Abstract
The collapse of world oil prices and the sharp decline in petroleum output, the latter resulting from a lowering of Nigeria’s OPEC quota in the early 1980s, brought to the forefront the precarious nature of the country’s economic and financial position. Rising and ill-directed government spending during the 1970s, neglect of the agricultural sector, and inward-looking industrial policies left Nigeria vulnerable to profound changes in the external environment in the following decade. Thus, the dramatic fall in oil export revenues entailed a sharp deterioration in the country’s public finances and balance of payments. The overall fiscal deficit rose from ½ percent of GDP in 1980 to 9½ percent in 1981, and the external current account balance shifted from a surplus of 4½ percent to a deficit of 7½ percent in the same period. The severe weakening of the external position was reflected in a dwindling of international reserves. Stepped-up foreign borrowing by federal and state governments and public enterprises increased external debt to the equivalent of 23 percent of GDP by 1985, from only 5 percent in 1980 (Figure 1 and Table 3). The growing scarcity of foreign exchange affected output in the import-intensive manufacturing sector, with capacity utilization falling from 73 percent in 1981 to 38 percent in 1985. The steady appreciation of the real effective exchange rate also depressed agricultural output, which remained at levels below those achieved in the early 1970s. As a result, annual GDP growth decelerated sharply and turned negative in 1981.
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