Nigeria, where 80% of public revenues come from oil, is a very strong candidate for a SWF. Here’s why:
- The country has squandered billions of dollars in oil revenues over the past few decades due to corruption.
- It remains the only OPEC member without a SWF.
- 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.’
In a bid to remedy this, President Goodluck Jonathan has set the wheels in motion to establish a credible and legitimate SWF. But there are plenty of difficulties ahead. In particular, there is the question as to how this country, with all its unique political constraints, can go about setting up a SWF that will actually meet its objectives of promoting sustainable economic development.
Interestingly, the Revenue Watch Institute, in partnership with Nigeria-based think tank Centre for the Study of Economies of Africa, just released a policy brief outlining some key design considerations that any new Nigerian SWF will want to take into consideration (h/t allAfrica.com).
Frequent readers of this blog won’t be surprised to hear that Alexandra Gillies, the report’s author, argues that strong and transparent governance practices are paramount. In coming to this conclusion, she seems to be inspired by the mistakes made by the ECA:
“…permissive governance structures have allowed extensive ad hoc withdrawals, reducing the ECA balance by almost 85%, or 16 billion dollars, in just 18 months…After an encouraging start (including the repayment of Nigeria’s external debt), the ECA has failed to serve its intended purpose.”
Gillies argues that a new Nigerian SWF needs: 1) a solid legal standing, 2) binding rules regarding inflows and outflows; and 3) transparency. Obviously, I agree. But what’s quite interesting about this paper is Gillies’ view that Nigeria’s politicians need to commit to commitment:
“For a Fund to be successful, its balance must be protected from the short-term political pressures to spend. The rules establishing the fund must bind the hands of the current leader, and be seen to be binding on the successors as well. In Nigeria, where political power changes frequently, a leader will be more inclined to save if assured that the next leader will also be bound by prudence. The primary shortcoming of the ECA is the failure to provide these kinds of protections and guarantees.”
To be sure, the SWF should be a commitment mechanism for the Nigerian government — a means of sequestering revenues from the short-term folly of politicians. And yet, I’m also mindful that an absolute commitment is impractical (or even dangerous). It’s all well and good to talk about ‘tying Odysseus to the mast’, but I’m of the opinion that the design of the SWF should include a variety of caveats that allow for a draw down when the country’s sovereignty or autonomy is threatened.
I’ve said this before, but I think best practice in this regard is found within the Canada Pension Plan, wherein using the money in this plan for anything other than pension payments requires a greater level of political support than is needed to change the Canadian Constitution. And if Canada gets this level of political support to tap the CPPIB, then tapping the fund is probably warranted!
Anyway, it still remains to be seen if Nigeria can marshal the political support to set up a SWF at all, let alone set one up with all the appropriate design and governance procedures. But it’s still interesting to think about how such a fund should be designed.
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