Economic Adjustment under the Babangida Administration
Afolabi A. Faramade
Background to Structural Adjustment
The oil boom of the 1970s brought with it fundamental changes in the Nigerian economy. The first is the heavy dependence of the economy on crude petroleum export as the main source of foreign exchange earnings and government revenue. By 1980, the oil sector provided about 80 percent of government revenue and over 96 per cent of export earnings. In addition, the competitiveness of the agricultural sector in the international market was eroded by over-valued naira exchange rate, inadequate pricing policies, rural-urban migration and neglect arising from the so-called oil syndrome.
The share of the agricultural sector in the Gross Domestic Product (GDP) fell rapidly from 40 per cent in the early 1970s to 20 per cent in 1980. Low productivity in the agricultural sector became so acute that Nigeria became heavily dependent on imported food and agro-allied industrial inputs. Furthermore, the structure of policy incentives and controls encouraged import-oriented production and consumption patterns with little incentives for non-oil exports. Moreover, by 1980, the public sector involvement in economic activities had become pervasive. A large number of parastatals were established and many of them became drainpipes which depleted the country’s resources. They depended heavily on government subvention to cover their operating losses.
From about mid – 1981, the world oil market began to collapse and as a result, an economic crisis emerged in Nigeria. Oil export as well as oil prices declined with a negative impact on government revenue. Crude oil export prices fell from $40 in 1981 to $14 in 1986.
Foreign exchange receipts fell from $21 billion in 1981 to $6 billion in 1986. Thus, external reserves fell sharply and foreign debts mounted in the face of rising imports. Government deficits widened and efforts to tackle the adverse developments created other problems such as economic depression, inflation and unemployment. By the end of 1985, it was obvious that the Nigerian economy was in the throes of a deep-seated crisis which required drastic measures.
In January 1986, the Babangida government adopted a program of far-reaching economic consequences in the budget for the year. During the second half of the year, the program was revised into an IMF and World Bank – supported Structural Adjustment Program (SAP).
Structural Adjustment Program: Overview
The aim of the Structural Adjustment Program was to effectively alter and restructure the consumption and production patterns of the economy, eliminate price distortions and reduce heavy dependence on the export of crude oil as well as imports of consumer and producer goods. The Structural Adjustment Program was introduced to achieve the following objectives:
- restructure and diversify the productive base of the economy in order to reduce dependence on the oil sector and on imports;
- achieve fiscal and balance of payments viability over the period;
- lay the basis for a sustainable non-inflationary or minimal inflationary growth, and
- lessen the dominance of unproductive investments in the public sector, improve the sector’s efficiency and intensify the growth potential of the private sector.
The main policy instruments of the adjustment program include:
- the adoption of a realistic exchange rate policy coupled with the liberalization of the external trade and payments systems;
- monetary and credit restraint;
- adoption of appropriate pricing policies in all sectors with greater reliance on market forces and reduction in complex administrative controls;
- further rationalisation and restructuring of public expenditures;
- privatisation and commercialisation of public sector enterprises; and
- debt rescheduling and debt conversion.
Appraisal of the Structural Adjustment Program
The various economic policy measures– introduced under the Structural Adjustment Program helped to stem the drift and apparent hopelessness which characterised the Nigerian economy prior to the adoption of the program.
Some of the major benefits of the program are in the areas of increased domestic output; deregulation of the economy; rural and social transformation; and increase in external reserves.
During the period under review (1986 – 1993), the GDP increased, recording an average annual growth rate of about 3 per cent. Both agricultural and industrial production contributed to the increase in domestic output during the period. The index of agricultural production which increased on average by only 0.4 per cent a year between 1981 and 1985, recorded an annual growth rate of 2.6 percent during the program. Similarly, the growth rate in manufacturing production averaged 14.5 per cent during the period, compared with 1.4 per cent in the preadjustment period, 1981 – 1985.
The deregulation of the economy increased efficiency in resource allocation in both the public and private sectors. With the deregulation of the naira exchange rate and the substantial depreciation that accompanied it, the wide margins between the parallel and the official exchange rates narrowed down.
In addition, economic deregulation removed all the administrative controls and bottlenecks associated with trade and foreign exchange transactions. This provided a relief to all categories of foreign exchange users, particularly the business sectors which had easy access to foreign exchange compared with the pre-adjustment regime of foreign exchange rationing through import licensing. The removal of bureaucratic controls eliminated problems such as frustration and delays in processing import license and foreign exchange applications as well as corrupt practices associated with such transactions. Also, exchange deregulation encouraged the inflow of foreign exchange from non-official sources. In the same vein, the deregulation of interest rates had a favourable impact on the economy as it stimulated keen competition among banks for deposits.
The Structural Adjustment Program succeeded, in raising the level of agricultural production. The policy measures as they affected agriculture included among other things abolition of the commodity boards system which served to tax agriculture; export trade liberalisation and retention of foreign exchange earnings by exporters. Consequently, investors began to see agriculture especially production for export, as a viable venture. The output of agricultural export crops, especially cocoa, cotton, rubber, groundnuts, palm-produce, ginger and coffee was stimulated by the sharp increase in farmgate prices following Naira depreciation. The development encouraged farmers to embark on rehabilitation of abandoned farms. The total volume of agricultural exports increased substantially while the rural farmers enjoyed an unprecedented boom. In a nutshell, the proscription of the commodity boards, removal of price distortions and the exchange rate adjustment created an attractive environment which encouraged farmers to boost production.
In the rural sector, drastic transformation was recorded through the activities of the Directorate of Food, Roads and Rural Infrastructure (DFRRI). The agency invested heavily in the construction of rural feeder roads, provision of potable water and rural electrification through funds made available from the proceeds of the removal of oil subsidy and from Foreign Exchange Market (FEM). These developments reversed the rural – urban migration which featured prominently in the pre-adjustment period.
In the industrial sector, capacity utilisation was enhanced in a number of industries, especially those that were less dependent on imported inputs. Some industrial enterprises such as paper manufacturing, beer brewing, textiles, vegetable oil, paints and cement recorded significant increases in capacity utilisation. On the other hand, there were declines in capacity utilisation in industries which were heavily dependent on imports such as motor vehicle assembly and electronic equipment manufacture.
A significant development in the manufacturing sector was the steady growth in the volume of locally sourced raw materials in such industries as meat and meat products, beer and stout, textiles, plastic products, paints and structural metal products.
On the external sector, there was a substantial return of international confidence to the economy. The country became credit worthy while external reserves grew with improvement in the balance of payment. The Structural Adjustment Program provided a favourable environment for debt rescheduling and refinancing arrangements with attendant ease of the debt service burden.
However, it–must be pointed out that the implementation of Structural Adjustment Program had some adverse effects, especially the high rate of price inflation in the economy. Following the depreciation of the naira exchange rate, prices of imported goods rose sharply. The general increase in the price level worsened the standard of living of the people, particularly the low and fixed income groups and the unemployed.
As part of policy measures to cushion the adverse effects of SAP, the Babangida administration established the People’s Bank of Nigeria in 1990. The bank was set up to provide credit to underprivileged and disadvantaged Nigerians who could not benefit from the services of conventional banks due to their inability to provide collateral. Today, the People’s Bank of Nigeria and the Community Banks are part of the enduring legacies of the Babangida regime.
On the whole, the Structural Adjustment Program must be seen as a worthwhile policy package in the context of Nigeria’s contemporary economic problems. It was the most radical economic program ever to be launched by any government in Nigeria since independence.
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