The country’s economic crisis came to a head in August in 1985. It is worth recalling the highlight indicators of the state already discussed.
- the country was overly dependent on one commodity, crude oil for export receipts and government revenue, and the world oil market had collapsed with oil prices in the precipitous decline;
- in result, the country’s total foreign exchange receipts fell to less than half of their former values, with corresponding constraint on the capacity to import;
- the country’s official foreign exchange reserves were severely drained and could barely support normal imports levels for two months;
- trade arrears mounted; import obligations which should have been settled on a current basis rapidly accumulated;
- the country’s creditworthiness was in jeopardy as most overseas correspondent banks refused to extend confirming lines to Nigeria, and most importers who had import license could not use them for opening letter of credit;
- the credit blockage reinforced the squeeze on the already scanty national resources, the import capacity and industrial capacity utilization;
- an external debt burden appeared and became massive;
- internally, government debt owed to local contractors, development loan shock) reached a high of some N8 billion; this was the period when Federal Government [Central Bank] cheques were bouncing.
Given this situation, we chose, not the easy route of political expediency with its half measures which we well knew were futile, but the hard correct route of reform in foundations of society. We chose this hard route in order to bring the country back from the brink of collapse, despair, and possible disintegration, to reposition the Nigerian economy decisively on the trajectory of a modern self-developing market-oriented economy as an appropriate vehicle for the optima harnessing of the abundant energies, enterprise and intellect of all Nigerian for the cultivation of economic freedom and democracy and for the inauguration of a new order of social justice.
As a long-run strategy, reform in foundation of society comprised (a) structural economic reform to create the right incentives framework for productive endeavors, resource use and allocative efficiency; and (b) aligned political-social reforms to cultivate freedom democracy, and social justice.
The specific objectives of the economic reform packaging were to:
- 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
- reduce the dominance of unproductive investment in the public sector, improve that sector’s efficiency and enhance the growth potential of the private sector.
The main strategy included:
- the adoption of a realistic exchange rate policy coupled with the liberalization of the external trade and payment system.;
- adoption of appropriate pricing policies in all sectors with greater reliance on market forces and reduction in the complex of administrative controls;
- rationalization and restructuring of the tariff regime; so as to aid the promotion of industrial diversification; and
- rationalization and commercialization/privatization of public sector enterprise and further rationalization of public expenditure.
In other words, democratization of opportunities and assets, deregulation, decentralization, and deconcentration, increased production densification, employment and skills; a lead rule for the private sector and a new partnership between the public and private sectors of the economy, improved economic efficiency and national self-reliance – were visualized as key strategies in our drive for national salvation in a highly competitive world and for securing for our people and posterity a solid basis for rapidly improving welfare.
We called the economic reform program the Structural Adjustment Program. As I have indicated, its implementation was undertaken under extremely difficult conditions, not the least of which were the meager financial resources, the crushing debt burden, and the distress and expectation of the policy.
Of course, we were aware that structural economic reform – just as with any other policy – entails costs, and would have and did have adverse side-effects and unintended consequences for some economic agents, particularly the weaker segments of the populace. Consistent with this knowledge, government employed its best endeavour to grant wage and non-wage relief to workers and the general polity and emplaced specific policies to help willing economic agents to “scale the wall of adjustment” from initial time, despite the severe resource constraints and although these reflects and ameliorants entailed huge revenue losses to government.
The adverse side effects of structural economic reform are the short-term price we have to pay for future long run prosperity. We sincerely believed that the people of this great country, if well informed, would freely elect the path of short-term discomfort and long-term stability and prosperity instead of a path of short-term excitement and long-term depression and possible disintegration.
Quite simply, we sought to create an unbounded set of productive opportunity for the bondless energies, enterprise and intellect of all Nigerians.
There was no personal agenda about the reform objective or the means. For us, reform was a highly patriotic and imperative endeavor. Even today, the reform ideas remain close to our hearts, and nothing has happened over the last twenty-eight years to negate the soundness of our perspectives. Indeed, we have been roundly vindicated by developments in the country and the global economy. As we presciently [far-reaching] forecast [by one of my Ministers during the controversy attending the reform in 1987]. “[I feel sure that] the positive verdict of history will be on the side of this Administration’s economic reforms”. [Special Press Briefing by the Minister of Finance on “Review and Approval of the Structural Adjustment Program”. September 23, 1987] we can, justifiably with hindsight, claim to have had an appropriate and enduring foresight. From this viewpoint, we warmly welcome all the converts to the reform club.
First and foremost, against the background of the severe national economic predicament, we [the Armed Forces Ruling Council] declared a State of National Economic Emergency on October 1, 1985, valid for fifteen months. A principal instrument established in this contention was the National Economic Recovery Fund (NERF) into which the following revenues would be paid:
- key on all factor incomes, varying from 2 to 15 percent;
- revenues accruing from the 80 percent reduction in petroleum subsidy; and
- revenues from the consolidated import levy of 30 percent on all imports.
This measure facilitated demand management and considerably eased government fiscal operations in the lean period. And I want again to sincerely commend all Nigerians for their patriotic response during the national emergency.
We encouraged an unfettered nation-wide debate – in town and country, across and within social groups, in public forums, schools, factories, offices, farms, in places of worship and public houses –on the reform issue, formalizing the questions on the desirability of the so-called IMF loan – that is, the IMF Program and its Standby Arrangement. For, although, we were running a military administration and we were convinced of the reform imperative, it was nonetheless important to have the people freely express themselves, to determine their views, and for us to be guided by those views. It is significant that at the end of the democratic debate it was the Nigerian people that rejected the IMF Program and its facility, opting instead for the “home grown” structural adjustment program (SAP) – that is, to revamp the economy without the IMF loan.
The program of national economic recovery, which had been further detailed in the 1986 budget, with measures such as export promotion incentives, full institution of the Domiciliary Account Scheme, approval in principle for the introduction of a second-tier foreign exchange market for foreign exchange dealings at market-determined rates, a cap on debt service burden at a maximum of 30 percent of foreign exchange earnings, was now fully elaborated into a formal Structural Adjustment Program which received the endorsement of the IMF and the World Bank.
In July, 1986, we launched the Structural Adjustment Program. Its key aspect was the Second–Tier Foreign Exchange Market (SFEM), which commenced on September 29, 1986. The main objective of the SFEM was to achieve a realistic market-determined exchange rate for the Naira, eliminate frivolous demand for foreign exchange, and to reduce the pressure on the balance of payments. Such a realistic rate was expected to achieve a more efficient resources allocation. With the introduction of the SFEM the following complementary measure were taken:
- abolition of import and export licensing;
- elimination of price control;
- abolition of mandatory surrender requirement for all non-oil proceeds. Thenceforward, residents of Nigeria were allowed to remain 100 percent of their net foreign exchange earnings which would should be lodged at Domiciliary Accounts:
- “capital amnesty” was granted in respect of [previous capital flight; and
- the Central Bank (CBN) delegated to the authorized dealersfull approving authority for current private sector import and invisible trade transactions.
In general, with the exception of transactions related to government debt,contributions to international organizations and transfer to Nigerian missions abroad, which were accorded first-tier [official] rate status, all transactions were channeled through the SFEM. The first-tier rate would track the SFEM rate and it was expected that the two rates would converge within nine months.
On the related matter of finding the market, while government would initially inject funds into the SFEM though the Central Bank, and used its best endeavors to well fund the market, government was supposed to progressively withdraw over the first two years to the state such that it would intervene only occasionally to influence rates, monitor and supervise the market to ensure its orderliness, competitiveness and depth. Given the abolition of surrender requirement and the generous 100% exports proceeds retention allowance, participating dealer banks were expected to source foreign exchange competently, it was also considered imprudent for a debt-distressed country to borrow in order to fund the market.
In the spirit of the times, authorized foreign exchange dealership status was liberally granted to any applying commercial or merchant bank. The initial operational framework of the SFEM was the closed auction system, with the CBN calling for bids from authorized dealers once a week for the available foreign exchange.
Fiscal and monetary policies were rationalized and aligned with the reform program. For example, on monetary policy while the rates of credit expansion were reviewed in line with the desired monetary aggregates, banks and their customers were given the freedom to negotiate mutually acceptable rates payable on time deposits subjects to a floor [rate of 8 percent]; as regards fiscal measure, the 30 percent import levy earlier introduced was abolished, while the import duties on a wide range of basic industrial raw materials and agricultural inputs were substantially reduced, those on some consumer/final goods were reduced and those on capital goods were raised. Excise duties on most categories of excisable products were substantially reduced. Significantly, the import prohibition line was severely trimmed from 74 to 16.
Even at this early date, as part of the policy thrust, we resolved to study the question of an optimal tariff policy with a view to making the external tariff regime less cascading, more uniform, stable and predictable, and emplacing the resultant optimal regime over a seven-year horizon beginning in 1988 to aid forward planning by entrepreneurs.
In order to reduce the debt service burden, Government intensified negotiations with overseas creditors for the rescheduling of external debt, the maximum initial relief that could then be obtained. An immediate achievement of the SAP was the greater cooperation of foreign creditor banks and countries – under their various groups, London and Paris Clubs and Promissory Noteholders – to negotiate refinancing arrangements and rescheduling, with some minor debt cancellation. The rescheduling brought the debt service ratio in 1986 from as high as 42 percent to 21.6 percent and in 1987 from as high as 81.1 percent to 24.3 percent of the arrears that had built up in the interim. Thus, rescheduling enabled the country to devote more of the limited foreign exchange earnings towards more pressing and growth-oriented sectors.