Lagos: Nigeria risks repeating patterns of weak economic governance and volatile spending, unless its new Sovereign Wealth Fund features certain safeguards to promote sustainable economic development for which the fund is to be created. This was contained in a press release this week by the Revenue Watch Institute, New York, United States of America in partnership with Nigeria-based think tank, the Centre for the Study of Economies of Africa.

According to Menachem Katz, Director of CSEA, "Stabilisation of Nigeria's economy against oil price volatility remains a crucial priority and a precursor for development and economic diversification."

It would be recalled that Nigeria's Excess Crude Account was created to save windfall profits from periods of high oil prices. However, permissive governance structures have allowed extensive adhoc withdrawals, reducing the account balance by almost 85 per cent, or $16 billion in 18 months.

The account's depletion is among the reasons why Nigeria's National Economic Council and Ministry of Finance are considering alternative stabilisation programmes like SWF. The fund enables resource rich countries to save windfall profits when commodity prices are high, and soften the negative impact of price volatility.

Around 80 per cent of Nigeria's public revenues come from oil, leaving the government dependent on a highly volatile income stream. Public expenditures have tended to follow the boom and bust cycles of the oil market. This contributes to damaging "resource curse" effects including indebtedness, currency instability, inflation, weak growth rates and limited economic diversification.

A researcher and Nigeria expert, Alexandra Gillies of the RW1 explained that if Nigeria's leaders are to create a fund that is more effective than existing fiscal policies, the fund needs a solid legal standing, binding rules regarding the inflow and outflow of funds, and strict transparency requirements.

"The politics of Nigeria calls for a carefully safeguarded fund. Without strong and transparent governance, a new fund will end up as depleted as the current Excess Crude Account. If the fund has a clearly-defined relationship to the constitution and operates transparently, Nigeria can avoid the longstanding challenges to savings that arise from competition for resources among the federal, state and local governments," he said.

He said the policy brief did not address whether the fund is the ideal type of fund, nor how one should be structured. "These are crucial questions which deserve careful consideration. We make three basic governance recommendations legal standing, binding rules and transparency - that will bolster the effectiveness and sustainability of any fund, regardless of its specific
nature."

Former President Olusegun Obasanjo's economic team introduced the oil benchmark price and the Excess Crude Account in 2003. By setting a conservative oil benchmark price and saving the revenues received over that price in order to discontinue the destructive pattern of volatile spending. Gillies said: "After an encouraging start (including the repayment of Nigeria's external debt), the ECA has failed to serve its intended purpose. Even with heavy outflows, the ECA balance reached $20 billion in late 2008 following a historic oil price boom. But policymakers have exhausted these savings, and the current balance of $3.2billion leaves neither safeguard against future price shocks nor any resources for strategic long-term investment.

"Moreover,the withdrawals during recent years have not increased the quality or quantity of infrastructure, even though most outflows were designated for this purpose. National power supply, for example, remains below 4000MW despite an excess of $14 billion in ECA spending on the sector by the last two administrations. Nigerians are familiar with the wastage of windfalls; for instance, similar problems occurred in 1992, when the Middle East conflict caused prices to spike."

Healleged that Obasanjo's withdrawals from the ECA were ad hoc and discretionary, rather than components of a long-term developmentplan. "His withdrawals included at least $8 billion for independent power plants, and $10 billion to compensate for overly optimistic budget revenue projections. These withdrawals, and the flimsiness of their justification,accelerated as the 2007 elections approached and the former president faced political battles and shorter horizons."

He also said the late President Umaru Yar'Adua withdrew funds to appease state governors demanding access to the ECA balance. "Federal and state authorities reached a so-called gentlemen's agreement that permitted 80 per cent of the inflows to be distributed across the three levels of government. Since then, the balance has quickly been depleted, and the governors enjoy regular transfers from the country's "savings."

President Goodluck Jonathan has continued this practice - authorizing a $2 billion outlay was one of his first actions as acting President. These withdrawals contribute to damaging instability in state-level incomes. For instance, Bayelsa State's average monthly allocation fell from N9.8 trillion in 2008 to N5.1 trillion in 2009,3 a fluctuation that illustrates how budget levels still follow price volatility."

Gillies explained that for the fund to be successful, its balance must be protected from the short-term political pressures to spend. The rules establishing the fund must bind the hands of the current leader, and be seen to be binding on the successors as well."In Nigeria, where political power changes frequently, a leader will be more inclined to save if assured that the next leader will also be bound by prudence. The primary shortcoming of the ECA is the failure to provide these kinds of protections and guarantees.

The political pressures which drove this underperformance will always be present, especially given the very fluid and competitive nature of Nigerian politics. Savings will remain vulnerable and require careful protection.The ECA has lacked such protections. While other factors have contributed to poor performance, such as consistently unrealistic oil revenue projections, weak and malleable governance structures have played the decisive role."