How secured is Nigeria’s sovereign wealth fund?

The recent report and offhand remarks by officials of the International Monetary Fund (IMF) ranking Nigeria’s sovereign wealth as the second weakest after Qatar has set off a chain of reactions with many analysts expressing divergent views. Ibrahim Apekhade Yusuf and Nduka Chiejina in this report focus searchlight on the activities of the Nigeria Sovereign Investment Authority (NSIA), the umbrella body saddled with the responsibility of managing the fund vis-à-vis its networth, corporate governance processes, etal

For the discerning members of the public the whole idea behind setting up a sovereign wealth fund for any economy is indeed noble. But a situation where such efforts are considered inadequate should naturally be a cause of concern. This has been the bone of contention since the International Monetary Fund (IMF) released its latest report ranking Nigeria second worst in the world on a ranking of sovereign wealth funds.

Crux of the matter

A section of the news media had penultimate Friday escalated the report by the IMF on the weak profile of Nigeria’s sovereign wealth fund, thus pitting the country against the Bretton Wood institution.

Not at ease with IMF report

Firing the first salvo, the Managing Director of the NSIA, Mr. Uche Orji faulted the IMF, arguing matter-of-factly that the report quoted a third-party data and not the output of the Fund’s research.

According to the NSIA boss, the IMF’s report and its conclusions were based on the report by the Natural Resources Governance Institute, which he described as strange.

“Whilst the report does not mention that NSIA, its sweeping generalisation and use of third-party data, raises concerns that diminishes its usage. More importantly, graphing governance against asset size to GDP has limited correlative value. This is basically, for lack of a better word, a flippant piece of work.

“It is obvious in this report that the IMF prefers SWFs of countries that do not invest in their domestic economies and dislikes countries that want to use part of their resources to develop their own domestic infrastructure.

The first two funds invest globally and the last fund is focused on Nigeria domestic infrastructure needs, he said.

The governance process of NSIA, Orji stressed, “Is well documented in its Establishment Act. NSIA has an independent professional Board that through five committees, rigorously oversees the operations of the fund.”

Echoing similar sentiments, the NSIA in a statement by Titilope Olubiyi Communications Adviser said ‘the content of the April 2019 edition of the IMF Fiscal Monitor Report – Curbing Corruption, has been brought to the attention of the Authority. While the report does not reference the Nigerian Sovereign Investment Authority, its sweeping reference to the Nigeria’s Sovereign Wealth Fund and the use of third-party data raises concerns.

‘Since its inception, the Authority has adhered to the strongest principles of governance and as a result is highly rated under the Sovereign Wealth Fund Institute (SWFI) Transparency Index. Over the past 5 years the Authority has consistently ranked in the top quartile of the SWFI’s transparency ranking; currently ranked global joint second which is the highest ranking for any African Sovereign Wealth Fund (https://www.swfinstitute.org/research/linaburg-maduell-transparency-index). It is noteworthy that the NSIA has been used as a case study by some African countries seeking to set up their Sovereign Wealth Funds (SWF).

Finance Minister reacts

The Minister of Finance, Hajia Zainab Ahmed, while reacting to the IMF outburst about the country’s sovereign wealth fund said the NSIA is in a much better place than the Buhari-led administration met it.

“I would say that the Sovereign Wealth Authority has been doing well if you look at where we are starting from, we have achieved quite a lot of progress by building more of the fund from where we met it and by utilising the savings at the Sovereign Wealth Authority for projects that are physically visible. We still have some movements to go but the movement is a positive one.”

“The governance challenges of commodity-rich countries— that is, the management of public assets— call for ensuring a high degree of transparency and accountability in the exploration of such resources.

“Countries should develop frameworks that limit discretion, given the high risk of abuse, and allow for heavy scrutiny.”

A rebuttal from IMF

Not unexpected the IMF in its rebuttal claimed that the data about the excess crude account was used in its ranking on sovereign wealth funds across the world.

Abebe Selassie, head of the African department while speaking to journalists on the sidelines of the spring meetings of the International Monetary Fund and World Bank Group, said, “There have been two sovereign wealth funds in Nigeria. There has been the excess crude account (ECA), and the Nigeria Sovereign Investment Authority (NSIA).”

The NSIA, he admitted has been run transparently and best on standard best practice and it has been doing a good job.

“The concern that we have is about the ECA, because if you recall that the ECA economically was set up to save resources when oil prices are high, and to be drawn on when oil prices are low. We do not think that the ECA has been doing effectively enough job that way.

“When oil prices fell, the economy was very hard in the last couple of years, we feel like a much better job could have been done, saving enough more in the ECA when oil prices were at $100 and $120 per barrel.”

Mr. Amine Mati, the IMF’s Senior Resident Representative and Mission Chief for Nigeria, was also onm the same page with Selassie.

While reacting to the backlash of criticism of the Bretton Wood institution, Mati said: “In view of recent local media reports, I would like to clarify that the reference to the Sovereign Wealth Funds (SWF) included in Figure 2.16 of the IMF’s Fiscal Monitor showing a low ranking for Nigeria does not refer to the Nigerian Sovereign Investment Authority (NSIA). The NSIA is a Sovereign Wealth Fund that has worked extensively with development partners to ensure it is applying transparency practices that are aligned with the Santiago Principles of transparency, good governance, accountability and prudent investment practices.”

Points to ponder

It is instructive to note that Sovereign Wealth Funds first established by Kuwait in 1953, now serves to protect oil economies from boom and bust. The world’s current largest SWF boasts of assets under management of around $1trn. In 2017, Norway’s sovereign wealth fund exceeded $1 trillion.

Reports have shown that emerging market economies with high levels of international reserves were better prepared to withstand the ripple effects of the 2008/2009 global financial crisis.

In Nigeria, there are two Sovereign Wealth Funds: the Excess Crude Account (ECA) and the Nigeria Sovereign Investment Authority (NSIA). Note that these two are funded by the savings earned when oil prices are at peak.

Hence, as a larger chunk of revenue is appropriated for ECA and NSIA rise, external reserves are likely to fall. For instance, in 2018, the National Economic Council (NEC) reportedly approved fresh injection of $650m from the reserves into SWF, and that improved the SWF to $2.15 bn.

The fund is usually expected to generate revenue to meet budget shortfalls in the future, provide dedicated funding for development of infrastructure and keep some savings for future generations.

Following the IMF’s latest ranking of Nigeria as the world’s second-worst country in the use of sovereign wealth funds, Nigerians have become critical of the excesses of the government in the mismanagement of the country’s commonwealth.

Nigeria has reportedly grown SWFs up to $2.53 billion in the last 10 years. Also, Nigeria’s external reserves have continued its bullish run, edging towards $45 billion thresholds. This was last recorded six months ago.

The Naira has been relatively stable because of CBN’s injections. However, this is only a short term fix which requires appropriate policy restructuring.

Also, there have been several reported cases of mismanagement of the excess crude accounts. Chief among all is the reported $1.68 billion the Federal Government removed from the ECA in 2018, with claims that the fund was used to offset the last tranche of the Paris Club obligations to states.

There have also been reported cases of accruals being shared every month during the Federation Accounts Allocation Committee (FAAC) across the three tiers of governments in Nigeria.

It was recently reported that Nigeria’s external debt stood at $25.2 billion. With external reserves at $44.7 billion, it suggests Nigeria’s external debt is 56% of foreign reserves.

Also, Nigeria’s Debt-GDP ratio, which reportedly stood at 21.1 percent in 2018, appears good. Yet, there has been concern that the economy is treading a risky path.

NSIA’s PR stunt

As if the NSIA had a premonition of IMF’s report the Authority had swiftly circulated a video documentary, which our correspondent confirmed was done in February earlier in the year but which nonetheless came in handy as a good damage control tool in view of the IMF report.

In the video documentary a certain Asa Borssen, a TV anchor, Series Host, at RawTalks, while speaking with an unnamed guest, as to whether countries succeed because of good sovereign wealth funds, or do sovereign wealth funds succeeds because of good governance, said, “Sovereign wealth fund will not help your macroeconomic framework. You need to have a framework for doing a sovereign wealth fund now. One way to make sovereign wealth fund succeeds is to have strict governance separation between owner and management. And that’s the most important part of managing super funds.”

Asked to cite any well-managed sovereign wealth fund that people may not have heard of, she said Nigeria is an exemplary one.

“I think it will surprise people that the Nigerian Sovereign Investment Authority (NSIA) is well managed as it is, given Nigeria’s history through the Excess Crude Account, of less than optimal resource money management. The NSIA was set up in 2012 and it has three ring-fenced separate accounts. One for savings, one for stabilisation and one for domestic infrastructure spending. And those have been well-managed over the past six years, and it will surprise people to hear that Uche Orji’s team has done such a great job in managing that money.”

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