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Revenue Watch: Nigerian oil savings fund requires strong protections
Friday, 30 July 2010 16:03 | 
Gillies: "The politics of Nigeria call for a carefully safeguarded Fund"
To promote sustainable economic development, the government of Nigeria is considering the creation of a Sovereign Wealth Fund (SWF), a savings tool that could protect against the volatility of the country’s main revenue source: oil.
But, according to new analysis by the Revenue Watch Institute (RWI), Nigeria risks repeating patterns of weak economic governance and volatile spending unless its new Fund features certain safeguards.
Sovereign Wealth Funds enable resource rich countries to save windfall profits when commodity prices are high, and soften the negative impact of price volatility. As researcher and Nigeria expert Alexandra Gillies explains in the Revenue Watch analysis, 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 call for a carefully safeguarded Fund,” said Gillies. “Without strong and transparent governance, a new fund will end up as depleted as the current Excess Crude Account.”
Nigeria’s Excess Crude Account (ECA) was created to save windfall profits from periods of high oil prices. However, permissive governance structures have allowed extensive ad hoc withdrawals, reducing the ECA balance by almost 85%, or 16 billion dollars, in just 18 months. The account’s depletion is among the reasons why Nigeria’s National Economic Council and Ministry of Finance are considering alternative stabilization programs such as an SWF.
“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,” said Gillies.
The RWI analysis was released in partnership with Nigeria-based think tank Centre for the Study of Economies of Africa (CSEA). Menachem Katz, Director of CSEA said: “Stabilization of Nigeria’s economy against oil price volatility remains a crucial priority and a precursor for development and economic diversification.”
“Nigerians understand that we must diversify our economy and move past our unenviable legacy of oil dependence,” said RWI Nigeria Program Coordinator Dauda Garuba. “This Fund can help us build a stronger economic future, but it will only succeed if it is aligned with the constitution and accompanied by a sound policy framework.”