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Nigerian Economy: How Sovereign Wealth Fund will make a difference

Emma Ujah, Abuja Bureau Chief

With the recent appointment of the Board and management of the Nigerian Sovereign Investment Authority, NSIA,  to manage the Sovereign Wealth Fund, SWF, the nation has joined the economies of the world that have used their foreign reserve to set up sovereign wealth funds to create more assets in the interests of their nationals.

After much efforts spanning three years of negotiations and buy-in campaign, especially among the states governors and members of the federal legislature,  the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, on the 28th of last month announced global investment banker,  Mr. Uche Orji, Managing Director of the much-awaited body to manage the SWF.  She also named Alh Mahey Rasheed, a former Deputy Governor of the Central Bank of Nigeria, CBN, as Chairman of the board.

The journey towards the establishment of the NSIA began in October 2009 when the then Minister of Finance, Dr. Mansur Murhtar, told journalists in far-away Istanbul, Turkey during that year’s World Bank/IMF annual meetings, that Nigeria was considering setting up of the fund with its reserve in order to create more value for the nation.

According to the International Working Group of Sovereign Wealth Funds, a SWF is “a  special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.

The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports”. Nigeria belongs to the last category as the SWF is created from the resources in the Excess Crude Account, ECA.

It can also be said to be a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. These assets can include: balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports. Sovereign Wealth Funds can be structured as a fund, pool, or corporation.

According to the Lauder institute of Management of the University of Pennsylvania, “ the definition of sovereign wealth fund exclude, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises, in the traditional sense, government-employee pension funds, or assets managed for the benefit of individuals”.sanusi1

SWFs are therefore, simply put, pools of money derived from a country’s reserves, which are set aside for investment purposes that will benefit the country’s economy and citizens. The funding for a sovereign wealth fund comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources.

The Nigerian Sovereign Investment Authority, NSIA,  has been established with a sum of US$1 billion set aside as seed capital. The establishment of the NSIA which will manage the Sovereign Wealth Fund is expected to help reduce the vulnerability of the economy to external shocks, ensure inter-generational equity and serve as a catalyst for attracting investment for Nigeria’s critical infrastructure. It has three components, (i) inter-generational savings; (ii) a stabilisation fund; and (iii) an infrastructure fund

The types of acceptable investments included in each sovereign wealth fund vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments. Some countries have created SWFs to diversify their revenue streams.

SWFs in other countries
SWFs have become very popular as veritable avenue for growing national resources across the globe, especially among wise oil-rich nations who see it as a means of securing the future of their economies against volatile crude oil price which could crash anytime.  The Funds have also come to play the key role of providing such nations with an alternative revenue sources outside the traditional foreign exchange earners, as some of such funds are invested in other economies to accelerate their national wealth.

Most countries of the world with economies that depend on hydrocarbon as their main stay have established SWFs for many years. Even on the continent of Africa, Countries like Algeria established theirs as far back as 2000.  By far Algeria’s most significant exports, financially, are petroleum and natural gas. Hydrocarbons provide Algeria with almost two-thirds of government income and over a third of GDP.

The stabilization fund was set up in 2000 to insulate the Algerian economy from price volatility in gas & oil commodity prices.  Algeria’s SWF officially known as Fond de Regulation des Recettes or the Fund for the Regulation of Receipts (FRR) currently holds about $54.8 billion dollars.

Sudan, Equatorial Guinea and even, Nigeria’s next-door neighbor- São Tomé-Príncipe, which hit oil, very recently all have SWFs.  This government’s bold step at establishing the fund  must be commended as the nation is indeed behind its peers, in this regard.  But as it is said, one had “better be late than never”.

The United Arab Emirates, UAE, one of the leading countries with the SWF has over $875 billion in its fund.  That nation relies on oil exports for its wealth; therefore, it devotes a portion of its reserves to a sovereign wealth that invests in other types of assets that can act as a shield against oil-related risk.

More than 20 countries have these funds, and half a dozen more have expressed an interest in establishing one. Still, the holdings remain quite concentrated, with the top five funds accounting for about 70 per cent of total assets. Over half of these assets are in the hands of countries that export significant amounts of oil and gas. Norway has a large sovereign fund, as do places as disparate as Alaska, Canada, Russia, and Trinidad and Tobago. About one-third of total assets are held by Asian and Pacific countries, including Australia, China, and Singapore.

With the acknowledged infrastructure gap in the country, Mr. Orji and his team at the NSIA must realize that the $1 billion is like “a drop in the ocean” and therefore aggressively pursue two strategies for enlarging the resources at the disposal of the authority.  The first is to take advantage of his many years in the global finance market to attract foreign counterpart funding for all projects in which the authority’s resources are to be invested.

Good enough, with the high rate of return on investment in Nigeria, it is expected that Mr. Orji will not need to preach to foreign investors for too long before convincing them that Nigeria is the place to invest their funds.  With the current troubles in the Euro zone and America, and a tall profile the MD should be able to easily turn the NSIA into a well of resources for the needed rapid infrastructure development.

Although it has been announced that the authority would commence operations in March, next year, it remains critical for the MD to realise, early on his job, the need to work with Dr. Okonjo-Iweala and President Goodluck Jonathan to convince the State Governors and the National Assembly to increase the funding of the NSIA from the initial $1 billion to a much more substantial amount that can really impact positively on the lives of ordinary Nigerians.

Nigerians have waited for the provision of critical infrastructure facilities necessary to make their lives more meaningful for too long.   For several decades, Nigerians have waited in vain for significant improvement in two of the most critical sectors- power and rail transportation.

This is the time to make a difference.  Nigerians certainly want to see the realization of the dream of the Abuja-Lagos Speed Rail, for instance, just like Abuja residents now eagerly await the completion of the Abuja Light Project.  Rather than wasting four man-hours everyday in traffic gridlock on every-busy Massaka-Ado- Maraba-Nyany- Asokoro Road, for instance, one is sure that most motorists would gladly abandon their cars at home for a ride in the proposed trains.

There is no gainsaying the fact that a functional network of rails between Lagos-Kano; Maiduguri-Port-Harcourt ; Calabar -Sokoto would be a delight as it would reduce prices of goods and services across the country and boost tourism within the country.


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