Back Matter

Back Matter

International Monetary Fund
Published Date:
April 1997
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    The terms “Government,” “fiscal deficit,” and “public expenditure” refer to the Federal Government, unless stated otherwise.

    High protective tariffs, import bans, an import licensing scheme, and export bans on food crops characterized the external trade regime. The proliferation of government controls was reflected in the establishment of price controls (Price Control De-cree of 1971), marketing boards (Commodity Board Decree of 1977), state trading corporations (in 1977, the Nigerian National Supply Company, the Nigerian National Freight Company, and the National Fertilizer Board), and the effective nationalization of all land (Land Use Decree of 1978, which brought all land under the control of state governments). In addition, through the Nigerian Enterprise Decree (1972), the Government promoted indigenous participation in industrial investment and discouraged foreign investment.

    The distinctions between north, south, east, and west are made to simplify what is actually a more fluid geographic distribution of religious and ethnic affiliations.

    The Transitional Council was sworn in on January 4, 1993, together with the members of the House of Representatives and of the Senate.

    Official unemployment statistics, while providing an indication of the trends in the labor market, substantially underestimate trends by excluding underemployment, which was estimated to be in the range of 40 percent in 1985.

    The Cocoa Board (cocoa, coffee, and tea), the Groundnut Board (groundnuts, soya beans, benniseed, peanuts, and ginger), the Cotton Board, the Palm Produce Board (palm oil, palm kernel, and copra), the Rubber Board, the Grains Board (corn, millet, maize, wheat, rice, and beans), and the Tuber and Root Crops Board (yams and cassava).

    At the average official exchange rate for 1989; the tariff was only 0.5 U.S. cents at the parallel exchange rate.

    The price of household kerosene remained unchanged. With this exception, the lowest increase was for liquefied petroleum gas (24 percent).

    Measured at the official exchange rate, the domestic price of gasoline was 186 percent of the world wholesale price after the increase. Measured at the parallel exchange rate, the domestic price was still 10 percent below the world price.

    Only authorized dealer banks were allowed to participate in the auction, which was designated as the Secondary Foreign Ex-change Market (SFEM).

    The foreign exchange surrender requirement to the Central Bank for non-oil export proceeds was lifted in 1986, but exporters were still required to surrender 75 percent of foreign exchange earnings to commercial banks at the prevailing interbank rate. In 1987, the surrender requirement was eliminated altogether.

    The two rates were unified at3.73 per U.S. dollar (the prevailing auction rate) and the SFEM was renamed the FEM (foreign exchange market).

    The remaining import bans covered cigarettes, poultry, vegetables, rough wood, eggs, fruit, most textile fabrics, plastic wares, mineral water, jewelry and precious metals, rice, maize, wheat, selected alcoholic beverages, gaming machines, and vegetable oils.

    A 6.02 percent surcharge was reimposed in January 1987.

    Creditors agreed to reschedule: (1) all principal and interest (excluding late interest) due from January 1, 1989, up to April 30, 1990 on medium- and long-term debt contracted before October 1, 1985 (the cutoff date used for the previous rescheduling); (2) all arrears (including late interest) outstanding as of end-1988 on medium- and long-term debt contracted before the cutoff date; (3) up to a maximum of 60 percent of the amounts that were due be-fore December 31, 1988, and not paid, on previously rescheduled debt; and (4) all arrears outstanding at end-1988 on short-term credits, contracted before that date.

    Since the personal income tax is levied at the state level, this measure had virtually no impact on federal government revenue. The Federal Government collects income taxes only from resi-dents of the Federal Capital Territory (Abuja), and the armed forces.

    Data limitations preclude a comprehensive accounting of the fiscal operations of the state and local governments and the special funds. Data are available for allocations from the Federation Account, statutory claims on transfers to the Federation Stabilization Account, highly aggregated state budgetary data, and net bank credit to state and local governments. Little information is available on the financial operations of the special funds or revenue collected directly by local governments.

    Local governments collect some fees and municipal taxes, but these revenues are relatively small.

    The exchange included 217 securities at the end of 1990, including 131 equities, 43 government securities, and 43 industrial loans and preferred stocks. The market is heavily concentrated, with 20 stocks representing over 70 percent of the total equity capitalization during the same period.

    Nigeria’s external terms of trade declined by 9½ percent annually during 1986–90, compared with an annual average decline of 2½ percent during 1980–85.

    See Appendix III for an empirical analysis of the major factors influencing Nigeria’s agricultural exports.

    See Central Bank of Nigeria (1991),The Impact of SAP on Nigerian Agriculture and Rural Life.

    Estimates of savings and investment balances for the public and private sectors are based on official GDP data and Fund staff balance of payments and fiscal estimates.

    The official unemployment statistics exclude a significant share of the labor force that is underemployed or not actively seeking employment.

    Approved Budget of the Federal Republic of Nigeria, 1992, p. xxiii.

    Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree, November 9, 1994.

    More current data on government equity in and loans to public enterprises are not available on a comprehensive basis.

    Price data are collected for 256 items in 83 urban towns and 312 rural centers on a weekly or monthly basis. The FOS com-piles the data monthly to prepare a CPI for each of the 21 states and an aggregate rural and urban CPI as well as the national composite CPI.

    The FOS completed a new National Consumer Survey during the period April 1992 to March 1993. A preliminary analysis suggests that expenditure on food items is broadly in line with the data from the 1985/86 national survey.

    See, for example, Adamson (1989) and Aigbokhan (1991).

    As a result of fixed interest rates over most of the period, domestic interest rates were not included as they do not add significant additional information.

    The inflation, foreign interest rate, and foreign prices variables were dropped from the analysis as they were found in earlier versions of this paper to be insignificant.

    All the coefficients were significant at the 1 percent level with the exception of the constant term, which was insignificant at the 10 percent level.

    See, for example, Laidler (1993) for a detailed discussion of money demand models.

    Interest rates were controlled and significantly negative in real terms over much of the period. Real interest rates were tested as a possible opportunity cost variable but were not found to have significant explanatory power. Future empirical work could investigate real curb rates as an alternative opportunity cost variable.

    That is, if a linear combination of the 1(1) variables is stationary, or 1(0).

    See Engle and Granger (1987 and 1991) for a detailed discussion of error correction models. See Lahiri (1991), Tseng and Corker (1991), and Tseng and Khor (1994) for recent examples of error correction cointegration models applied to money demand.

    See Johansen (1988 and 1991) for a detailed discussion of the Johansen test.

    The ADF test for the income variable excludes both a constant and trend term.

    See Appendix III and IV of Tseng and Khor (1994) and Rein-hart (1995) for a detailed discussion of the mechanics of using the Johansen test.

    See Kremers and others (1992) on the superiority of this test over the conventional tests of cointegration. Harris (1995) also provides an excellent discusison of this. Kremers and others argue that htis test is more pwoerful than the ADF test, as it uses the inofrmation scope efficiently.

    See Oresotu and Mordi (1992). The CBN study estimated an income elasticity of 2.03 in the long run for real broad money based on a partial adjustment model.

    For a detailed account of the incentives proffered, see Central Bank of Nigeria,Annual Report and Statement of Accounts, and Export (Incentives and Miscellaneous Provisions) Decree 1986.

    A chronological account of quantitative restrictions on ex-ports is provided below.

    See for instance Olayide and Olatunbosun (1970), Ojo (1977), Scherr (1989), Okonkwo (1989), Oyejide (1986), and Nigeria’s Ministry of Agriculture (1988).

    During the 1970s, exchange rate policy in Nigeria aimed at maintaining a stable nominal exchange rate in order to moderate the impact of external inflation on the domestic economy. This policy stance was reinforced by the presumption that cheap im-ports were essential to political stability, and that the benefits of higher agricultural exports were modest (Scherr (1989)).

    No official data on rural wages are available. These estimates were computed by Duncan and Rouis (World Bank (1985), pp. 21–22).

    There is evidence that wages in Nigeria’s oil palm subsector were well above average wages in other oil palm producing coun-tries, including Brazil, Cameroon, Cote d’Ivoire, Ghana, Indonesia, and Malaysia. Assuming that these wages are representative of the agriculture sector in general, it is clear that Nigeria’s agri-cultural exporters had a competitive disadvantage vis-a-vis their competitors. (See World Bank (1981); also quoted in World Bank (1982) Report No. 3771-UNI, p. 12).

    The growth in demand for a commodity is expressed as D =GZ +P, where D = growth rate in demand, Z = income elasticity,G =GNP per capita growth rate, and P = population growth rate.

    Disaggregated trade statistics were available for the years 1970 to 1984 only.

    The import figures were obtained from Nigeria Trade Sum-mary, an annual publication of the Federal Office of Statistics of Nigeria.

    Nigeria’s official production figures for exportable crops relate to purchases of commodity boards, and may therefore be underestimated, because the share of crops that are domestically consumed is not known with a reasonable degree of certainty.

    Estimates of growth were computed using the log-linear model, and are based on the index of agricultural production reported by the Central Bank of Nigeria. Estimating the average growth by the compound method produced lower estimates of 2.05 for aggregate crops and 2.1 for cash crops.

    No reliable estimates of the volume of smuggling are available, but there is evidence of large-scale smuggling of cocoa and other manufacturing exports, particularly to neighboring coun-tries, part of which serves as capital flight. In 1985, the Nigerian Cocoa Board estimated that more than 20,000 metric tons of cocoa were smuggled out of Nigeria yearly, fueled by delays in the payment of farmers by licensed buying agents. Efforts to curb the illicit trade flows by closing the country’s land borders from mid-1984 to March 1986 only terminated official trade with Nigeria’s neighbors, while falling short of its objective.

    The ban on the export of cocoa beans announced in January 1991 was rescinded only because of opposition from domestic producers and exporters who pointed out that domestic processing capacity fell short of bean production.

    Surveys of econometric work, on foreign trade price elastici-ties and their weaknesses, are available in Leamer and Stern (1970), Magee (1975), and Goldstein and Khan (1985).

    The prominent controversial issues are outlined in Riveros (1989) and Faini (1988) and include the use of either partial or general equilibrium models, the definition of the prevailing market structure, the assumed degree of substitution between domestically consumed and exported goods, the treatment given to factor costs, and the role taken with regard to relative prices and productive capacity vis-a-vis more “Keynesian” variables such as domestic absorption.

    Satisfactory results have been obtained in many studies that applied the model in its basic form, to both developed and developing countries, and for agricultural and manufactured exports. See for instance Goldstein and Khan (1978), Lundborg (1981), Arize (1988), Balassa (1987,1989), Okonkwo (1989), Lord (1989), and N’geno (1991).

    The competing views on the impact of domestic demand on exports are discussed in Artus (1970) and Dunlevy (1980).

    See for instance the country study Spain by Donges (1972). The study by Islam and Subramanian (1989) is one of the few studies that estimated an export supply function for agricultural exports and incorporated domestic demand among the explanatory variables. The variable was, however, not found to be statistically significant even though it yielded the expected sign.

    The procedure adopted is fairly standard, see Stern and Zupnick (1962), Basevi (1973), Isard (1977). Besides, attempts to estimate the supply and demand functions simultaneously yielded poor results, particularly for export demand.

    A detailed discussion on the rationale for including particular variables in the export supply function is available in Goldstein and Khan (1985).

    For a detailed discussion of the sources and types of lags in adjustment see for instance Junz and Rhomberg (1973), Goldstein and Khan (1985), Moran (1988).

    The adjustment mechanism adopted has been used in other similar studies, including Goldstein and Khan (1978), Okonkwo (1989), N’geno (1991).

    The export of groundnuts, cotton, hides and skins, timber, and palm oil has been prohibited for several years and available data do not provide sufficient observations to permit some econo-metric analysis.

    Lagging the relative price variable allows for the possibility of delayed supply adjustment beyond the period of one year. This form of specification was also adopted by Bond (1987) and yielded equally good results.

    In Arize’s (1989) study, export demand and supply functions were estimated for Nigeria’s aggregate exports. However, to the extent that oil exports account for over 90 percent of total exports, the results are technically incomparable and are of limited use for our purposes. Similarly, although N’geno (1991) estimated export supply equations for Kenya’s agricultural exports and for the individual commodities, coffee and tea, the results were of equal limited importance for our purposes because of the difference in the composition of the commodities and also because the commodity markets are constrained by the quota system.

    Import parity is defined as the world price of gasoline valued at the parallel exchange rate. The analysis is limited to the gaso-line market for ease of exposition and because most smuggling involves gasoline. The analysis applies to other petroleum products as well.

    The impact of these two actions, both of which reduced the profitability of smuggling, was partially offset by increases in retail gasoline prices in most CFA franc countries.

    It is generally assumed that the gasoline smuggled into the neighboring countries originates from the allocation from domestic consumption.


    The smuggling function is derived from the following maximization problem: max II = (En/Ec)PcXC (X) where II represents profits arising from smuggling and C (X) =PnX +zX2 de-fines the cost of smuggling. Equation (1) follows where b = 1/zt.

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