Sovereign Wealth Funds as Cushion for Lean Purse

The federal government and its federating units are presently facing massive cash crunch due to the sharp decline in oil prices. The country has for decades depend solely on the revenue from oil sales. The federating units send their representatives to the federal capital every month to collect their share of the monthly allocations.

While their monthly trip to Abuja can be excused same cannot be said of the way the allocations and revenues generated have been spent in the last decade.

The situation has become so dire and disheartening as most of the state governments can no longer pay salaries. They now ask the federal government for bailout.

In 1926, George Samuel Clason a former US army issued the first of a famous series of pamphlets on thrift and financial success, using Babylonian parables. These were distributed in large quantities by financial institutions, the most famous being, The Richest Man in Babylon. It is one of most inspiring book on wealth ever written.While the secrets from the book were mostly directed to personal lives they are applicable and transferable to governments too.

In the book, Arkad, the richest man was asked how he has acquired his fortune. Arkad quoted the first piece of advice he received from Algamish, his mentor “I found the road to wealth when I decided that a part of all I earned was mine to keep.” The advice to save no less than a tenth of what Arkad earned was the start of a transformation he said. This is a golden rule and it applies to governments too.

Successive governments over the years have refused to keep and invest a part of what they earned. No individual or government will spend all during time of plenty and expect everything to be fine in time of famine.

Globally, countries as well as states who generate commodity driven revenue have been found to set aside part of their earnings for the future and the vehicle or platform mostly used is the sovereign wealth fund (SWF).

Resource prices are really volatile. They go up and down and if a government is making plans on these prices they should be very careful, a savings plan like the SWF can ensure that when the economy contracts there will be a buffer to sustain that government.

A sovereign wealth fund (SWF) is a state owned investment fund investing in the real and financial assets such as bonds, stocks, real estate or precious metals. They can also be invested in private equity fund or hedge fund. Generally, SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank.

It is estimated that there may be a total of eighty SWFs globally holding, holding about $7 trillion in total assets.

Norway, a commodity driven country like Nigeria, established the Government Petroleum fund in 1990, commonly referred to as the Oil fund, the fund changed its name to The Government Pension Fund Global in 2006.It was established after a decision by the country’s legislature to counter the effects of the decline in income and to smooth out the disruptive effects of highly fluctuating oil prices. The fund currently valued at about $1trillion, holding 1.3% of global equity market making it the world’s largest sovereign wealth fund is now a shining example on how SWF can succeed.

Kuwait has the first and oldest SWF in the world.  Founded in 1953, It is the 5th largest sovereign wealth fund in the world with assets exceeding $592 billion. Set up to manage the funds of the Kuwaiti Government in light of financial surpluses after the discovery of oil.

Another oil rich country Qatar, founded its own fund in 2005. The Qatar Investment Authority was set up to manage the oil and natural gas surpluses to strengthen the country’s economy by diversifying into new asset classes. QIA is estimated to hold in excess of $170 billion of assets.

There are other commodity driven countries who also use SWF to save and invest revenues from commodity sales. The interesting thing is while countries are commonly known to own SWF, oil rich federating states and provinces are also now embracing SWF as a way of saving for rainy day.

Alberta, an oil rich Canadian province established its Heritage Trust Fund (HSTF) in 1976 with three main objectives “to save for the future, to strengthen or diversify the economy, and to improve the quality of life of Albertans. At inception, the fund received 30 per cent of Alberta’s non-renewable resource royalties. It was worth $17.5 billion as of March 31, 2014 according to the Alberta government’s 2013-2014 annual report.

Alaska’s Permanent Fund was established the same year as Alberta’s Heritage Fund. At least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state are placed in a permanent fund. The Fund grew from an initial investment of $734,000 in 1977 to approximately $53.7 billion as of July 9, 2015.

Texas’ Permanent School Fund is a sovereign wealth fund which serves to provide revenues for funding of public primary and secondary education in the US state; as of the end of fiscal 2014, the fund had an endowment of $36.3 billion.

After oil started booming from the Bakken Formation in North Dakota, state legislators established a sovereign wealth fund in 2010.The North Dakota Legacy Fund to help save and invest revenue from its oil sales, it is now worth $2.4Billion

Sovereign wealth funds as a vehicle for commodity rich states is an increasing phenomenon

The decision of the Federal Government of Nigeria to establish a National Sovereign Wealth Fund (NSWF) is by far one of the most significant economic policy decisions taken in recent times. The act establishing the National Sovereign Wealth Fund (NSWF) was signed into law in May 2011. The objective of the fund is to invest the savings gained on the difference between the budgeted and actual market prices for oil.

 

Although coming rather late for a commodity driven county like Nigeria, it’s a step in the right direction. At inception the fund was allocated $1billion as seed capital. While the fund is the third-largest in sub-Saharan Africa, after Botswana’s $6.9billion and Angola’s $5billion it still lags behind its peers in oil rich countries. Sadly, the fund has not received fresh funds since the government injected $1 billion in 2014.

Data from the office of the accountant general indicates that Ebonyi, Ekiti, Osun and Rivers states received N35 billion, N40billion, N46billion and N245 billion respectively from the federation account in year 2011. Data for 2012 also indicated similar amounts were received. The implication of this is that if these states have saved between 10%-30% of their monthly allocation they would have something to cushion the effect of the present cash crunch.

State legislators should pass laws that will mandate their various state governments to save a portion of their monthly allocation or revenue for the rainy day. The SWF, originally intended to counteract the boom and bust cycles of oil and commodity dependent economies like ours is a good platform that can help them in achieving this.

Today, as a country we have so much less to show for all the years of oil boom we have had. Our infrastructure gap is huge yet our savings is so lean and in most states there are no savings at all.

At the federal level the national assembly should pass laws that mandates the executive to compulsorily save every month, it is ludicrous that since the establishment of the country’s SWF with the seed capital, no fund has been contributed to it.

To actualize this, there has to be the political will to do it. Erstwhile Finance Minister Dr. Ngozi Okonjo-Iweala, blamed the country’s present economic situation on the zero political will of the immediate past government to save for the rainy day. In her speech in April 2016 at the George Washington University, Washington D.C. She said “In 2004 we saved $22 billion because the political will to do it was there. And when the 2008 /2009 crisis came, we were able to draw on those savings precisely to issue about a five per cent of GDP fiscal stimulus to the economy, and we never had to come to the Bank or the Fund. “This time around and this is the key now, you need not only to have the instrument, but you also need the political will. In my second time as a finance minister, from 2011 to 2015, we had the instrument, we had the means, we had done it before, but zero political will”.

Nothing should stand in of the way of both the federal and state government in seeing that they put everything in motion to actualize this. The executive and legislative arm of government should see this is an economic issue, SWFs act as stabilization funds during times of low revenue and this can promote economic development.

 

@jideolutuyi

 

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About Olajide Olutuyi

Father.Husband.Calgary Flames fan. Calgary Stampeders fan. Akure Sunshine stars fan. Supports conscious capitalism.Progressive conservative( supports sin taxes, low taxes and laissez-faire economy). Now listens to gospel and country. Former rap fan Believes in volunteering and community service as agents of developmental change. A lot of my time goes into community service, reading, encouraging people and most importantly God’s business. Loves culture , business start-ups and politics of both my home and adopted countries. This is my blog. The opinions and thoughts in my article are mine and I make no mistakes for having them. You may also find articles, news or opinions of others that I agree with on my blog. More information about my professional background and interests available on my LinkedIn page.
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