As we enter a new electoral cycle, our need to save off a transgenerational (wasting) asset (our crude oil exports) is as urgent as the requirement to break away from the procyclical spending patterns that have been responsible for our severe economic troughs and peak over the years.
1Malaysia Development Berhad (1MDB) was recently back in the news. Mid-February, Malaysia’s immediate past prime minister, Najib Razak, was in court in connection with charges, including criminal breach of trust and money laundering, associated with the collapse of what was once billed as the country’s strategic development company. A successor to Malaysia’s sovereign wealth fund, the Terengganu Investment Authority (TIA), 1MDB was set up to support strategic initiatives critical to the country’s long-term development aspirations.
It appears to have supported more than these, however. Four years ago, it emerged that the funds in the company (about US$4.5 billion) had found other less-than-honourable outlets. The more glamourous of this included financing The Wolf of Wall Street, a Hollywood black comedy, about, well, crime. The funds were put to more traditional uses, too, such as sustaining jet-set lifestyles, buying gems, art, private jets, and the “Equanimity”, a 300-foot ship with a guide price of US$130 million.
As an example of the uses to which a sovereign wealth fund could be put, 1MDB is clearly in the “how not to do so” category. It is in this sense, a very narrow description of how improper governance arrangements conduce to the diversion of scarce resources away from projects designed to drive growth and development, and into lining the pockets of the rich and crooked. Properly run, though, sovereign wealth funds could add value to an economy. Under the “how to” rubric, The Government Pension Fund of Norway is the star performer. It currently has more than US$1 trillion of assets under management. It currently accounts for 1.3 per cent of global equity. And it was set up only in 1990, to invest surplus funds from Norway’s petroleum sector (which is why it is also called the “Oil Fund”).
Extractive resources, especially, ones with strong export markets, and which earn steady flows of foreign currency are not always healthy for economies. As the quantity of foreign exchange inflows from their operations rise, relative to local currencies, the latter begins to appreciate. A strong currency often means that the economy is now able to afford the luxuries of life: With governments becoming enamoured of and able to construct pharaonic infrastructure projects (bridges that go nowhere, and buildings that simply reach for the skies); a newly emerging middle class suddenly finding that it can pay for foreign holidays in expensive places, send kids to school abroad, and buy bigger cars. Input costs, including labour, also rise, unfortunately. So domestic prices rise. The local economy then ceases to be competitive both internally and externally. In other words, it becomes addicted to its export.
In the Nigerian case, though, the downsides from the export of crude oil reach further. Conceptually, there’s an ethical consideration to our crude oil exploration and export. It is a wasting asset – the more we extract of it, the less there is in the ground. It is also a trans-generational asset. All of it should technically belong to every Nigerian – alive and yet to be born. To the extent that proceeds from the export of crude oil drives growth and development in the country that future Nigerians will benefit from, this transgenerational need is quite readily met. However, if the net effect of primary produce export is to bring about a “resource curse”, as has been the case, then there is a strong argument for sterilising part of the earnings from our crude oil export in an investment vehicle whose returns ensure that the pot will be much bigger tomorrow than it currently is.
The design of a proper “rainy day” fund ought, therefore, to be at the top of the agenda over the next electoral cycle. Essentially this fund should be one that finds efficient construction within the ambit of our Constitution. It would help strengthen our public expenditure management framework by moving on to a sustainable basis.
This, though, is but one of the arguments for a sovereign wealth fund. Just as important for oil producing countries is the pro-cyclicality of domestic spending that has come to follow from the vicissitudes of the global market for crude oil. As the world’s energy source of choice, oil prices rise as the global economy grows, and falls once global output contracts. Oil exporters, thus, see strong oil receipts during boom times. And the tap turns into a trickle during downturns. Over the years, we have spent hand-over-fist in booms times, only to twiddle our thumbs when the going turns bad.
To break this pro-cyclical spending pattern, by saving for the rainy day, cannot therefore be a bad thing. Our attempt at doing this, the Excess Crude Account (ECA), while not a bad idea, at least not in the way the 1MDB has turned out, is not yet a good one. Its chances of good governance is sorely hampered by structural constraints: It was always going to be hard to save off export earnings when the Constitution mandates prompt sharing of all national incomes.
As we enter a new electoral cycle, our need to save off a transgenerational (wasting) asset (our crude oil exports) is as urgent as the requirement to break away from the procyclical spending patterns that have been responsible for our severe economic troughs and peak over the years. Both of these needs are no less “to do” as is the need to finally break the resource curse that we have suffered from since the early 1970s.
The design of a proper “rainy day” fund ought, therefore, to be at the top of the agenda over the next electoral cycle. Essentially this fund should be one that finds efficient construction within the ambit of our Constitution. It would help strengthen our public expenditure management framework by moving on to a sustainable basis.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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