ECONOMIC POLICIES AND PROCESSES
At the eve of the inception of the Babangida Administration in August 1985, the Nigerian economy was in a very bad shape. Five years earlier, and precisely from 1981, the economy had begun to show signs of serious deterioration and economic structural defects. This was triggered off by the collapse of the world market price as well as the decline in the volume of crude oil exports. There was world-wide economic recession giving rise to glut in the world market for crude oil. Nigeria depended almost completely on the export of crude oil for foreign exchange. It was this development which rendered the country increasingly unable to earn enough foreign exchange to sustain what, by that time, had become a flood of imports and to meet other international financial obligations, especially external debt servicing. For most of the period between 1981 and 1985, total output in the economy, as measured by the Gross Domestic Product (GDP), registered negative growth rates and all the indicators of the major sectors of the economy signaled serious deterioration in the country’s economic performance.
Specifically, the following structural defects became manifest in the economy by August 1985:
(a)Emergence of crude petroleum production as the dominant economic activity, turning the economy virtually into a single product one, on which the country relied for the bulk of government revenue and foreign exchange, with the great vulnerability that this involved.
(b) Huge decline in domestic production coupled with huge acceleration in population growth;
(c) Failure of agriculture (because of its rapid decline) to play the needed vital developmental role of providing sufficient foodstuff for the country’s growing popu !at ion;
(d) Huge dependence on imports for consumer goods, raw materials and machinery for industry;
(e) The vulnerable and fragile structure of manufacturing industry arising from its heavy import- dependence;
(f) Growing scarcity of employment opportunities for the country’s growing labour force;
(g) Absence of effective diversification the economy’s productive base;
(h) Over-valuation of the exchange rate of the Nigerian currency (Naira) which, as a consequence stimulated imports and depressed exports, and thereby causing huge balance of payments deficits;
(i) Accumulation of huge external debt, the servicing and repayment of which created a heavy burden on the economy;
(j) An unduly disproportionate role vise-a-vise the country’s productive base played by the public sector with hardly concrete result to justify such a role in the GDP.
It was against the background of the above problems and weaknesses of the economy, the IBB Administration on assuming leadership, took to certain emergency measures to revamp it, On October 1, 1985 the Armed Forces Ruling Council (AFRC) declared a state of National Economic Emergency for fifteen months, enforced through the National Economic Emergency Powers Decree, 1985. Under this Decree, The President was empowered to introduce measures as deemed necessary to reorganise, stimulate, reactivate and improve the productive sectors of the economy, especially the agricultural and industrial sectors; to encourage viable projects with a view to reactivating the economy; to actively promote export of primary commodities and manufactures; to conserve foreign exchange; to provide incentives for domestic and foreign investment; and to stimulate employment.
More specifically, in the exercise of the above powers, the President ordered deductions from wages, salaries and other incomes of all workers at source, ranging between 2 and 15 percent, payable into an Economic Recovery Fund at the Central Bank of Nigeria to be managed by the Federal Director of Budget. In addition, a total ban was imposed on the importation of certain products such as rice, maize and wheat flour.
Despite the above measures, the economic situation did not markedly improve and for this reason, measures were articulated in the 1986 budget used as framework for economic restructuring. These measures were later, by July 1986 developed, amplified and clarified into a formal Structural Adjustment Program (SAP). The program was supported by the International Monetary Fund (IMF). As SAP and its implementation became the socio-economic lifeline of the Babangida Administration in the past four years, it is appropriate to assess the performance of the economy in the context of the implementation of Structural Adjustment Program (SAP).
Essentially, SAP is a nationally articulated and self-imposed economic recovery program. It was decided upon by the IBB leadership in preference to an IMF standby loan facility which on political grounds, was turned down by the Nigerian people because of what appeared to be burdensome economic conditions and implications of political subservience attached to such loan facility. But in essence, the policy measures of SAP are as rigorous as, and indeed much more rigorous than those of the IMF conditionalities, at least going by the experience of countries where Programs of economic recovery have been adopted largely to satisfy the conditions of IMF standby loans.
The policy measures of SAP included the following, among others:
(a) Fiscal and monetary measures to stimulate domestic production;
(b) Measures intended to diversify the export structure by encouraging production of non-oil exports;
(c) Measures to reduce the external dependence of the economy, especially of manufacturing through the local sourcing of raw materials;
(d) Measures to restructure and broaden the production base of the economy and to reduce its dependence on the oil sector;
(e) Measures to eliminate administrative controls, especially the notorious import licensing, and allowing market forces of demand and supply to play a much greater role in the allocation of resources;
(f) Measures to achieve appropriate pricing policies of goods and services by the removal of subsidies, especially those for petroleum products and certain social services such as education, health, communication and transport industries;
(g) Measures to rationalise public enterprises through divestment, commercialisation and privatisation of such enterprises;
(h) Measures to reduce drastically the external debt burden through debt rescheduling and strategies of debt equity swap as well as to encourage capital inflow;
(i) Measures to correct gross over-valuation of the Naira exchange through the setting up of the Foreign Exchange Market (FEM);
(j) Measures to rationalise and restructure the tariff system in order to assist and promote industrial growth and diversification.
The foregoing measures of Structural Adjustment Program have now been implemented for a period of about three years. The effects have been a mixture of economic boom, especially with a restructuring and re-orientation of economic activities, economic productions and consumption patterns on the one hand, and of social pains especially with hardship for the most vulnerable groups in the society on the other. It is important to point out that Structural Adjustment Program in any economy is a medium to long-term affair and it will therefore be premature to try to evaluate its full impact on the economy over a period of just three years. Nevertheless, by looking at results so far in terms of the objectives of the program and effects on the economy in general it is possible to make some tentative evaluation.
On the positive side, SAP has brought with it gains and benefits to the economy as a whole. There is no doubt about the fact that through it, a much greater degree of efficiency in resource allocation throughout the economy has been achieved, with the shift of policy in favour of market forces. It has been widely acknowledged for example, that one of the greatest achievements of SAP is the abolition of the wasteful and corrupt import licensing system, through which socio-economic parasites and non-producers had managed to make huge gains worth several thousands of millions of Naira simply by hawking import licences.
More specifically, one decisive benefit of SAP to the public sector of the economy, has been the great boost to government revenue. This arises from the much higher Naira value of foreign exchange earnings due to the rational devaluation of the currency, as well as from the proceeds from the operations of the Foreign Exchange Market (FEM). This additional source of revenue has provided quite a relief to the government from the pressure of increased spending in the face of dwindling revenue from oil.
In the private sector of the economy, the large devaluation of the Naira has also led to an appreciable increase in incomes of primary producers generally, and particularly those engaged in agricultural export production. The rural economy has come to know and own an economic boom not experienced for more than three decades. In industry on the other hand, the abolition of import licensing and relatively easier access to foreign exchange through the Foreign Exchange Market (FEM), has enabled manufacturers to get imported raw materials relatively more easily. This has greatly contributed to a measure of improvement in capacity utilisation in the last two years from an average of 35.0 to 40.0 per cent. Albeit, this has been at a high cost to the manufacturers.
Generally, SAP has had the beneficial effect of stimulating non-oil exports, both agricultural products and manufacturers, although the level of production is still much below what is expected for full and desirable export diversification. More importantly, SAP has induced and promoted the policy of self-pride in consumption of local products and self-reliance through the program of local sourcing of raw materials. Quite a number of manufacturing establishments have made considerable progress in adaptation of machinery for local raw materials.
But this is an area where full adjustment will take some time to blossom. In effect, the impact of the program may not be fully felt until in the medium to long-term.
At the individual level, the harsh economic conditions within the domestic economy ushered in by SAP have led to a complete reordering of priorities in consumer tastes and re-allocation of individual incomes. Some of these have been reflected in the drastic change in family budgets and consumption patterns through systematic substitution and choice of food items and the boycott of non-essential goods and services in conformity with falling standards of living and the economic realities of the times. But while the foregoing developments have had the positive effect of more rational and efficient resource allocation at the household level, they have also had the adverse effect low sales in manufacturing industries.
The foregoing benefits of SAP notwithstanding, the disadvantages or undesirable effects have equally had their impact. For example, the inflationary consequences of the program have been very disruptive of economic activity at both the levels of the consumer and producer. Rising prices of foodstuff, transportation, drugs and medical services, and other basic consumption items have led to a drastic reduction in the real incomes of consumers, causing great economic hardships to the most vulnerable groups such as large families, low income earners and the unemployed. The various restrictive measures taken by the government which led to supply shortages is no doubt one important cause of the inflationary pressure that has accompanied SAP. Another important cause is the drastic fall in the value of the Naira following its necessary devaluation that came automatically with the establishment of the Foreign Exchange Market (FEM). This has had the effect of increasing the cost of imported raw materials which, in turn, has raised the costs of production in manufacturing. One other contributory factor to the inflationary trend is the removal of subsidy on certain key commodities like petroleum products which triggered off rising prices in transportation and manufacturing, due to the higher costs of fuel in these industries. It is instructive to add that this particular event provided the environment for social disturbance and unrest, industrial strikes and demonstrations by workers and students, leading to high social and economic costs.
Another negative effect of SAP is the rapid increase in the level of unemployment arising from retrenchment, occasioned by the reorganization and rationalization of labour resources in most private firms and businesses as well as in public enterprises and parastatals. Despite the policy response to the problem of unemployment through the establishment of the National Directorate of Employment (NDE) which is responsible for generating self-employment and thus minimizing the unemployment problem, the rate of unemployment continued to rise in the economy until about mid-1989 when government instituted a package of relief measures to cushion the rising sharp edges of the Structural Adjustment Program.
Although, the pre-SAP problem of low capacity utilisation in manufacturing industry which was created by the shortage of imported raw materials in the era of import licensing was to be solved by the provision of free access to foreign exchange through FEM, the cost of this solution has proved to be rather high. The high cost of imported raw materials arising from the Naira devaluation is one of the major causes of the high cost of manufacturing production and thus a contributory factor to inflation. Due to the resulting rising prices of manufacturers, consumers have developed some resistance and in consequence, manufacturers have suffered low inventory turnover. This consumer resistance has also been strengthened by the general liquidity squeeze in the economy which has left consumers with low purchasing power. As a result of all these, manufacturing industry continue to suffer from relatively low capacity utilisation and the observable improvement in comparison with the pre-SAP situation has not been profound as it should be. The solution in this connection will await the medium to long-term.
It can be argued that there is a great urgency in further stimulating non-oil exports and ensuring that the proceeds are repatriated promptly to furnish additional supply of new money to the economy. Similarly, there is need to further stimulate, consolidate and harness the gains of SAP in agriculture and the rural economy. The benefits from the unique activities of the Directorate of Foods, Roads and Rural Infrastructure (DFRRI) must be beefed up and harnessed for a much more authentic routinization of growth and development at the basic level of the national economy.
In conclusion, it needs to be repeated that although SAP has brought with its hardships to the people through serious inflationary pressures and fall in real incomes, among others, there are decisive benefits that have accrued from the program. These include the boost to government revenue and farmers’ incomes, the fostering of self-reliance for industry through the policy of local sourcing of raw materials, and above all the more rational and efficient allocation of resources within the economy through the more market-oriented policies adopted.
Structural adjustment process is by its nature very demanding and painful. It cannot be implemented without economic and social hardships and sacrifices. After all, this is what it is all about. It requires national patience, hard work and patriotism. The restructuring of the Nigerian economy in the way envisaged through SAP is a decisive step in economic recovery and self-reliant development. Similarly, the government policy on relief package of measures to cushion the harsh effects of SAP is certainly a step in the right direction.