Last week, I argued that the main difference between the current excess crude account (ECA) and the proposed Sovereign Wealth Fund (SWF), for all practical purposes, is a further postponement, and perhaps a bigger pie of the consumption of oil revenues because of the way government is currently structured.
My arguments had three dimensions. First, I argued that SWF is still about smoothening of oil revenues over periods of low and high oil prices. As good as that sounds, it simply means that it is not different from ECA in that essential principle. So, it is just a policy to smoothen oil revenue and not a policy to create another source of revenue. It fails to address two key fundamental economic problems that we have – reducing poverty and helping diversify the Nigerian economy from the dependence on oil. In this context, the SWF is at best a distraction.
I also argued that there is simply no evidence that the SWF could add up significantly over time. The forces that depleted the ECA fund so quickly are still very much with us. These forces are those of waste, government inefficiency, corruption and big government. And thirdly, I am vehemently against any policy that centralizes the Nigerian economy further. The centralization of the federation account that has helped cripple the Nigerian economy, as the bedrock of big government and corruption is still the same apparatus for a SWF. The structure failed in the past, is failing and will continue to fail.
Now, essentially, the question is, do we need SWF for economic progress? Let me use a story you may find ridiculous, though a true story, to buttress my point. I believe it fits the mindset of the current agitation for a SWF in Nigeria. I had an aunty when I resided in the United Kingdom. There used to be these funny arguments about what one could do with a free one million pounds. Her response was always that she will just put the same in a bank and live on the interest. As an economist, I always found it odd that she did not want to take risks by investing the money and make more money.
The proposed SWF is similar. Instead of the government dreaming big about what it could do with oil resources and how it could use the same to diversify the economy and reduce our dependence on oil revenue, the government is thinking of a SWF. Though better than ECA, it essentially means using the capital we could use for expanding and diversifying our economy for some kind of returns by investing in bonds, equities and perhaps, properties abroad.
Those that disagree with my analysis could give the examples of Brazil and Korea, perhaps two of the biggest economies with a sovereign fund. But these two economies are more matured than Nigeria, and the level of accommodation of capital for these economies cannot be compared to that of Nigeria. And they make more revenue that can be used for capital more than us. In Nigeria, everywhere you look; there is a need for an increase in the deployment of capital. The economy is capable of accommodating more capital than we make from oil. The problem has always been waste. So, even though the SWF seeks to minimize the waste, it is still a policy of minimization of waste and not a policy of eradicating the sources of waste and corruption in government.
Now, the National Economic Council (NEC) met last week and felt work on the proposed SWF require some more work. It is expected that the government will continue to work on the framework and modalities until it is satisfied that it has something that will work. The details still expected include how the fund will be funded. As they think about that, it is interesting remembering the argument by many governors in 2007 and 2008 for the scrapping of the ECA fund on the basis that they had needs they wanted to meet. But they found the fund useful when oil prices fell. What am I saying? There will always be argument on how the fund should be funded, but never an argument whether it should be shared. It is usually a positive chorus. Until government, at all levels, are weaned of these oil resources, our governments will remain big governments in nature and characteristics.
Finally, in any economy, as in life, there is always the question whether it is the needful or the convenient that should be done. The Nigerian economy needs capital, less government, less waste and corruption and general improvement in productivity across all sectors. What the SWF provides is a mechanism for postponing the consumption that already takes place, and at best, increasing future consumption through the returns on investment. This same capital been exported will be used by serious economies to expand their economies further. I am not just convinced.