The Nigeria Sovereign Wealth Fund; replacing one Illegality with another Illegality
Now that President Jonathan has decimated the Excess Crude Account -Part 2
On Friday, August 13 2010, the Accountant-General of the Federation, Alhaji Ibrahim Dankwanbo announced to a bewildered nation after the monthly Federation Accounts Allocation Committee meeting, that the remaining $3 billion in the Excess Crude Account which has a balance of $20billion just 18 months ago has been depleted and shared among the Federal and State Governments this month leaving only about $460 million in the account.
He said $2 billion of it was shared among the three tiers of governments while $1 billion was set aside for the proposed Sovereign Wealth Fund.
Last week, in part 1 of this article, (http://www.elombah.com/news/node/4211) I explained that while the logic for saving excess crude revenue, may sound legitimate, by the provisions of Section 162 (3) of the Constitution and Section 80 (1) of the Nigerian Constitution, the maintenance of the Excess Crude Oil Account and the manner it is used, are illegal.
And now that the ECA account has been decimated, a proposed Sovereign Wealth Fund (SWF) taking its place with $1 billion already set aside for the SWF when it is yet to be signed into law, observers wonder whether President Goodluck Jonathan intends to replace the previous illegality with a new illegality.
Over the weekend, NEXT Newspaper quoted The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) as saying that the Sovereign Wealth Fund being proposed by the Federal Government is illegal, as its foundations are not rooted in the provisions of the country's constitution.
While Olusegun Aganga, the Minister of Finance, said the decision to establish the Fund is to enable it serve as a catalyst for the nation's economy development, a RMAFC Federal Commissioner, told NEXT that "government is treading the path of illegality in pursuing a justifiable agenda", pointing out that "no matter the good intentions of government, the structure establishing the SWF would render it defective, illegal, null and void, if its existence and operation are not derived from the provisions of the country's constitution."
He said that though the revenue mobilisation agency is yet to formally write to the Presidency on its position on the proposal, it, however, made its concerns known during a meeting convened recently by the Federal Ministry of Finance to discuss the issue of government treading the same path of unconstitutionality when it established the Excess Crude Account (ECA) and the Excess Revenue Account (ERA).
WHAT IS A SOVEREIGN WEALTH FUND?
A Sovereign wealth fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign wealth funds have gained world-wide exposure by investing in several Wall Street financial firms including Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from the credit crunch.
Some sovereign wealth funds are held solely by central banks, which accumulate the funds in the course of their fiscal management of a nation's banking system. These types of funds are usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have significant role in fiscal management.
Currently, there are more than 50 sovereign wealth funds, managing assets worth nearly $3 trillion.
Most of these funds are run by the countries that have huge trade surplus. It is mostly funded by commodity revenues, predominantly from oil and gas exports.
Prominent sovereign wealth funds are of Saudi Arabia, UAE, China, Russia, Singapore, Qatar, Japan, South Korea and Bahrain.
WHAT IS THE NATURE AND PURPOSE OF SOVEREIGN WEALTH FUNDS?
SWF's are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. To reduce the volatility of government revenues, counter the boom-bust cycles' adverse effect on government spending and the national economy or build up savings for future generations, SWFs may be created. One example of such a fund is The Government Pension Fund of Norway.
There is a lot we don't know about sovereign funds. Very few of them publish information about their assets, liabilities, or investment strategies. It's thought that they've traditionally been "long only": that is, they pursue buy-and-hold strategies, with no short positions and perhaps no borrowing or direct lending of any kind. They probably have long horizons and, like other long-term investors, are willing to step in when asset prices fall. This likely exerts a stabilizing influence on the world's financial system. But there is also anecdotal evidence that some sovereign funds have placed investments with other leveraged funds.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF SWF'S?
For those countries who promote SWF, it is a valuable tool for achieving certain public policy and macroeconomic goals. The movement of capital around the world with unregulated ease can contribute to rapid productivity growth and a global boom.
But there are always some national security limitations on what foreigners can own. Recent developments in the world suggest there may be a perception that certain foreign governments should not be allowed to own what are regarded as an economy's "commanding heights". This may encourage capital account protectionism, through which countries pick and choose who can invest in what.
With the current economic downturn, "The sovereign wealth fund (SWF) idea is an elegant idea that may be vacuous.
Therefore some Nigerians insist that before Nigeria rushes to embrace the establishment of Sovereign wealth Funds, pertinent questions should be asked:
Whose idea is this?
What is its value creation or value addition potential (in other words what will it do for Nigeria) that makes it desirable and necessary?
How well has SWF worked for other non-industrialized or industrializing countries?
In which countries will the funds invest?
What assets will the funds are invested in?
How safe are international capital market assets?
Who will be the funds' managers? Goldman Sachs?
Is Nigeria not better investing in Nigeria's capital market than holding vast sums of money in overseas portfolios that are managed by foreign financial firms and consultants?
Has anyone matched the funds' management costs against the funds' return and risk?
Does Dr. Jonathan know that fund managers usually earn more money (from management and other fees) than the funds' owners do?
Who will be the Nigerian overseers of the funds?
Will these persons be appointed on the basis of political, ethnic, or other partisan considerations, or technical expertise and personal integrity?
Is the SWF idea the brain child of the man from Goldman Sachs who is also the Federal Minister of Finance?"
According to Mr. Olusegun Aganga, "the apparent lack of discipline among managers of the nation's finances over the years has necessitated "a very strong structural vehicle, properly managed by local and international advisers, to meet the triple objectives as a stabilisation fund to support annual budget deficits; savings for future generations, as well as funding for the development of the nation's basic infrastructural needs."
Yet I have emphasized in my earlier articles, particularly this article ( http://www.elombah.com/news/node/3742) published on June 4, 2010 I said: Nigerians should watch Aganga carefully, lest he import Goldman Sachs fanciful ideas into our economy....
This Minister, like many Africans that have worked for foreign financial institutions, may be uncritical of foreign financial institution's advice and prescriptions for "less developed" countries. Many have swallowed false claims and theories hook, line, and sinker.
A concerned Nigerian responding to my article USA-Africa Dialogue Forum wrote:
"Economics principles may be generic but their implications are often times different for countries at different levels of economic development, or countries that have different economic structures, financial infrastructure, and economic challenges. There is economics for advanced economies, and there is economics for less developed (some say developing) economies.
Continuing he said: One is reminded of the vociferous arrogance, and intensity with which the failed I.M.F.'s Structural Adjustment Programs were recommended or forced on fewer developing countries in the 1980s and 1990s. Kalu Idika Kalu and Olu Falae (western educated economists) were the I.M.F.'s apostles and acolytes in Nigeria. They and some others were in the vanguard column of the program's marketing and imposition on an unwilling but informed people. Both men are western educated economists. Kalu was a former World Bank Economists. For these men, western economic policies and programs may not be challenged.
Nigeria's current Federal Finance Minister was a successful banker in England. He cut his teeth in a parasitic, no laws bared, unethical, and mindlessly profit-driven financial institution. He will probably return to that institution at the end of his term as Nigeria's Finance Minister. How readily and well he will be received will depend on how well he served the institution when he was Nigeria's Federal Finance Minister. The man may love his country of birth but what if he loves his cradle institution and fall-back employer equally? One hopes that Dr Jonathan is well aware of the inherent bias against fewer developing countries in western economics. He must supervise his Finance Minister respectfully and closely; He more than his Minister is accountable to Nigerians.
Nigerians should pay heed to the warnings by officials of the RMAF. When President Olusegun Obasanjo was accumulating and playing ludo with the Excess Crude Account, Hamman Tukur of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC) was the only voice in the wilderness in opposition to the account on grounds that it was, at best, of dubious legality because our constitution stipulates that all revenues collected by the Federal Government should go to the Federation Account.
The RMAFC is the only government agency mandated under Section 162 (2) and (3) to recommend the distribution of the amount standing to the credit of the Account among the federal, state and local governments in each state on such terms, and in such manner as prescribed by the National Assembly.
The implication of this is that any disbursement, withdrawal or appropriation of government revenue without strict compliance with these provisions, as has been the case with government's management of the ECA and ERA, is unconstitutional.
"The RMAFC has consistently criticised the practice by the Presidency and the Federal Executive Council (FEC) to approve withdrawals from the ECA, which has been depleted from over $22billion in 2008 to about $460million as at last month.
The FEC is made up of a group of politicians, whose decisions should not set aside the supremacy of the constitution, particularly on issues that have to do with the nation's finances.
Obasanjo still went ahead presumably because the account would, at least ostensibly, enable the country save for rainy days. Three years afterwards, all the money in the Excess Crude Account has been squandered without tangible improvement in the lives of Nigerians.
IS THERE A STRONG REASON FOR NIGERIA TO SET UP A SWF?
On Friday August 19, 2010, India announced that it has abandoned the plan to create a sovereign wealth fund on the line of Singapore, United Arab Emirates, Saudi Arabia, China and Russia, the finance ministry said on Friday.
India was considering a SWF with an initial corpus of $5 billion.
"The government had examined a proposal to create a sovereign fund of $5 bn for financing acquisitions of companies abroad. However, it was decided not to pursue this proposal," Minister of State for Finance Namo Narain Meena said.
Explaining the rationale behind India jettisoning the plan, a prominent Think Tank in the country stated: India's foreign exchange reserves stood at $.313 billion on April 25, the third largest holding in Asia.RBI Governor Dr.Y.V. Reddy has observed recently that the Indian economy has a current account deficit as also a fiscal deficit. India does not have any dominant "exportable" natural resources output, which might promise significant revenue gains. India also has a negative international investment position (IIP) with liabilities far exceeding assets.
But most countries that had set up SWF's had built reserves through current account surpluses or revenue gains from commodity exports. India's large reserves reflected an inability of the economy to fully absorb capital flow".
SWF's by their nature often lack transparency, with Nigeria being notorious in not managing their accounts transparently, how would Nigerians be able to monitor this fund so that they don't wake up one day to learn that the funds have disappeared into private pockets.
Don't doubt this possibility; we all are living witnesses to how the hundreds of millions of dollars recovered from the Abacha family suddenly grew winds and disappeared!
In view of the fact that Nigeria has decimated the ECA fund built over the past decade by the administration of Olusegun Obasanjo, and considering that rather having a surplus, the country is currently borrowing to augment their budget deficit, President Jonathan Goodluck should ask himself whether it is not wise to follow India's example and jettison the whole idea of establishing a Sovereign Wealth Fund.
elsdaniel@yahoo.com
End
Daniel Elombah
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