Sovereign Wealth Fund: Between Legality and Desirability

Sovereign Wealth Fund: Between Legality and Desirability

Saturday, September 20, 2014 10:17 pm

By Oluwatoba Oguntuase

By Tuesday, September 23, Nigeria’s Supreme Court will be entertaining a suit filed by the 36 states of the federation against the federal government on the legality of the Nigeria’s Sovereign Wealth Fund (SWF). But the legality and desirability of the institution of a SWF in Nigeria are not one and the same thing, the author argues here

The legality and desirability of the institution of a Sovereign Wealth Fund (SWF) in Nigeria are not one and the same thing. While determination of the former is an exclusive preserve of the law court and at the moment sub judice, the latter which is not a subject of dispute before any adjudicating body is, however, the focus of this piece.

SWFs the world over are attaining a position of universal prominence since the 2008 global economic recession when they played critical stabilizing role, and their managers, now widely classified among the new “Movers and Shakers” of the post-crisis world economic order, though may share common prospects; they essentially are faced with divergent challenges across different climes – Nigeria’s experience is a case in point.

The Nigeria Sovereign Investment Authority (NSIA), a body established in May 2011 by an act of parliament to manage the nation’s SWF is presently preparing its legal team to defend its constitutionality, and hence legality, before the Supreme Court come September 23. This, notably, is happening at a time when other SWF managers across the globe are busy preparing for two upcoming important events. First is the Institute Fund Summit 2014 Europe, an international event organized by the Las Vegas-based global consultancy, the Sovereign Wealth Fund Institute (SWFI), and taking place in London from October 27 – 28 while the second; the Sixth Annual Meeting of the International Forum of Sovereign Wealth Funds (IFSWF) will hold from November 19 – 20 in Doha, Qatar.

It is instructive to note that the NSIA fully joined membership of the IFSWF on 28 May 2014 alongside the Russian Direct Investment Fund (RDIF), by ratifying the Santiago Principles (SP). The SP is a set of 24 guidelines developed through a joint effort between the International Monetary Fund (IMF) and the International Working Group of Sovereign Wealth Funds; as proposed in the 2008 Kuwait Declaration; to provide a framework of rules on “appropriate governance and accountability arrangements and sound, prudent conduct of investment practices.”

Okonjo-Iweala: Finance Minister

Okonjo-Iweala: Finance Minister

Beyond the legal tussle surrounding the Nigeria’s SWF, certain pertinent questions beg for answers: Is a SWF needed this time by the country? Are there pressing social and economic reasons why we should keep maintaining the fund? Is the NSIA’s much-maligned legal status worth being overlooked for its acclaimed benefits?

The general purpose for establishing a SWF by any government should first be put in proper perspective. In a 2010 post by Forbes, they are likened to a kind of economic insulator. But common views regard them as special purpose investment vehicles for government’s surplus assets. The SWFI defines a SWF as “state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” The Nigeria’s SWF is oil-export based.

Since 2004, revenue earned by the federation from the sale of crude at international oil price in excess of budgeted oil benchmark, has ceased to be shared among the federal government and the 36 federating units as more money to burn, but instead was initially saved in an Excess Crude Account (ECA) to act as buffer against future systemic risk, especially oil-related risk.

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