Difference Between Excess Crude Account, Sovereign Wealth Fund, And The CBN’s External Reserve
There’s so much chatter in Nigeria about the Excess Crude Account, Sovereign Wealth Fund, and the Central Bank of Nigeria’s External Reserve. While there’s always a conversation on the topic going on, most people have no real understanding of what each of them actually means, and so, make little to no informative input.
So What Is The Excess Crude Account Or Sovereign Wealth Fund?
First, Nigeria’s Excess Crude Account (ECA) is the same as the Sovereign Wealth Fund, meaning they’re both one and the same. This account was created to provide a financial backup for the Nigerian economy if ever the country’s primary source of income (oil) dwindles or experiences distress just as the 2015 fall in oil prices shook the country or if the tax revenues generated at any point in time are far lower than expected.
When things like this happen, the Excess Crude Account or Sovereign Wealth Fund is tapped into, causing the account’s value to reduce whenever the country experiences an economic downturn and to increase whenever things are going well for the country.
So in summary, the Excess Crude Account is literally a foreign savings account owned by the Nigerian Government.
So Where Does The Money Put Into The Excess Crude Account Come From?
First, it’s important to know that most of the crude oil that leaves Nigeria is of a premium grade because of its low sulfur content, and as a result, is officially sold above the benchmark OPEC price, except if an OFF-OPEC transaction is involved.
Now, this premium or excess as it may be that’s placed on the original amount of the official selling price is then separated from the final selling price and deposited in a foreign account owned by the Nigerian government, which is the Excess Crude Account or Sovereign Wealth Fund.
For instance, the Nigerian government’s Excess Crude account had a balance of $5.1 billion in 2005, which grew to over $20 billion by November 2008, and by June 2010, the Excess Crude Account had drastically crashed to less than $4 billion.
As at December 2017, a news about the Federal Government proposing to withdraw $1 billion dollars from the Excess Crude Account, showed that what was left in the account before withdrawal was just $2.3 billion Dollars, and what would remain after withdrawal should be around $1.3 billion Dollars.
What Is The Central Bank Of Nigeria’s External Reserve Then?
The Central Bank of Nigeria’s External Reserve is the total cash in hard currency that the Central Bank of Nigeria has in its coffers. Since the CBN’s primary job is to create monetary policies that ensure a stability in the exchange rate, it can, at its own discretion, pump in hard currency into the Nigerian economy to either revalue the currency or buy out hard currency from the market in a bid to devalue the currency, thus making the country’s exports to become less expensive, and in the process, make Nigeria more competitive in the global market.
It literally means if the price of a Naira to a Dollar is 400 Naira to $1, the CBN could pump in hard currency into the economy to try to revalue it to maybe 300 Naira to $1 or could devalue it by buying out more hard currency.
The revaluation move was seen to be done severally by the Central Bank of Nigeria in the year 2016 when Nigeria suffered a major economic downturn and experienced high inflation rates in its first economic recession in a very long time.
It is also very critical to know that the Central Bank of Nigeria’s external reserve cannot and must not be used for any other thing other than stabilizing the economy’s currency fluctuation. This means it cannot be used to pay salaries, build housing projects, or anything other than stabilising the Nigerian economy.
To Sum It Up
The Excess Crude Account or Sovereign Wealth Fund is equally as important as the Central Bank’s external reserves. Both work in separate ways to maintain in balance in the economy, and as such, are critical to the country’s growth if proper management is introduced.
But above all else, the CBN’s external reserve must never be manipulated for other gains, else, the country Nigeria as we know it could sink to point of total peril.
What are your thoughts on the difference between the Excess Crude Account, Sovereign Wealth Fund, and the Central Bank of Nigeria’s External Reserve? Let me know by leaving a comment below.