over sovereign wealth fund

By Charles Kumolu
“Some of you may recall that on the 20th of April, 2010, the National Economic Council under my leadership approved the setting up of a National Sovereign Wealth Fund to secure Nigeria’s future growth. It was further approved that $1 billion be set aside for the fund as seed money.

The Sovereign Wealth Fund is a vehicle for growth that this administration conceived of to secure additional capital for growing Nigeria’s infrastructure and putting aside money for the rainy day so that future generations will always have something to fall back on in the event that revenues are impacted by market forces which have been known to be volatile”.

This was how President Goodluck Jonathan welcomed the passage of the Sovereign Wealth Fund, SWF, Bill by the National Assembly.

Dr. Ngozi Okonjo Iweala and Gov. Amaechi

The passage marked the conclusion of the clause-by-clause consideration of the contents of the bill by lawmakers and subsequent reading for the third time.

The passage of the bill has continued to generate dissenting voices from Nigerians.

From the man on the streets of Onitsha who cares little about governance to those on the streets of Katsina who are believed to have no other business than discussing politics, the story is the same.

That this initiative which President Jonathan said would guarantee the future of generations unborn, is generating controversies, is giving many Nigerians food for thought.

Growing opposition

Unlike what obtained in the past when most Federal policies were overwhelmingly  supported by state governments- even when they(programmes)) were un popular, the major opposition to the SWF appears to be coming from State Governors.

The governors  opposition to the Fund is also generating  criticsms  from a cross section of analysts who spoke to Vanguard Features, VF.

These analysts posit that suspending the Sovereign Wealth Fund would pose a threat to the huge benefits that would be reaped in the long run from the fiscal consolidation advocated by Nigeria ’s Finance Minister, Dr. Ngozi Okonjo-Iweala.

Those who favour the SWF hinge their stance on the prospective fortunes that would accrue from it. The fund is divided into three:  the Infrastructure fund, the Savings Fund for future generation and the Stabilization.

According to the bill, the Stabilization Funds would be used to complement the budget when you have sustained fall in oil prices while the future generation fund would be used for future generation and would be invested to make way for investment opportunities.

In addition, the bill sought to establish an agency with the authority to invest a portion of the excess profit made from crude oil sales in the Sovereign Wealth Fund to be held and managed by the Nigerian Sovereign Investment Authority.

The Authority is expected to invest the funds in a diversified portfolio of medium and long term investments “for the benefit of future generation of Nigerian citizens.” While this was expected to have doused any doubts on SWF, the  governors of the 36 states have remained unrepentant in their opposition to it. According to them, such idea contravenes the provisions of the 1999 Constitution.

Why governors rejected the SWF

The Chairman of the Governors Forum, Mr. Rotimi Ameachi last week, restated the earlier position of the state chief executives . To him, the SWF is an attempt to desecrate section 162 of Nigeria’s Constitution.
Section 162(1), (2) & (10) of the 1999 Constitution prescribed the mode of sharing the revenue of the Federation.

It states that “the Federation shall maintain a special account to be called the Federation Account into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the Armed Forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja.”

Perhaps, it is against this backdrop that Ameachi said, “the law says that anything that is outside the constitution is wrong and section 162 of the constitution also says so. Our reasons are based on our resolve to save our money and to uphold the rule of law. Anything that contravenes the constitution is wrong.

We are only saying that they should obey the constitution.”
Ameachi stated that contrary to opinion being held in some quaters, the governors would judiciously conserve their state’s fund.

“We are responsible citizens and will use our money judiciously. I save money for River State every month. For instance, River State generates 560 megawatts of electricity and we went to Mr. President telling him that we want to distribute it. But their committee objected to the idea saying that it is against the law.

Yet they want to save money outside the ambits of the law.  Our problem is structural, which only true federalism can solve. We know that any country without a SWF is doomed but we don’t want it,” he stated in Awka at the recent Anambra @ 20 celebration.

Governors were carried along

While that was supposed to have calmed some nerves at the Women Development Center, venue of the celebration, a member of the House of Representatives, Mr Victor Ogene queried the governors for kicking against SWF, when they were part of its making.

“My question is that at what time did the governors realise that the SWF law is against the constitution? This is because the governors were carried along in all the processes before it was signed into law”, Ogene who represents Ogbaru Federal Constituency,  asked.

This was Amaechi’s response: “All the governors in Nigeria held a meeting with them on Sovereign Wealth Fund and at that meeting, we opposed the idea. I and Governor Fashola spoke against the idea. Yet they went ahead to pass it into law”.

Okonjo-Iweala’s antidote

Also reacting to the controversy, the Minister of Finance, Dr. Ngozi Okonjo Iweala, noted that dialogue remains the solution to the disagreement over SWF.

Iweala, who was apparently responding to Governor Ameachi’s position, said: “What I will say is that we need dialogue so that we can have a solution. Since 1970, Nigeria has earned more than $300 billion, yet there is no evidence of development. If those money were properly used, there would not have been developmental problems that we have today”.

Continuing, she stated that “there is need for results and accountability”.
“Nigeria has 35 years for our oil reserves to run out.

If we don’t make more discoveries, we will be left without oil in the next 35 years. Already we have lost billions of crude. We must think of how to use our money for the sake of our children.”
Although the governors’ forum has vehemently opposed the Fund, VF learnt that it is a good initiative that should be supported by all Nigerians.

One of the state governors, who spoke to VF on condition of anonymity noted that, “SWF is good, I believe that we will resolve all the issues at stake. it is a good thing.”

Composition of SWFs

SWF is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign Wealth Funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial firms including Citigroup, Morgan Stanley, and Merrill Lynch.

Some Sovereign Wealth Funds may be held by a Central Bank, which accumulates the funds in the course of its management of a nation’s banking system. This type of fund is usually of major economic and fiscal importance. Other Sovereign Wealth Funds are simply the state savings which are invested by various entities for the purposes of investment return and which may not have a significant role in fiscal management.

Genesis of SWF

VF learnt that SWFs  have been around for decades but since 2000, the number of sovereign wealth funds has increased dramatically.

The report further maintained that, “The first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait even gained independence from the United Kingdom. According to many estimates, Kuwait’s fund is now worth approximately $300 billion.

Another of the first registered SWFs is the Revenue Equalization Reserve Fund of Kiribati.

Created in 1956 when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates used in fertilizer, the fund has since then grown to $520m.

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds.

It also said, “There are two types of funds: saving funds and stabilization funds.

Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles’ adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway.

It is believed that SWFs in resource rich countries can help avoid resource curse, but the literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat.  In such circumstances, saving the money to spend during a period of low inflation is often desirable.

Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf war managed excess reserves above the level needed for currency reserves (although many central banks do that now).

The Government of Singapore Investment Corporation and Temasek Holdings are partially the expression of a desire to bolster Singapore’s standing as an international financial centre. The Korea Investment Corporation has since been similarly managed.”


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.