The goals of Nigeria’s Sovereign Wealth Fund (SWF), which include providing a countercyclical rainy day fund, as well as savings for future generations is being threatened by political bickering and oil revenue leakages.
While the SWF announced last month that it made capital gains of N1.2 billion ($7.75 million) in the first quarter (Q1) of 2014 representing 0.5 percent return on total capital of $1.55 billion, the need to grow the fund through regular monthly transfers by the Government has failed to materialise.
The Q1 return which amounts to 2 percent gains when annualised, are inadequate to achieve the funds goals, without regular transfer of excess oil revenue above the budgeted benchmark oil price, say analysts.
Nigeria’s powerful state governors have however filed a lawsuit currently before the Supreme Court, challenging the legality of the SWF, while oil leakages that cost $7 billion in revenue in 2011 according to the central bank, are crimping the Federal Government’s ability to add to the fund.
“The country’s marginal oil savings suggest that Nigeria will not be able to withstand a future oil price shock, especially if there is no qualitative reform of the existing fiscal system,” said Samir Gadio, an emerging markets analyst at Standard Bank in London.
Oil revenues account for up to 95 percent of Nigeria’s dollar earnings, leaving the country potentially exposed to macroeconomic instability if crude prices fall.
Nigeria’s SWF fund amounts to 0.3 percent of 2013 gross domestic product (GDP), of $510 billion. This compares with Norway’s $878 billion fund which is equivalent to 183 percent of 2013 GDP.
The Norway fund, which received its first cash infusion in 1996, has grown through a combination of regular transfers and capital gains to become the largest in the world.
The fund has almost doubled in size since 2010 and the Norwegian government predicts it will grow 41 percent to $1.2 trillion by 2020.
It will take Nigeria’s SWF 36 years to double to $3 billion (from todays levels) at a 2 percent nominal rate of return, without further transfers by Government, BusinessDay’s calculations show.
Nigeria’s SWF Wealth per capita, is equivalent to $8.82 compared to $173,518 for Norway, according to data from the Sovereign Wealth Fund Institute.
The seed capital of the fund was sizable, according to Uche Orji, head of Nigeria’s SWF, while growing the fund beyond the initial $1 billion “will not be easy and straightforward.”
“Nigeria’s is susceptible to external vulnerabilities from a fall in oil prices or production,” said Matthew Pirnie, Standard & Poor’s (S & P), Senior Analyst for Sub-Saharan Africa Financial Services Ratings, in an interview with BusinessDay in Lagos.
Standard & Poor’s rates Nigeria at BB-, three levels below investment grade, with a negative outlook.
The outlook is negative on fiscal risks according to S & P.
The Nigeria SWF set up in 2011 is split into three funds.
The SWF hopes to safeguard oil revenues for future generations, with a future generations fund, provide a buffer against external shocks with a stabilisation fund and spur infrastructure development in Nigeria, with its Infrastructure fund.
The Nigeria SWF is the third-largest in sub-Saharan Africa, after the $6.9 bn Botswana and $5 bn Angola fund.
However despite decades of oil production, the country has never previously had a SWF.
PATRICK ATUANYA
