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.
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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.
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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.
See Also: Why African Nations Are Poor, And Others Are Wealthy
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.
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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.
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What effect will the withdrawal of $1b from the eca account have on Nigerian and will money come to Nigeria in cash or how?
On the CBN external reserve, can any sitting govt order its withdrawal to serve other purposes and what is the hype about the current growth of Nigeria external reserve?
Hi Idowu,
News on its intended use is all over the internet. You can google that.
As for its final use, we can only hope it is really used for what they claim they want to use it for, since transparency in Nigeria is almost non-existent.
Withdrawals from the ECA can’t be in cash, but would always go through the banking system.
As for withdrawing the CBN’s external reserves for other uses, the law doesn’t allow that.
But let’s hope we never reach a point where the Nigerian government decides to use the CBN’s external reserves for reasons it was never meant for.
Thank you for your comment.
“As for withdrawing the CBN’s external reserves for other uses, the law doesn’t allow that.”
Good commendable explanation by Stan, BUT the above MAY not be correct. Its not about the statutory law, but economic law.
Naira value of the ext reserv is Printed in Paper Naira and has been swapped and shared into the economy. So, if you spend Ext reserv, its like chopping your collateral of a loan facility.
Its there to say, if you bring back the paper Naira CBN gave you, CBN has the exact/enough dollar paper to always give back to you.
Also, inflation will arise, as you are introducing double fictitous money. The paper earlier printed will have no backing or value. See Mozambique, Zimbabwe, Argentina,
Ext reser in the capital account, is recorded as an asset, you have to look at the corresponding liabilities tied to it.
Final Ext reserv = Book Ext reserv + ECA, etc
Just my thoughts!!
Thank you for the contribution, Ooawe.
Thank you immensely Stan for this clarification. i am better enlightened. however what i still found confusing is on the issue of revaluation and devaluation- I mean how pumping in more hard currency into the economy can reevaluate the Naira and how buying the hard currency out can devalue the Naira. please a little more explanation may help my misunderstanding.
Thank you as always.
Hi Austin,
It may be better for you to do a google search for in-depth information, as it is quite a lot to type in here.
Maybe I’ll write an article about it at some point.
Thank you for asking.
You said something like,
“when Nigeria got into recession for the first time in a long while.”
The statement is kind of contradictory, is it the first time or it’s just been a long time since the last time?
Hi Aaron.
Thank you for pointing that out.
Nigeria was last in an economic recession in 1991, 1987, 1984, and 1982.
This has been the worst so far.
Thank you for the enlightenment. Startuptipsdaily’s posts has always been a rich source of information to me on many counts. I rate it number one in Nigeria on business/startup information and education.
Wish you have a Mentorship business training platform or so. I would love to participate even if I have to pay.
Thank you for the kind words, Okasor.
When we have a mentorship program we’ll do well to let everyone know.
Thank you.
Really appreciate the information on difference between Excess Crude Oil, Sovereign Wealth Fund and Central Bank External Reserves. i will like to know more about how to access agric loan
Thank you for reading, Abalagada.
Concerning Agric loans, we’re posting grant opportunities every two weeks on the blog.
Do look out for them.
Thank you.
interesting post