Nigeria's Sovereign Wealth Fund: A Brief Comparative Analysis to Norway.

Ex-President Goodluck Jonathan has been hit with a series of allegations concerning the mismanagement of Nigeria’s oil wealth, mainly her Excess Crude Account.

The allegations revolving around the unauthorized withdrawals from the Nigerian Excess Crude Account (ECA), led the National Economic Council (NEC) to set up a 4-man committee (made up of 4 sitting governors) to investigate the claims. They found that $2.1 billion was withdrawn from the ECA without prior authorization. In reply to their findings, Ex-Minister of Finance, Ngozi Okonjo-Iweala proclaimed with a supporting document, that no unauthorized withdrawals were made under her watch in the Finance Ministry. She went ahead to say that decisions on such withdrawals were discussed at meetings of the Federation Accounts Allocation Committee (FAAC), attended by finance commissioners from all 36 states. The FAAC denies this fact.

This conflicting issue raises questions about the legality of the ECA, and who is allowed access to it. This article provides a comparative analysis of the Sovereign Wealth Funds Nigeria and Norway. This will help to identify the flaws that have led to the on-going scandal.

What is a Sovereign Wealth Fund?

The SWF Institute defines a Sovereign Wealth Fund, as

“A state owned investment fund or entity that is commonly established from the balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.”

A country sets up a fund to protect and stabilize the budget and economy from excess volatility in revenues/exports. For example, this fund would have been efficient at stabilizing the naira against the pound and dollar, as crude oil prices are falling. It also sets up a fund to increase savings for its future generations and earn greater returns than it would on foreign exchange reserves.

Norway: A brief Analysis

Norway established its Sovereign Wealth Fund in 1990. The Government Pension Fund Global [GPFG], previously Petroleum Fund, is credited with holding the world’s largest SWF with a value of $882billion.

In 2011, it was estimated that each Norwegian citizen was a millionaire, albeit in theory because citizens are not granted access to the funds. The brilliance in its economic policy is its unwillingness to convert oil export proceedings into domestic currency, thus pushing up the exchange rate. Norges Bank Investment Management manages the fund on behalf of the Ministry of Finance.

Nigeria: A brief Analysis

Nigeria operates 2 funds:

The Excess Crude Account: This was established in 2003 and became operational in 2004. It was used to save revenues, during periods of high oil prices. By 2007 it was worth $17.3Billion. However, unexplained withdrawals took place, which reduced the balance by 85%. The underlying issue was the flaw in the legal framework of the account. It was unclear who had access to it and on what circumstances it should be used. The Fiscal Responsibility Act 2007 gives guidelines but is vague.​

The Nigerian Sovereign Investment Authority: The NSIA was set up, with an initial capital of $1billion, under the NSIA Act 2011. This gave its Jurisdiction over the country’s excess petroleum revenue. It is the 3rd largest sovereign wealth fund in Sub Saharan Africa. The fund is split into 3 components which are:

Stabilization Fund

Future generations Fund

Nigeria Infrastructure Fund

COMPARISON: GPFG AND NSIA

Transparency

The Linaburg-Maduell Transparency Index is a method of rating transparency in respect to sovereign Wealth Funds from a scale of 1-10. A minimum of 8 points is required to be graded as Transparent. This index is based off ten essential principles that depict sovereign wealth fund transparency to the public.

Norway (GPFG) was graded with 10 points which is the highest attainable grade depicting Transparency.

Nigeria (NSIA NOT ECA) was upgraded from a 4 to 9 which is a THE 2ND highest score.

Legal Framework Guiding Spending Rule

Norway (GPFG) operates a Budgetary Rule known as handlingsregelen. The rule states that a maximum of 4% of the fund’s total assets be allocated to the yearly government budget. With the value of the pension fund increasing every year, the rule has secured better conditions for future generations. A broad majority of the political parties in Norway have also agreed to comply with this fixed percentage usage.

In stark contrast, Nigeria (ECA) does not have a well-defined framework for its operation; political interests have constantly guided it. Weak governance structures have allowed extensive ad-hoc withdrawals. However, the Nigerian Sovereign Investment Authority Act 2011 guides the NSIA. The act clearly provides clear policy on how the NSIA should operate.

Investment Strategy

The Norwegian (GPFG) investment strategy is based on the principle that to achieve a satisfactory long-term return, one must assume risk. The Ministry places emphasis on exploiting the Fund's ability to bear risk by building on its special characteristic as a large, long-term investor. The GPFG has grown because money is consigned to fund managers to invest in a wide array of stocks and bonds so as to minimize risks. The aim for the management of the GPFG is not to minimize fluctuations in the Fund's returns because such a strategy would produce a significantly lower expected return overtime. The GPFG is able to do this because of its large capital.

The Nigerian (NSIA) investment strategy is intended to help increase the credibility of Nigeria’s macro-economic framework and to act as a buffer against short-term instability. The Fund’s assets are invested conservatively, striking a balance between generating a modest positive return and preserving capital in nominal term. The time horizon of the fund is short and as a result the fund is restricted to investing in investment grade sovereign and corporate fixed income assets with a maturity of up to 3 years.

CONCLUSION

It is still unclear why the ECA has not been closed with the balance moved to the NSIA. Norway is a much smaller country with a diversified economy, there are also different socio economic factors involved but Nigeria can take some lessons from the Norwegian economic model, especially when it involves issues of spending limits, access to accounts and the Legal Framework in which a fund is set up.