Lagos: Nigeria’s position as the country with the second largest Foreign Exchange (FX) reserves in Sub-Saharan Africa (behind South Africa), is in danger, as Angola is set to overtake it in the near future. Angola, which produced around 1.7 million barrels per day (mbpd) of crude oil in 2011, compared to 2.1 mbpd for Nigeria, has managed to increase its FX reserves by 132.4 percent, from $12.5 billion in October 2009 to $33.1 billion in May 2012. In the same period (2009 – 2012) Nigeria’s FX reserves fell by 16.4 percent, moving from $45 billion to $37.6 billion.

“The difference between Angola and Nigeria is obviously the direction in fiscal policy,” Samir Gadio, emerging markets strategist at Standard Bank London, said in an e-mail reply.

“Unless the Sovereign Wealth Fund (SWF) is effectively launched in the near term in Nigeria, and fiscal excesses and inefficiencies (including the fuel subsidy) seriously addressed, Angola will probably overtake Nigeria as the Sub-Saharan Africa country with the largest FX reserves, excluding South Africa.”

Gadio notes that if fiscal savings in the Excess Crude Account (ECA) had fully resumed in 2010 after the global economic crisis and other structural imbalances had been tackled, Nigeria’s aggregate FX reserves would be hovering around $60-70 billion today, suggesting leakages of over $30 billion.

“This would have helped smooth the boom and bust oil cycles, restored Naira (NGN) confidence and ensured a more viable FX framework,” he said.

The prospect of Angola overtaking Nigeria in reserve accumulation is not just symbolic, but highlights the damage the fuel subsidy scam and other fiscal leakages are having on the country.

A detailed report by the House of Representatives ad-hoc committee on fuel subsidy, recently alleged fraud totaling the equivalent of N1.07 trillion (about $ 6.8billion). Payments totaling N2.6 trillion ($16 billion) in fuel subsidies were made in 2011 through a fraudulent process, the committee said.

The ECA which contained $20 billion in 2007 now holds around $5 billion, despite years of record oil prices. The level of the external reserves is important for macro-economic stability because the Central Bank of Nigeria (CBN) uses the reserves to defend the local currency, and for attaining its price stability mandate.

“The CBN has been increasing its dollar sales at the bi-weekly auction to $300 million from 04 June and to $400 million from 13 June,” FBN capital analysts wrote in a note to clients on June 15.

Analysts say the CBN still has some ammunition ($37.2 billion of overall FX reserves, including CBN reserves), that can be used to support the Naira, to prevent a disorderly depreciation of the exchange rate.

However, they say if aggregate reserves were to fall to $30 billion, on the back of falling oil prices, a devaluation would probably become unavoidable.

Oil prices have slipped in recent months, from $110 a barrel to below $80 a barrel on Monday.

“For the moment, it is the external risks that loom large,” said Razia Khan, in an email reply to BusinessDay. “Even emerging from a period of relative strength in oil prices, Nigeria’s FX reserves have risen only very modestly to $37 billion. In view of global risks, and Nigeria’s new susceptibility to potential outflows, much still needs to be done to rebuild the economy’s external buffers.”

The approval by state governors of the federal government’s proposal to launch the SWF would probably help forestall that scenario by reducing leakages and bringing increased confidence to the local currency.

“The council has agreed with the federal government to go ahead to implement the Nigeria Sovereign Investment Authority with an initial fund of $1 billion,” Rivers State Governor Rotimi Amaechi told reporters yesterday.

The SWF is to replace the ECA, where Nigeria saves oil revenues over a benchmark budget price, currently $72 a barrel. Nigeria was one of only three OPEC member states not to have a SWF.

The government has said the fund will provide a firmer legal basis to ring fence Nigeria’s oil savings. It has three main aims: saving money for future generations, providing financing for badly needed infrastructure, and starting a stabilization fund to defend the economy against commodity price shocks.