Saving Nigeria’s Oil Revenues For The Rainy Day

All over the world, resource-rich countries like Nigeria that depend on revenues from natural resources to finance annual budgets plan early to insulate themselves from  price volatility in the international market and eventful depletion of the resources. Many of these countries do so by setting up stabilization funds to save for the rainy day and for the future of the next generation.  This essentially requires a deliberate policy to set aside money earned from natural resources especially during periods of high prices to smoothen expenditure when prices fall.

The stabilization funds also protect these countries against total dependence on natural resources revenue. The essence of saving for the rainy day is that it also helps resource-rich nations to effectively address the resource curse syndrome and the moral burden of generational equity.

In Nigeria, the idea of saving a portion of oil and gas revenues for the rainy day and for the future generation began in 1989 when the Stabilisation Fund was set up.  The objective was to set aside 0.5% of revenues going into the Federation Account to support "any state of the Federation that suffers absolute decline in its revenues as a result of circumstances beyond its control.

However, investigations reveal that management of the Stabilization Fund over the years was anything but prudent. For instance, the Fiscal Allocation and Statutory Disbursement Audit Report by Nigeria Extractive Industries Transparency Initiative (NEITI), released in 2013 showed that while N109.7 billion was transferred into the account for the period between 2007 and 2011, the sum of N152.4 billion was withdrawn from the Fund for purposes other than its original intent. 

The result was that the opening balance which stood at N41 billion in January 2007 was further depleted to N36.1 billion by December 2011. A recent Occasional Paper released by NEITI disclosed that as at May 31, 2017, only N29.02 billion was left in this Fund.

In 2004,the Government again set up another fund known as the Excess Crude Account (ECA),most probably to address the failure noticed in the management of the Stabilisation Fund. This time the government adopted what it called an “Oil Price-based Fiscal Rule policy” in the management of the account. Under the arrangement, revenues in excess of a pre-determined commodity price were saved in a Consolidated Revenue Fund under the custody and management of the Central Bank of Nigeria. The law that set up the Excess Crude Account also provided clear stringent conditions under which spending from the account could be permitted.

However, findings by a recent publication by NEITI revealed that the conditions for withdrawal from the account were seriously abused and violated..

The Occasional Paper by NEITI which focused on “the case for a robust oil savings fund for Nigeria” revealed that the total credit balance in the Excess Crude Account as at May, 2017 was a meagre $2.3 billion for a country with a huge population like Nigeria.

Again, and perhaps in efforts to address the challenges being experienced in the management of the Excess Crude Account and the Stabilization Fund, the National Economic Council in 2010,approved the creation of a Sovereign Wealth Fund(SWF) for Nigeria  with a seed capital of one ($1) billion dollars. The Fund was placed under the management of the Nigeria Sovereign Investment Authority, specially set up for this purpose. Since coming to power in May 2015, the Buhari Administration has boosted the fund by injecting additional $500 million bringing its total capital base to ($1.5Bn) one-point-five billion dollars.

The SWF is quite unique in several ways. This probably explains why three distinct (ring-fenced) components were created within the fund structure namely; the Future Generations' Fund, Nigeria Infrastructure Fund and Stabilization Fund.

Under the arrangement, 60% of the Sovereign Wealth Fund was allocated equally to the three components while 40% was allocated at the discretion of the Board of the Nigeria Sovereign Investment Authority. Investigations by NEITI revealed that the Board allocated 40% each to the Future Generations and the Infrastructure Funds, while Stabilization Fund has 20%. The threshold is to be reviewed every two years by the NSIA, giving consideration to our country’s population and growth projections.

The Stabilization Fund component of the Sovereign Wealth Fund was invested in short-term assets that are easily monetized for possible budget augmentation. Up to 10% of the Infrastructure Fund was invested in identified key "development projects" such as agriculture, healthcare, motorways, power and real estate. The projects include the presidential initiative to deliver locally produced fertilizer at an affordable price. The immediate aim is to deliver 100 million metric tons of fertilizer in 2017 for direct delivery to rural farmers, resulting in potential budgetary savings from fertilizer subsidies, foreign exchange savings and job creation. Other projects include the $200 million Agriculture Fund Investment, the Family Homes Fund, and the Second Niger Bridge while up to 60% of profits from the Sovereign Wealth Fund (SWF) are available every year for distribution to the three tiers of government.

Findings by the Nigeria Extractive Industries Transparency Initiative (NEITI), shows that investments into the Sovereign Wealth Fund seed capital of $1.5 billion has generated net income profit  of N505 million in its first 15 months, N15.8 billion in 2014, N26.3 billion in 2015 and N149.83 billion as at last year ending. This is a feat never achieved by savings in the Excess Crude Account or the 0.5% Stabilization Fund.

Further disclosures by NEITI report shows that all Nigeria’s efforts at saving some portion of oil revenues for the rainy day  put together have only yielded a total of $3.9 billion. The break down consists of $95 million in the Stabilization Fund, $2.3 billion in the Excess Crude Account and $1.5 billion in the Sovereign Wealth Fund.

A quick comparison with other resource rich countries that have imbibed the robust culture of saving for the rainy day and for the future of the next generation shows that Nigeria is amongst the lowest in the World. For instance, Norway with a population of 5.2 million has so far saved over $922 billion since 1990 when that country embraced the savings culture. In this direction, Russia has saved $89.9 billion since 2008, Kuwait with a population of about 4.1 million has so far saved $592 billion and Chile $24.1 billion. Even neighboring African countries have done better. For instance, Angola has saved $4.6 billion while Botswana with a population of 2.3 million people and endowed with solid minerals resources only has so far saved $5.7 billion since that country embraced compulsory savings culture in 1994. 

It is against this background, that NEITI has strongly recommended that the time has come for Nigeria to embrace a robust saving culture irrespective of whether oil prices is low or high. Our country’s experience over the current   economic recession and volatility in the oil market has made this decision quite imperative.

Under the circumstance, and given the importance of healthy savings as one of the tools for tackling resource curse, NEITI strongly recommends that the federating units especially the Federal and the states governments should seek speedy resolution of all pending cases in this regard at the Supreme Court on the constitutionality of remittances to the Excess Crude Account and the Nigeria Sovereign Investment Authority. There is also the urgent need to initiate amendment of Section 162 of the 1999 Constitution drawing on the political consensus that led to the creation of the ECA and the NSIA.

Besides, NEITI is of the view that all the oil revenue savings in the ECA and Stabilization Fund should be moved to and consolidated into the Nigeria Sovereign Wealth Fund. In making this recommendation, NEITI is persuaded by the recent ranking of NSIA by the global Sovereign Wealth Institute Transparency Index, the highest by an African Sovereign Wealth Fund. Besides, the SWF is the only one of the three funds that has recorded profit. It is also our hope that SWF should be strengthened with appropriate guarantees on transparent and accountable governance to re-assure all stakeholders. Above all, the time to delink government expenditure from oil revenues and pursue prudent macro-economic policies is now. These measures are critical success factors to rescue Nigeria from the resource curse syndrome, save for the rainy day and the future generation before the oil runs out in 38 year’s time as already predicted by experts.

Dr. Orji Ogbonnaya Orji is a Director of Communications in NEITI.

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