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Who’s Afraid of Saving Money? The Political Economy of Nigeria’s Sovereign Wealth Fund

Nigeria’s sovereign wealth fund has the important objective of addressing critical issues in relation to the Nigerian economy and is, perhaps, the most important fiscal initiative from the Nigerian federal government in the last decade.

The debate on how to sustainably manage Nigeria’s sovereign wealth has been raging for about a decade and a half. In all this time, the central question has not changed: can the federal government unilaterally decide to save money on behalf of all the Nigerian people? The major concerns that ring through this debate can be examined through the perspectives of law, economics and politics. The recent ranking of the sovereign wealth fund by the International Monetary Fund (IMF) as the second worst in the world brought the sovereign wealth fund once again to the attention of the public. This attention naturally came with a discussion of the myriad issues surrounding the fund’s management. As the Nigerian Sovereign Investment Authority continues to make progress in the management of the sovereign wealth fund, it is important that the various issues concerning the management of the fund be put in perspective and dealt with.

Nigeria’s first attempt to manage its sovereign wealth happened during the Obasanjo administration through the establishment of the Excess Crude Account (ECA) in 2004. Although the ECA was generally regarded to be a noble idea at inception, it was criticized for having a faulty political and constitutional foundation, and for being dictatorial, uncoordinated and unconstitutional. Aside from the question of its legality, the ECA generated controversy over allegations of corruption and mismanagement. There were allegations that accruals were being shared arbitrarily from the ECA across the three tiers of government, during the monthly meeting of the Federation Accounts and Allocation Committee (FAAC). These issues with the ECA led to the establishment of the Nigerian sovereign wealth fund. While the ECA was never repealed and continues to operate, the sovereign wealth fund has taken over its mandate.

The Nigerian sovereign wealth fund was established under the Nigerian Sovereign Investment Authority Act of 2011. The Act also established the Nigerian Sovereign Investment Authority and empowers it to manage the sovereign wealth fund through three different funds. These are: the Future Generations Fund, the Stabilization Fund, and the Infrastructure Fund. The objectives of structuring the sovereign wealth fund through three different funds are principally to protect the economy from the ‘boom and bust’ effect of oil prices in the international oil market; to address the huge infrastructural deficit in the country; and to create a fund for future generations of Nigerians. While the sovereign wealth fund faces the same legal and political challenges as the ECA, regarding its economic results, the fund has been more successful. The benefits of the fund on the Nigerian economy are evident and there is reason to believe these benefits will continue.

THE ECONOMICS OF NIGERIA’S SOVEREIGN WEALTH FUND

Nigeria’s dependence on crude oil revenue makes its economy subject to the vagaries of the international oil market. This problem is heightened by the mismanagement of public funds and the absence of adequate infrastructure to meet the needs of Nigeria’s ever-increasing population. In light of these issues, a sovereign wealth fund is essentially the only way the country can ensure a reliable stream of income. From an initial fund of $1 billion, the sovereign wealth fund is currently valued at $2.15 billion, and it has declared profits every year for the past five years.

Economists argue that, in the context of the Nigerian economy, a sovereign wealth fund is important since it helps to diversify the economy and stabilize it in the event of revenue shortfalls. When oil prices are high, Nigeria pays into the fund to save for a rainy day. When they are low, the country can withdraw from the fund to pay salaries steadily and invest in the future despite low revenues.

In the last two years alone, the NSIA has provided infrastructural investment in critical areas of the economy ranging from healthcare to agriculture. It is not difficult to conclude that the continued investment by the NSIA in other areas of the economy will boost economic growth and could lead to the provision of employment opportunities.

Furthermore,the fund can help to sustain and eventually improve the monetary value of the naira. By investing the funds in various asset classes in the international market, the government’s access to foreign currency will increase. This situation can also be expected to positively impact Nigeria’s monetary policy by: protecting the economy from inflationary pressure; enabling better management of forex; making government debt more attractive to international investors; and improving transparency in the management of state resources.

THE POLITICS OF NIGERIA’S SOVEREIGN WEALTH FUND

Looked at from an economic perspective, the sovereign wealth fund is clearly a net-positive for Nigeria. From a political view, however, the initiative is quite divisive. Since the inception of the ECA, the idea of managing Nigeria’s sovereign wealth through the deduction of monies from the federation account has been the subject of intense political debate among all the federating units in Nigeria. This debate hinges on crucial political interests that are of importance to state governments, primarily the level of fiscal centralization in Nigeria’s federal system and the share of oil revenues owed to oil producing states.

The issue of the sovereign wealth fund undermining the fiscal federal structure in the country has been the major argument canvassed by state governments in Nigeria for the non-establishment of the sovereign wealth fund. State governments argue that disbursing excess revenue to the sovereign wealth fund substantially reduces how much revenue ends up in the federation account and, thus, how much the states receive within any fiscal period. This argument is bolstered by the fact that the federal government unilaterally controls the sovereign wealth fund and the ‘excess revenue’ that finances the fund is entirely dependent on the ‘oil price benchmark’—a benchmark entirely at the discretion of the federal government. By controlling the benchmark, the federal government can effectively tilt the sharing formula in their favour whenever they choose. This arrangement is made worse by the fact that the structure that underpins the sovereign wealth fund was set up by the federal government and carried out without any state consultation.

For oil producing states, the prospect of diverting excess oil revenues to the sovereign wealth fund is doubly contemptible. Just as it reduces the revenue that all federating states of Nigeria receive, it also reduces the funds oil producing states are guaranteed under the derivation formula stated in the constitution.

The overarching problem with the status quo in the operation and management of the sovereign wealth fund is that the NSIA continues to manage the fund despite not resolving the aforementioned political issues. Rather than saving with the cooperation of state governments, Nigeria saves amid vigorous opposition from its federating units (who sense that an arrangement like the fund is fundamentally against their interests).

THE LEGAL LANDSCAPE OF NIGERIA’S SOVEREIGN WEALTH FUND

The legal issues with the management of the sovereign wealth fund have their basis in the Constitution. Unlike the political and economic perspectives to the debate on the establishment of the sovereign wealth fund, the debate’s legal perspectives are more robust and more developed, with two competing schools of thought.

The first school believes that the establishment of the sovereign wealth fund is unconstitutional because the disbursement of funds that should accrue to the federation account was not envisaged by the Constitution (Section 162). Proponents of this school argue that if the Constitution did not mention such an instrument when describing revenue allocation, then the sovereign wealth fund is unconstitutional. This conclusion finds its root in the decision of the Supreme Court in the onshore/offshore dichotomy debate in the case of AG Federation v AG Abia, (No. 2) (2002).

The second school believes that the Constitution in Section 162 does not expressly preclude the disbursement of funds to the Nigerian sovereign wealth fund. They argue that the logical conclusion is that since the creation of the sovereign wealth fund was not expressly excluded, the sovereign wealth fund cannot be stated to be unconstitutional. This argument is further strengthened by the fact that the Constitution in Section 162 presumably establishes a trusteeship over the revenue of the government and the objectives of the sovereign wealth fund align with the management of the funds accruing to all the governments of the federation as envisaged by the Constitution.

This school also believes that Section 162 of the Constitution directs the state to harness the resources of the nation in the bid to create a prosperous and self-reliant economy. As a result of this provision and the fact that the National Assembly is also empowered to legislate on this section, legal scholars have argued that the establishment of the Nigerian sovereign wealth fund under the NSIA Act is constitutional. This view is consistent with the decision of the Supreme Court in AG Ondo v AG Federation (2002).

FULFILLING THE SOVEREIGN WEALTH FUND’S MANDATE

The Nigerian sovereign wealth fund has the important objective of addressing critical issues in relation to the Nigerian economy and is, perhaps, the most important fiscal initiative from the Nigerian federal government in the last decade. The consistent growth and profitability of the sovereign wealth fund for the past five years, as well as its consistent positive ranking on the index of the Sovereign Wealth Fund Institute, is indicative of the fact that the sovereign wealth fund is being well managed.

However, to enjoy sustained and continued growth of the sovereign wealth fund, it is important that the legal and political issues arising from the management of the fund be addressed. The abolition of the fund is clearly not an option in light of the numerous economic benefits of operating and managing the fund. The constitutional lacuna should, therefore, be addressed and more funds be disbursed to empower the NSIA to invest more in infrastructure and carry out more investments globally through the stabilization fund and future generation fund.

The constitutional lacuna, if addressed, presents a strategic way to deal with both the legal and some of the political issues relating to the management of the sovereign wealth fund. The only tactful way of doing this is for the federal government to initiate a constitutional review process for the amendment of the provisions of Section 162 of the Constitution. Undoubtedly, some states—particularly oil-producing states—will not support this initiative for various political reasons. These states will certainly oppose the idea, as they have always done, because of the discretionary power of the federal government to determine the ‘oil price benchmark’. To address this issue will require negotiations for the fixing of an objective formula for determining the oil price benchmark. This will remove the high level of federal government discretion that is currently economically and politically unacceptable for oil producing states.

Furthermore, the participation of the various federating units through their governors in the governing council of the Nigerian Sovereign Investment Authority will be useful in ensuring that the management of the fund is both transparent and gives the various states a feeling of being involved in the fund’s management. With these political and legal hurdles cleared, the sovereign wealth fund will finally be free to fulfil its mandate