Nigeria has squandered billions of dollars in oil revenues over the past few decades due to corruption. The country is ranked near the bottom of Transparency International’s Corruption Index, and its status as the world’s 8th largest crude producer has done little to improve the lives of many within Africa’s most populous nation. As such, Nigeria has often served as inspiration for other countries to set up a SWF. For example, Ghana is reported to be setting up a SWF to avoid Nigeria’s fate.
Put simply, Nigeria lacks credible and legitimate institutions to manage oil rents. It is the only OPEC country NOT to have a SWF (…though that’s not to say that other OPEC countries are beacons of anti-corruption…). While Nigeria has had the Excess Crude Account since 2004, the ECA has no clear legal basis and has been the subject of considerable ‘political wrangling’. As Finance Minister Olusegun Aganga said,
“The present arrangement is just an administrative arrangement, it has no legal basis.”
Moreover, the ECA is nearly empty. According to Reuters, the ECA contained over $20 billion when Yar’Adua came to power. However, it has been tapped at regular intervals and now has only about $3 billion.
The new Nigeria government is searching around for an innovative mechanism to manage oil rents. Accordingly, Nigeria’s acting President Goodluck Jonathan has called for the launch of a new SWF. According to Aganga,
“What we have to begin now is to give it a legal basis so the excess crude account will be replaced by a legal arrangement … in line with international best practice.”
Aganga also notes,
“The whole idea is that it is absolutely irresponsible for us to spend all the revenue we generate today. We need to provide for the future.”
This sounds sensible enough! So, what’s the likelihood that these guys can pull this off?
Honestly, I have no idea; I’m no expert on internal Nigerian politics. However, I know people, who know people, who know such things: Jason Mosley, Senior Editor for Africa at Oxford Analytica and Chair of an NGO in Nigeria, has this take:
“The contested constitutional status of a new SWF, in place of the Excess Crude Account, would not be resolved. However, one thing that the new fund could do a better job of would be to define the conditions under which transfers are made to the federal, state and local administrations. The drawdown of about 17 billion dollars over the past couple of years has been justified as counter-cyclical ‘stimulus’ spending, but it’s hard to take that seriously. A new fund might conceivably do a better job of keeping the funds invested in assets abroad, if defined properly. However, with the acting president calling for urgent action — and in the middle of a contested leadership transition, with party primaries looming ahead of the 2011 elections — what are the chances of a proper design being developed and adhered to? Slim to none, in my opinion.”
I’m a bit less pessimistic than Jason (though, I acknowledge, that my optimism is probably due to the fact that I’m further removed from the reality on the ground i.e. I don’t really know what’s going on). Still, Aganga was a former MD at Goldman Sachs in London. While that might not be seen as a compliment today, it at least illustrates competency. Moreover, Aganga has the right inclinations about how a SWF should be different from the ECA:
“It is the same idea, but the only difference is that the money we have in the excess crude account does not have the same legal and transparent framework.”
Once again, this all comes down to the governance and design of the SWF. As we have seen, SWFs that haven’t gotten this right have failed. So, if Nigeria’s new leadership wants to be successful, they should design an organization that can withstand political corruption and has explicit rules on contributions and withdrawals.
What if we put the question in this way: will Nigeria be better off with new kind of oil fund? It hardly to believe. Empirical evidence such as provided by Davis et al. 2000 shows that reforms in the public financial management should precede the creatio of any SWF. These resources can be put aside even without non-renewable resource fund in the condition of sound public finances. But, however this step will be of outmost priority for the Nigerian government in the beginging of resource accumulation for future generations. Nigeria could be one of the prosperous countries if more than $300bn could be accumulated on the such kind of saving funds.
Thanks for your comment, Abzal. I think your question is a good one. I personally think that in a country like Nigeria, the assets coming out of the ground have to be sequestered away in entities like a SWF…or simply be left in the ground (or taken out of the ground slowly). For me, the appeal of a SWF is that you can build it with all sorts of tricks to keep politicians from misbehaving. Cheers.