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Nigeria plans big boost to sovereign fund

Nigerian Finance Minister Ngozi Okonjo-Iweala is trying to convince state governors to back the government’s new sovereign wealth fund.

ARBEN CELI/REUTERS

Nigeria's government hopes to expand its new sovereign wealth fund by at least $1-billion (U.S.) a year, despite lingering opposition from the country's powerful state governors.

The fund was officially launched this week when its management team took office. It is designed to safeguard oil revenues for future generations, and cushion Africa's second-largest economy against external shocks.

Unlike many Opec members, Nigeria has never had a sovereign fund, and decades of high oil production have failed to result in any significant savings.

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Seed capital for the new fund was limited to $1-billion to appease the 36 state governors, who feared a cut in their share of national revenues. By law, Nigeria's income is shared between the federal government, states and local authorities.

However, Ngozi Okonjo-Iweala, the finance minister, told the Financial Times that the federal government aimed to transfer up to $100-million a month to the fund.

"Even if it's just the federal government and we are putting in $1-billion a year, within the next five years the fund will be $6-billion," she said in an interview in Abuja. "Several states have told us they will join us, and hopefully more will follow. We have to build their trust."

With oil prices far above the $72-a-barrel benchmark in the budget, bigger savings should be possible. But finances remain squeezed in part because the country's fuel subsidy program ballooned to $14-billion last year amid massive fraud. Though the subsidy was partially scrapped in January, its cost this year remains high due to arrears payments and continued waste.

In June, the presidency mooted a $4-billion supplementary budget to cover the subsidy. In addition, theft of up to 400,000 barrels of oil a day could be costing the government and oil companies more than $1-billion a month.

The fund has three components: a future generations fund, a stabilization fund and an infrastructure fund. Each will constitute at least 20 per cent of the total fund, and will require separate investment strategies. Uche Orji, an investment banker with U.S. and European experience, will manage the fund.

"This is a huge event for Nigeria," said Mrs. Okonjo-Iweala. "It sends a signal that we are willing to save our resources and husband [them] well. It will also show that we have a means to stabilize the economy that is underpinned by law."

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Samir Gadio, emerging markets strategist at Standard Bank, said that while the fund was symbolic, the proposed $6-billion savings by 2017 would only represent up to 2 per cent of gross domestic product, while the average ratio of fiscal savings to GDP in big oil economies was close to 65 per cent.

"The country will remain vulnerable to oil boom-and-bust cycles unless a more comprehensive framework to accumulate large fiscal savings emerges and there is some fiscal restraint," he said.

The new fund will initially run alongside the existing savings account, known as the Excess Crude Account, which was set up during Mrs. Okonjo-Iweala's first stint as finance minister in 2004. Revenues above the benchmark oil price are supposed to flow into the account. But there is little to stop it being raided, and little disclosure on spending.

From $20-billion in 2007, the Excess Crude Account fell to $4-billion last year. It has since risen to about $8-billion. Mrs. Okonjo-Iweala said the government hoped to boost the account to $10-billion by next March, which should be enough to "act as a buffer" for two or three months in case of an economic shock.

The steady buildup of the account was proof that the country was not broke, as some reports have suggested, the minister said. At the same time, she is targeting foreign exchange reserves of $50-billion within six months – up from $41-billion now.

"Then we will really be in good shape," she added.

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