Within the last decade, crises in emerging markets have not only underscored the importance of maintaining adequate external reserves, it has also underscored the need to identify its sustainability. In attempts to achieve macroeconomic stabilisation, Nigeria, like other developing economies, have accumulated substantial foreign currency reserves in recent years.
It has been argued that the best use of surplus reserves is effective management to maximise profits rather than for liquidity sake. Hence, Sovereign Wealth Funds (SWFs) have a long history of using foreign exchange reserves for profit-seeking investment. This is why SWFs have emerged as a popular institutional blueprint for more active external reserves management.
An overview of SWFs: First established in Kuwait, now a global phenomenon
Before the dominance and adoption of the U.S dollar as a vehicle currency, gold (under the gold standard) was the major component of external reserves as the means of settling international debts.
Now economies of the world have adopted the Guidotti rule, which stipulates that developing countries should hold enough reserves to cover all foreign debts that is short-term or maturing within one year.
However, concerns have been raised about how institutions in the “investing” and “receiving” countries may need to adapt. The issues range from transparent investment approach, information on the type and amounts of assets held, governance structured and how decisions are made on the fund have been mooted as major concerns.
Similarly, critics have expressed worry over currency accumulations managed by the State, citing tendencies of vulnerability to politically driven investment decisions, cronyism, and even corruption.
Nigeria’s Sovereign Wealth Fund: How Reserves maybe affected?
In Nigeria, there are two Sovereign Wealth Funds: the Excess Crude Account (ECA) and the Nigeria Sovereign Investment Authority (NSIA). Note that these two are funded by the savings earned when oil prices are at peak.
Hence, as a larger chunk of revenue is appropriated for ECA and NSIA rise, external reserves are likely to fall. For instance, in 2018, the National Economic Council (NEC) reportedly approved fresh injection of $650m from the reserves into SWF, and that improved the SWF to $2.15 bn.
Nigeria has a Sovereign Wealth Fund established which by the Nigeria Sovereign Investment Authority (NSIA) Act 2011. Specifically, the SWF was reportedly established to address the controversies surrounding the Excess Crude Account (ECA).
The fund is usually expected to generate revenue to meet budget shortfalls in the future, provide dedicated funding for development of infrastructure and keep some savings for future generations.
Is the International Monetary Fund’s (IMF) ranking truly flawed?
However, the Managing Director, Nigerian Sovereign Investments Authority (NSIA), Mr. Uche Orji, faulted the IMF’s ranking, describing it as a flippant piece of work. According to him, the poor ranking is due to Nigeria’s policy to use part of its SWFs’ funds in domestic investment.
IMF’s Bluff: Should it be celebrated?
Just days after the IMF’s controversial ranking, the IMF’s Senior Resident Representative and Mission Chief for Nigeria, Amine Mati, reportedly tried to provide more explanation on the controversial report.
“In view of recent local media reports, I would like to clarify that the reference to the Sovereign Wealth Funds (SWF) included in Figure 2.16 of the IMF’s Fiscal Monitor showing a low ranking for Nigeria does not refer to the Nigerian Sovereign Investment Authority.”
There have also been reported cases of accruals being shared every month during the Federation Accounts Allocation Committee (FAAC) across the three tiers of governments in Nigeria.
Way Forward: IMF can’t be ignored
It was recently reported that Nigeria’s external debt stood at $25.2 billion. With external reserves at $44.7 billion, it suggests Nigeria’s external debt is 56% of foreign reserves.
Also, Nigeria’s Debt-GDP ratio, which reportedly stood at 21.1 percent in 2018, appears good. Yet, there has been concern that the economy is treading a risky path.
As recalcitrant as IMF’s fiscal policy stance may appear, corruption and policy somersaults as noted by the Bretton woods organisation, are major banes that must be addressed if the Nigerian economy must fulfil its growth potentials.
Download Nairametrics App for breaking news and market intelligence.