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.
Selected Economic and Financial Indicators, 1980–85
Figures prior to 1982 are based on constant 1977/78 prices.
Selected Economic and Financial Indicators, 1980–85
| 19801 | 19811 | 1982 | 1983 | 1984 | 1985 | |||
|---|---|---|---|---|---|---|---|---|
| (Annual percentage changes, unless otherwise indicated) | ||||||||
| National income and prices | ||||||||
| Real GDP (at 1984 market prices) | 2.9 | –2.9 | –0.6 | –4.9 | –4.8 | 9.7 | ||
| Oil GDP (at 1984 factor cost) | –11.6 | –31.6 | –11.4 | –3.2 | 13.0 | 8.5 | ||
| Non-oil GDP (at 1984 factor cost) | 7.8 | 5.7 | 1.5 | –5.7 | –7.7 | 9.5 | ||
| Consumer prices (end of period) | 16.0 | 17.3 | 7.1 | 38.7 | 22.6 | 1.1 | ||
| Nominal GDP (in billions of naira) | 49.8 | 50.7 | 51.7 | 57.1 | 63.6 | 72.4 | ||
| Oil production volume (in m/b per day) | 2.060 | 1.440 | 1.280 | 1.240 | 1.390 | 1.500 | ||
| Average oil export price (U.S. dollars per barrel, f.o.b.) | 35.4 | 38.3 | 32.4 | 29.2 | 28.9 | 26.9 | ||
| Population (millions) | 61.4 | 63.5 | 65.7 | 67.9 | 70.2 | 72.6 | ||
| External sector | ||||||||
| Exports f.o.b. (in billions of U.S. dollars) | 26.0 | 17.7 | 12.2 | 10.4 | 11.9 | 12.6 | ||
| Of which: oil (in billions of U.S. dollars) | (24.9) | (17.2) | (11.9) | (10.0) | (11.6) | (12.2) | ||
| Imports f.o.b. (in billions of U.S. dollars) | –14.7 | –18.4 | –14.9 | –11.5 | –8.9 | –8.3 | ||
| Oil export volume | –12.9 | –36.0 | –18.3 | –6.7 | 17.3 | 13.6 | ||
| Non-oil export volume | 5.2 | –33.9 | –23.1 | 59.3 | –38.6 | 10.3 | ||
| Import volume | 11.0 | 31.2 | –15.4 | –20.1 | –19.8 | –7.1 | ||
| Nominal effective exchange rate | 11.1 | 3.4 | 4.6 | 3.9 | 7.2 | –8.3 | ||
| Real effective exchange rate | 6.5 | 10.8 | 2.7 | 18.1 | 37.7 | –10.3 | ||
| Average official exchange rate (naira/U.S. dollar) | 0.55 | 0.62 | 0.67 | 0.72 | 0.77 | 0.89 | ||
| Terms of trade | 52.0 | 12.2 | –12.1 | –7.4 | 3.9 | –7.3 | ||
| Money and credit | ||||||||
| Net foreign assets | 73.7 | –54.5 | –61.7 | –61.8 | 172.9 | 78.8 | ||
| Net domestic assets | 33.5 | 72.5 | 26.1 | 18.9 | 7.9 | –34.1 | ||
| Net credit to the Federal Government | –6.5 | 116.8 | 58.1 | 48.9 | 15.0 | 12.1 | ||
| Credit to the rest of the economy | 61.9 | 46.5 | 24.1 | 9.8 | 3.1 | 12.2 | ||
| Broad money | 48.9 | 15.6 | 10.6 | 14.0 | 11.3 | 16.7 | ||
| Velocity (GDP/average broad money) | … | 3.7 | 3.4 | 3.3 | 3.3 | 3.3 | ||
| Savings deposit rate (end of period) | 6.0 | 6.0 | 8.5 | 7.5 | 9.5 | 9.5 | ||
| (In percent of GDP) | ||||||||
| Investment and savings | ||||||||
| Gross national savings | 23.2 | 18.1 | 17.9 | 13.1 | 10.4 | 15.2 | ||
| Gross domestic investment | 18.5 | 25.5 | 27.3 | 19.4 | 11.7 | 15.5 | ||
| Federal Government budget | ||||||||
| Revenue | 24.2 | 15.9 | 16.0 | 13.1 | 11.5 | 12.4 | ||
| Expenditure and net lending | 24.5 | 25.2 | 25.0 | 23.8 | 16.1 | 15.2 | ||
| Current expenditure | 10.5 | 9.7 | 8.2 | 11.9 | 10.1 | 8.3 | ||
| Capital expenditure | 14.0 | 15.5 | 16.8 | 11.9 | 6.1 | 7.0 | ||
| Federal Government budget deficit | –0.3 | –9.3 | –9.0 | –10.8 | –4.6 | –2.8 | ||
| External sector | ||||||||
| Current account balance | 4.7 | –7.4 | –9.4 | –6.3 | –1.3 | –0.3 | ||
| Overall balance of payments | 5.0 | –7.5 | –6.9 | –7.3 | –0.5 | –0.1 | ||
| External debt | 4.5 | 7.4 | 16.1 | 22.4 | 21.0 | 23.3 | ||
| (In billions of U.S. dollars, unless otherwise indicated) | ||||||||
| Current account balance | 4.3 | –6.0 | –7.2 | –5.0 | –1.1 | –0.2 | ||
| Overall balance of payments | 4.5 | –6.2 | –5.3 | –5.8 | –0.4 | –0.1 | ||
| External public and publicly guaranteed debt | 4.1 | 6.1 | 12.4 | 17.8 | 17.3 | 18.9 | ||
| Gross international reserves (end of period) | 10.4 | 4.5 | 2.0 | 1.2 | 1.5 | 1.7 | ||
| (in months of imports of goods and nonfactor services) | 5.9 | 2.3 | 1.3 | 1.1 | 1.7 | 1.9 | ||
Figures prior to 1982 are based on constant 1977/78 prices.
Selected Economic and Financial Indicators, 1980–85
| 19801 | 19811 | 1982 | 1983 | 1984 | 1985 | |||
|---|---|---|---|---|---|---|---|---|
| (Annual percentage changes, unless otherwise indicated) | ||||||||
| National income and prices | ||||||||
| Real GDP (at 1984 market prices) | 2.9 | –2.9 | –0.6 | –4.9 | –4.8 | 9.7 | ||
| Oil GDP (at 1984 factor cost) | –11.6 | –31.6 | –11.4 | –3.2 | 13.0 | 8.5 | ||
| Non-oil GDP (at 1984 factor cost) | 7.8 | 5.7 | 1.5 | –5.7 | –7.7 | 9.5 | ||
| Consumer prices (end of period) | 16.0 | 17.3 | 7.1 | 38.7 | 22.6 | 1.1 | ||
| Nominal GDP (in billions of naira) | 49.8 | 50.7 | 51.7 | 57.1 | 63.6 | 72.4 | ||
| Oil production volume (in m/b per day) | 2.060 | 1.440 | 1.280 | 1.240 | 1.390 | 1.500 | ||
| Average oil export price (U.S. dollars per barrel, f.o.b.) | 35.4 | 38.3 | 32.4 | 29.2 | 28.9 | 26.9 | ||
| Population (millions) | 61.4 | 63.5 | 65.7 | 67.9 | 70.2 | 72.6 | ||
| External sector | ||||||||
| Exports f.o.b. (in billions of U.S. dollars) | 26.0 | 17.7 | 12.2 | 10.4 | 11.9 | 12.6 | ||
| Of which: oil (in billions of U.S. dollars) | (24.9) | (17.2) | (11.9) | (10.0) | (11.6) | (12.2) | ||
| Imports f.o.b. (in billions of U.S. dollars) | –14.7 | –18.4 | –14.9 | –11.5 | –8.9 | –8.3 | ||
| Oil export volume | –12.9 | –36.0 | –18.3 | –6.7 | 17.3 | 13.6 | ||
| Non-oil export volume | 5.2 | –33.9 | –23.1 | 59.3 | –38.6 | 10.3 | ||
| Import volume | 11.0 | 31.2 | –15.4 | –20.1 | –19.8 | –7.1 | ||
| Nominal effective exchange rate | 11.1 | 3.4 | 4.6 | 3.9 | 7.2 | –8.3 | ||
| Real effective exchange rate | 6.5 | 10.8 | 2.7 | 18.1 | 37.7 | –10.3 | ||
| Average official exchange rate (naira/U.S. dollar) | 0.55 | 0.62 | 0.67 | 0.72 | 0.77 | 0.89 | ||
| Terms of trade | 52.0 | 12.2 | –12.1 | –7.4 | 3.9 | –7.3 | ||
| Money and credit | ||||||||
| Net foreign assets | 73.7 | –54.5 | –61.7 | –61.8 | 172.9 | 78.8 | ||
| Net domestic assets | 33.5 | 72.5 | 26.1 | 18.9 | 7.9 | –34.1 | ||
| Net credit to the Federal Government | –6.5 | 116.8 | 58.1 | 48.9 | 15.0 | 12.1 | ||
| Credit to the rest of the economy | 61.9 | 46.5 | 24.1 | 9.8 | 3.1 | 12.2 | ||
| Broad money | 48.9 | 15.6 | 10.6 | 14.0 | 11.3 | 16.7 | ||
| Velocity (GDP/average broad money) | … | 3.7 | 3.4 | 3.3 | 3.3 | 3.3 | ||
| Savings deposit rate (end of period) | 6.0 | 6.0 | 8.5 | 7.5 | 9.5 | 9.5 | ||
| (In percent of GDP) | ||||||||
| Investment and savings | ||||||||
| Gross national savings | 23.2 | 18.1 | 17.9 | 13.1 | 10.4 | 15.2 | ||
| Gross domestic investment | 18.5 | 25.5 | 27.3 | 19.4 | 11.7 | 15.5 | ||
| Federal Government budget | ||||||||
| Revenue | 24.2 | 15.9 | 16.0 | 13.1 | 11.5 | 12.4 | ||
| Expenditure and net lending | 24.5 | 25.2 | 25.0 | 23.8 | 16.1 | 15.2 | ||
| Current expenditure | 10.5 | 9.7 | 8.2 | 11.9 | 10.1 | 8.3 | ||
| Capital expenditure | 14.0 | 15.5 | 16.8 | 11.9 | 6.1 | 7.0 | ||
| Federal Government budget deficit | –0.3 | –9.3 | –9.0 | –10.8 | –4.6 | –2.8 | ||
| External sector | ||||||||
| Current account balance | 4.7 | –7.4 | –9.4 | –6.3 | –1.3 | –0.3 | ||
| Overall balance of payments | 5.0 | –7.5 | –6.9 | –7.3 | –0.5 | –0.1 | ||
| External debt | 4.5 | 7.4 | 16.1 | 22.4 | 21.0 | 23.3 | ||
| (In billions of U.S. dollars, unless otherwise indicated) | ||||||||
| Current account balance | 4.3 | –6.0 | –7.2 | –5.0 | –1.1 | –0.2 | ||
| Overall balance of payments | 4.5 | –6.2 | –5.3 | –5.8 | –0.4 | –0.1 | ||
| External public and publicly guaranteed debt | 4.1 | 6.1 | 12.4 | 17.8 | 17.3 | 18.9 | ||
| Gross international reserves (end of period) | 10.4 | 4.5 | 2.0 | 1.2 | 1.5 | 1.7 | ||
| (in months of imports of goods and nonfactor services) | 5.9 | 2.3 | 1.3 | 1.1 | 1.7 | 1.9 | ||
Figures prior to 1982 are based on constant 1977/78 prices.
The sharp worsening of economic conditions prompted the Shagari Government to introduce in April 1982 significant budget cuts and measures to improve the external position. The latter consisted of a severe tightening of import controls, the imposition of exchange restrictions on current international transactions, substantial increases in customs tariffs, the introduction of an advance import deposit scheme, and ceilings on total central bank foreign exchange disbursements. Henceforth, the foreign exchange budget would be used as an exchange control instrument rather than, as before, as a monitoring device. The tightening of fiscal policies consisted of a freeze on capital expenditure, the curtailment of lower priority public investment projects, an increase in petroleum product prices and utility tariffs, and a freeze on wages and salaries in the public sector. In addition, foreign borrowing of the state and local governments was severely restricted, ceilings on bank credit to the private sector were progressively lowered, and administered bank lending rates were raised.
These measures resulted in some easing of inflationary pressures, but real GDP contracted in 1982–83, owing to the sharp decline in oil production, the scarcity of imported inputs, and a worsening drought. Although the external current account position improved somewhat in 1983, reflecting the severe compression of imports, the Government’s financial position deteriorated as fiscal oil revenue dropped further and transfers to state and local governments and loans to parastatals expanded. The monetization of the Government’s fiscal deficit resulted in a strong growth of broad money and, coupled with the impact of a severe drought, the rate of inflation accelerated to 39 percent in 1983, from 7 percent in 1982.
The worsening economic and financial conditions and alleged widespread corruption led to a military coup at the end of 1983. The new regime under General Buhari sought to reinforce the 1982 austerity measures by further tightening financial policies and introducing more administrative controls. Additional exchange and trade restrictions were announced in mid-1984, including stricter import controls, higher import tariffs, a more centralized system of foreign exchange allocation, and severe penalties for smuggling, hoarding, and corruption. The fiscal and monetary measures announced in May 1984 aimed at drastically reducing domestic demand pressures. The Government also implemented draconian expenditure cuts and substantial tax increases. It dismissed some 10,000 civil servants (almost 5 percent of the civil service) and continued the freeze on civil service salaries.
The expenditure cuts were particularly successful in the short run. They reduced the overall federal government fiscal deficit from 11 percent of GDP in 1983 to 3 percent in 1985. As a consequence, the Government’s recourse to bank credit was virtually eliminated and inflationary pressures were significantly reduced. On the external front, the coverage of import licenses was extended considerably, and the authorities entered into barter arrangements to boost exports and secure essential imports in 1984. At the same time, the volume of oil exports rose and the external current account improved markedly in 1984 and 1985. Nonetheless, Nigeria accumulated external payments arrears throughout the period, and the heavy foreign borrowing resulted in an almost fivefold increase in the external debt during the first half of the 1980s.
The Government’s austerity measures did meet with some success by 1985; inflation fell to 1 percent, the external current account moved into balance, and real GDP growth jumped to 9½ percent. The substantial growth in real GDP was due principally to an increase in oil production arising from the upward adjustment in OPEC quotas and to the recovery of the agricultural sector from a two-year drought. However, improvements in the fiscal and external positions in 1984 and 1985 proved transitory and failed to establish a basis for sustained economic growth. Short-run fiscal stabilization measures and quantitative trade controls dominated the adjustment efforts, while underlying economic and financial conditions continued to worsen. Between 1980 and 1985 government revenue fell from 24 percent of GDP to 12 percent, reflecting the sharp decline in oil prices as well as the diminished buoyancy of non-oil taxes. The adverse impact of the overvalued exchange rate on oil and customs revenue, coupled with the depressing effect of increasingly complex import controls on the customs tax base, exacerbated the difficulties.
Gross national savings fell substantially during 1980–85, from 23 percent of GDP in 1980 to 15 percent in 1985, reflecting in particular a sharp drop in government savings. As the Federal Government’s savings-investment balance worsened significantly, the public investment program was financed by the other tiers of government, the drawdown of reserves, and the running up of arrears on external debt-service obligations. Private sector savings, on the other hand, increased from 4½ percent of GDP in 1980 to 8 percent in 1985, though the private sector savings-investment balance deteriorated as well over the period.
Despite the strong real appreciation of the naira during the first half of the 1980s, the Government resisted a fundamental reform of the exchange system. The adjustments of the official exchange rate against the U.S. dollar during this period only offset the appreciation of the U.S. dollar against other major currencies and failed to correct for the significant overvaluation of the naira. Given the relatively high rate of inflation in Nigeria, the real effective exchange rate appreciated by 85 percent between 1980 and 1984, and depreciated in 1985 by some 10 percent following the sharp deceleration in Nigeria’s inflation rate. The sizable overall balance of payments deficits during 1981–85 resulted in a depletion of international reserves, which fell to the equivalent of only two months of imports by the end of 1985, from six months in 1980.
The authorities’ policy to foster employment through the creation of public sector jobs continued to exert strong pressure on the budget during 1981–84. Following a 109 percent increase in 1977–81, public sector employment grew by a further 18 percent between 1981 and 1984. This policy promoted migration into cities, as government salaries compared very favorably with income opportunities in the rural areas. Urban migration and its attendant unemployment problems became even more pronounced in 1981 when the Government increased the minimum wage rate to the entry level salary of public sector employees. Urban unemployment increased substantially, from 2½ percent in 1980 to 10 percent in 1985, while rural unemployment rose from 3 percent to 5 percent over the same period.5 Real per capita income fell significantly as well, from US$1,010 in 1981 to US$850 in 1985.
The emphasis on short-run stabilization measures reflected the Government’s belief, at the time, that Nigeria’s economic and financial problems were transient and would eventually disappear with a recovery in oil export prices. In the event, oil prices did not recover, and it became clear that the stabilization policies had failed to address the underlying economic problems, including the lopsided reliance on oil, the neglect of the agricultural sector, the inward-looking industrial strategy, the inefficiency of the public enterprise sector, and the misdirected capital investment projects of the Federal Government. In addition to the inefficient allocation of large oil receipts, intervention in key areas of the economy, including the fixing of the exchange rate, of interest rates, and of domestic and export prices and the marketing of non-oil exports, remained pervasive and impeded the supply response essential to a sustained recovery of the Nigerian economy. The extensive system of direct controls suppressed market signals and discouraged private sector activity. Crippling import shortages and growing social and political discontent set the stage for another military coup, under General Babangida, who assumed power in October 1985.
