The call by Nigerian lawmakers for scrapping of the Excess Crude Account (ECA) might be legitimate.
However, doing that alone without recognising the importance of Nigerian Sovereign Wealth Fund will make the country float dangerously without a fiscal life jacket.
Unlike fellow oil exporter Saudi Arabia, which is financing a huge part of its deficit from its SAMA Foreign Reserves Holding while also toiling night and day to protect its unborn generation by either maximising potentials in oil sector or reducing aggregate risk to oil price, Nigeria is funding its budget deficit by record borrowings and seems not prepared for any rainy day.
The first attempt made to save money in Nigeria was the Excess Crude Account (ECA), which is simply a “spillover” savings account that accumulates the excess of the benchmark and the actual price of crude oil.
Thus, if the benchmark price in the annual budget is $50 per barrel and crude oil is sold for $70 during the year, $20 flows to the ECA. However, there is no federal law setting up the ECA.
Just as the Petroleum Development Trust Fund and the Ecological Fund were raided and used for purposes outside of their stated objectives, fiscal recklessness has reached its pinnacle with the depletion of the ECA to a pitiable $71 million. Nigeria’s lawmakers, led by James Faleke, chairman, House of Representatives Committee on Finance, last week unanimously approved the scrapping of ECA, describing it as illegal.
According to the lawmakers, the Excess Crude Account has no backing of law and should be scrapped with immediate effect and in compliance with sections 80 and 81 of the 1999 Constitution of the Federal Republic of Nigeria, as amended.
Serially abused ECA
The ECA, which states had particularly contended is illegal, has repeatedly faced a series of allegations of lack of accountability, lack of transparency, mismanagement and gross abuse.
Just like his predecessors, President Muhammadu Buhari, the poster child of corruption fight, also dipped his hand into the fund. Between 2016 and 2018, he dramatically increased the monthly security allowance allocated to the 36 states.
In 2017, Buhari withdrew $1 billion from the ECA without any formal consultation with the appropriate bodies.
Washington-based International Monetary Fund (IMF), last year, declared that Nigeria’s Excess Crude Account (ECA) was not achieving the goals for which it was set up.
“There have been two Sovereign Wealth Funds in Nigeria. There have been the Excess Crude Account (ECA) and the Nigeria Sovereign Investment Authority (NSIA). The NSIA is running transparently, on standard best practice and it has been doing a good job,” Abebe Selassie, IMF’s director of the African Department (AFR), said.
The poor performance of the ECA, the IMF chief said, largely influenced IMF’s decision to rank Nigeria second-worst in the world in the use of Sovereign Wealth Funds.
What SWF is about?
Nigeria’s Sovereign Wealth Fund was an upgrade on the ECA. The NSIA SWF is a savings account, set up by law, with an independent Board of Directors and a clear mandate.
The SWF is comprised of three sub-funds with clearly stated objectives. The Stabilisation Fund is to support the budget in times of economic stress, including to hedge against volatile crude oil prices; the Future Generations Fund is to save for future generations of Nigerians; and the Nigeria Infrastructure Fund is to invest in domestic infrastructure.
The NSIA operations are professional and transparent. Nigeria has so far invested $1 billion, then $500 million, and a further $650 million in the SWF. So just to be clear, from 1960 to 2019, Nigeria has saved only $2.15 billion. Nigeria can do better.
Nigeria clearly needs a strong SWF which can be used to support the budget in time of lower oil revenue; not to pay salaries or imports but rather to fund education, health, etc. Spending of the fund should be restricted to capital expenditure and infrastructure projects.
Recall that President Buhari approved the withdrawal of $150 million from the Stabilisation Fund to support the June 2020 FAAC disbursement.
The reason Russia and Saudi Arabia can afford to play the game of chicken in the last oil price war is their reserves. Russia has spent the past five years building an estimated $570 billion in reserves.
Officials say the reserves can allow it to cope with a low oil price environment for up to a decade.
Saudi Arabia has also built an estimated $500 billion in reserves.
Also, Norges Bank Investment Management oversees Norway’s $1 trillion sovereign wealth fund while United Arab Emirates has nearly $1 trillion capital pool in Abu Dhabi Investment Authority (ADIA) and Mubadala that is funded by excess oil and gas income.
United States’ Alaska Permanent Fund has one of the savviest SWFs in the world; the $65.3 billion fund is financed by oil and gas revenue for the benefit of future generations of Alaskans.
Why SWF is needed
Olusegun Aganga, a former minister of finance and one of those behind the idea of setting up SWF, said although the idea of ECA was bold, it would not achieve the desired goals.
“The aspiration was for the SWF to grow to about 15 percent of the GDP at least. The support of the three tiers of government and the quality of the leadership at the board and management levels will ultimately determine the on-going success of the fund,” Aganga said in an interview.
Adeola Adenikiju, professor of economics at University of Ibadan and member, expert advisory panel of Nigeria Natural Resource Charter (NNRC), said Nigeria ran down the ECA without augmenting other forms of capital or savings like the SWF.
“The lack of fiscal discipline and fidelity to the principle of the oil price-based framework did not enable the country to have same fiscal leverage to cushion the effect of oil price crash of 2014 as well as the economic effects of the current coronavirus pandemic,” Adenikiju said.
