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Nigerian Governors and Sovereign Wealth Fund

By Omoh Gabriel

Nigeria is an interesting country. The political class plays a game of chess with the people they are supposed to cater for. In the end, there is a lot of mistrust. The Governors’ forum was supposed to be a meeting point for chief executives of states to discuss common issues and chart a clear way forward for their states and the nation at large by taking a common position in the best interest of the people.

But happenings and the discordant tunes coming out of the Governors’ forum leaves one with the impression that they just gather to backslap one another and feel good. That the governors cannot take a common position on the sovereign wealth fund is, to say the least, very sad. It is worse even to hear that many are against it to the point of going to court under the guise that it is unconstitutional.

Many have asked me what this sovereign wealth fund is all about. In the newsroom, I have had to discuss the issue again and again. Sovereign wealth fund is a pool of money derived from a country’s reserves, which is set aside for investment purposes that will benefit the country’s economy and citizens.

The funding for a sovereign wealth fund (SWF) comes from the central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the export of natural resources. The types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments.

In other words, foreign investment funds owned by national governments and financed by the country’s foreign currency reserves (dollar, euro, yen), often through their central banks or via direct investments. Going down memory lane, research findings show that the term, sovereign wealth fund, was introduced in 2005, but the first SWF was introduced in 1953 by the Government of Kuwait known as Kuwait Investment Authority, a commodity SWF. Kuwait took the initiative then and invested in several areas ranging from refineries, filling stations in Europe popularly called Q8.

As at 2011, sovereign wealth funds are now major players in the world financial markets. The combined assets of the major SWFs (owned by 20 governments) have reached over three trillion dollars, and are expected to reach over 10 trillion dollars by next year, 2012.

Although the current total amount makes up only some 3 per cent of the world’s traded securities, the SWFs already have tremendous concentrated financial power. Over half of the SWF assets are owned by oil and gas exporting nations with the exception of Nigeria, and about one third by Australia, China, and Singapore.

SWFs are known globally to be aggressive investors and have bought into firms as diverse as Morgan Stanley, General Electric, and Sony. Today, sovereign wealth funds are avenue for nations that operate them to attract investment into their countries.

Countries which wealth funds invest in any organisation and sits on the board have access to decision-making in such institutions. When they are taking investment decisions abroad, the countries which funds have stakes are easily favoured. Investment pursuit has gone beyond the traditional approach of conversing and offer of generous incentives.

Sovereign Wealth funds currently manage between $1.9 and $2.9 trillion and are expected to grow to over $12 trillion by 2015. This is due to the rapid growth of commodity prices and large trade surpluses in several emerging market economies. Nigeria is not in any of this global move. During the second half of 2007, interest in SWFs increased as Asian and Middle Eastern SWFs, fueled by surging foreign exchange reserves, invested large sums of capital in U.S. and other Western companies.

Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates (UAE) relies on oil exports for its wealth; therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk.

Nigeria would have been in financial coma during the global financial crisis and the downturn of oil earnings that sent shock waves down the economy if not for excess crude account savings. Countries like Kuwait with diversified earnings from its sovereign wealth fund did not experience the kind of shock the Nigerian economy had and is still battling to come out from.

Nigeria, apart from oil has no other viable foreign exchange earner that can support the economy in time of financial turbulence. The global economy is not showing signs that prices of crude will continue north for much longer. They are tending south, the earlier the nation begins to save for yet another rainy day, the better for all Nigerians including the dissenting governors.

Curiously, India, one of the fastest growing Asian economies in September this year proposed to set up a $10 billion sovereign wealth fund, underscoring the fast-expanding economy’s intent to ready a war chest for securing global energy assets. The proposed fund would help India finance overseas energy assets to feed its power plants, Mr. Ahluwalia said.

The International Energy Agency forecasts India’s energy use may more than double by 2030 from 2007 to the equivalent of 833 million metric tons of oil. India, which imports more than three-quarters of its crude oil, is increasingly focusing on purchasing stakes in overseas oil and gas blocks through a unit of state-run explorer, Oil & Natural Gas Corp.

What about Nigeria, we are here dissipating energy on the legality or otherwise in a venture other nations are tapping into.

Nigeria sovereign wealth fund has only $1billion as take-off fund. This is the reserve amount which the federation account allocation committee agreed not to allow the excess crude account to fall below. If that amount was the set aside money agreed to by the federal and state governments in 2008, what is the objection from the state governors for? Were they not part of the $1 billion excess crude account reserve amount? Or those of them that are new on the job, were they not briefed by their commissioners of finance who represent them at the federation account sharing committee?

Policymakers in the United States have raised two broad policy concerns about SWFs which are similar to what many Nigerians are concerned about. Many state governors have raised the issue of the lack of transparency and possible misuse for political or other non-commercial goals of sovereign wealth fund. Certainly, SWFs pose a complex challenge for policymakers.

On one hand, they are long-term investment vehicles looking beyond quarterly results and therefore serve as stable funding sources during financial turbulence. On the other hand, however, there are operational concerns stemming from government control (i.e., lack of transparency and possible non-commercial investment goals). Without transparency, it is difficult to attain a clear picture of SWF investment activity.

A lack of SWF transparency can also obscure governance and risk-management problems within SWFs. Whatever the concern, the only safeguard against government financial uncertainty in the absence of the excess crude account is Sovereign wealth fund. It is the wise thing to do period!

 

 


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