Nigeria’s Second National Development Plan: A Financial Analysis

A COMMON DRAWBACK of most development plans for developing countries is that they pay insufficient attention to financial planning. However, “the process of development is inevitably very costly, so that it is just as important to have a good financial plan, making optimal use of financial resources, as it is to have a good economic plan, making optimal use of the real resources available.” 1 In the present state of availability of financial statistics in most of these countries, it is perhaps not possible to prepare a detailed and technically sophisticated financial plan. Nevertheless, it should generally be possible to analyze the implications of the plan for major financial variables with a view to determining the appropriate underlying monetary and fiscal policies.

Abstract

A COMMON DRAWBACK of most development plans for developing countries is that they pay insufficient attention to financial planning. However, “the process of development is inevitably very costly, so that it is just as important to have a good financial plan, making optimal use of financial resources, as it is to have a good economic plan, making optimal use of the real resources available.” 1 In the present state of availability of financial statistics in most of these countries, it is perhaps not possible to prepare a detailed and technically sophisticated financial plan. Nevertheless, it should generally be possible to analyze the implications of the plan for major financial variables with a view to determining the appropriate underlying monetary and fiscal policies.

I. Introduction and Summary

A COMMON DRAWBACK of most development plans for developing countries is that they pay insufficient attention to financial planning. However, “the process of development is inevitably very costly, so that it is just as important to have a good financial plan, making optimal use of financial resources, as it is to have a good economic plan, making optimal use of the real resources available.” 1 In the present state of availability of financial statistics in most of these countries, it is perhaps not possible to prepare a detailed and technically sophisticated financial plan. Nevertheless, it should generally be possible to analyze the implications of the plan for major financial variables with a view to determining the appropriate underlying monetary and fiscal policies.

The purpose of this paper is to carry out such an analysis for Nigeria’s Second National Development Plan, 1970–74,2 which was launched in October 1970. For this purpose the investment strategy as well as the projected rate of growth is considered as given in the Plan. Section II discusses the internal consistency of the Plan with reference to consumption, saving, and import gap. Sections III and IV identify sectoral savings and construct the underlying flow of funds needed to transfer savings from the surplus to the deficit sectors. The role of the banking system, and of credit and public debt policies, in effecting the necessary intersectoral transfer of savings is shown by the flow-of-funds accounts. Sections V and VI discuss some policy implications of such flows in the fiscal and balance of payments fields. It is shown that the Plan implies a considerable step-up in the rate of savings, to which end, however, no particular policies have been specified. For example, a substantial additional tax effort will be needed to reach the target of public savings.

The analysis through Section VI utilizes projections as given in the plan document. The Plan was apparently formulated on the assumption that the Nigerian economy would continue to operate under the trade and exchange controls inherited from the civil war period. Furthermore, the projections of the balance of payments and of government revenue were based on the maintenance of the pre-May 1971 agreements with the petroleum-producing companies. Neither of these assumptions is any longer valid. Section VII, therefore, assesses the impact on the balance of payments and on government revenues of the changes in the trade and exchange policies and in the agreements with the petroleum companies. No attempt is made to reconstruct the financial flow tables, since that must await decisions as to the disposition of additional revenues likely to be available to the Government. It is shown that domestic finance should no longer be a main handicap in the execution of the Plan but that the external capital requirements would remain almost unchanged despite the substantial increase in the foreign exchange receipts from oil exports. The public sector should be able to generate a substantial current account surplus, the disposition of which needs to be considered within a framework of overall social and economic priorities.

II. The Development Plan

The Second National Development Plan covers the four fiscal years 1970/71–1973/74 (April-March). This Plan was preceded by the First National Development Plan, 1962–68, the implementation of which was compromised by political events leading to a civil war that did not end until January 1970. The preparation of the present Plan began with the organization of the Ibadan conference on reconstruction and development in March 1969.

The Development Plan was formulated within a framework of national accounts, with projections made for the main national accounting aggregates. This framework, in terms of the supply and use of resources, is shown in Table 1. The Plan envisages an average annual rate of growth of 6.6 per cent in real gross domestic product (GDP). Gross domestic investment is estimated at £N 1,596 million, of which the equivalent of £N 495 million would be financed by a net inflow of foreign capital.

Table 1.

Nigeria: Supply and Use of Resources, 1970/71–1973/74

(In millions of Nigerian pounds)

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Source: Federal Ministry of Information, Second National Development Plan, 1970–74, Tables 9(B) and 10, p. 54.

The plan document foresees that domestic savings would amount to £N 1,101 million (that is, gross investment of £N 1,596 million less anticipated net foreign capital inflow of £N 495 million). However, the projected savings as derived in Table 1 amount to only £N 654.7 million. Another inconsistency relates to the estimated import gap, which, as derived from Table 1, totals £N 181 million for the plan period; imports of goods and net nonfactor services are estimated at £N 2,398.2 million, while exports are projected at £N 2,217.2 million. However, the plan document also contains a detailed projection of the balance of payments, which is reproduced here as Table 14. In that table the payment for imports and net nonfactor services is shown as only £N 1,905.4 million, £N 492.8 million lower than that shown in the national income accounts. This difference equals net factor payments (£N 760.3 million) less the inflow of capital into the oil sector (£N 267.5 million) and appears to have been inadvertently included in the original estimate of imports of goods and services.

In Table 2 the lower estimate of imports into the national income accounts was substituted while the Plan’s estimate of GDP was retained. This means that consumption will be lower by the same amount as the reduction in the projected imports. An alternate projection of national accounts is shown in Table 3, where consumption is retained as in the Plan and the GDP has been revised upward by the same amount as the reduction in the projected imports. In both tables, however, savings over the plan period will be identical and will amount to £N 1,147.5 million, somewhat (£N 46.5 million) above the original plan projection. For purposes of analysis the estimates of Table 2 were used, although the same analysis could be carried out on the basis of Table 3. The adoption of the lower estimate of imports would appear to be suggested not only because it is specifically included in the balance of payments projections and yields a savings estimate closer to the plan estimate but also because it implies, in our view, an attainable level of foreign aid for the plan period as a whole.

Table 2.

Nigeria: Revised Projections of National Accounts, 1970/71–1973/74

(In millions of Nigerian pounds)

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Sources: Tables 1 and 14.
Table 3.

Nigeria: Revised Projections of National Accounts, 1970/71–1973/74

(In millions of Nigerian pounds)

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Sources: Tables 1 and 14.

The estimate of public consumption, £N 614 million, is considerably lower than the Plan’s projections of government current expenditure, £N 1,310 million. The difference consists of transfers, such as expenditures on interest and pensions, and of other expenditures that do not represent direct consumption by the public sector. The Plan implies that such transfers will average 53 per cent of expenditure, against an average of 28 per cent during the past several years.

It will be seen from Table 2 that savings as a proportion of gross national product (GNP) will average 14.1 per cent for the plan period, reaching 16.1 per cent in 1971/72 but declining thereafter to 11.8 per cent in 1973/74. The planned average rate of savings is considerably higher than the estimated actual savings ratios of 9.7 per cent in 1969/70 and 8.5 per cent in the last prewar year, 1966/67, and would imply a special effort to reach the target.3 The Plan does not specify any measures to promote savings, but the projected increase in the rate of saving in the first years appears to be related to the planned reliance on deficit financing (see Section IV).

III. Sectoral Generation of Savings

The plan document gives annual estimates of government revenues and expenditures as well as the projected surpluses of the public sector. These figures as well as the revised national accounts data have been used here to estimate sectoral savings. In Table 4 savings are identified as originating in the private and public sectors, while in Table 5 the private sector is further subdivided into households, the non-oil corporate sector, and the oil corporate sector, the savings of which are given in the Plan. However, it was not possible to apportion the entire amount of the estimated private savings among these three subsectors. Unidentified savings amount to £N 140.2 million, of which £N 72.3 million refers to the public sector’s borrowing, mainly from the banking system (£N 50.9 million), £N 21.4 million to the projected surplus of the National Provident Fund (NPF)—which covers all the sectors—and £N 46.5 million to the increase in the savings estimate resulting from the revision made in the national income accounts.

Table 4.

Nigeria: Projected Public and Private Sector Savings, 1970/71–1973/74

(In millions of Nigerian pounds)

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Sources: Federal Ministry of Information, Second National Development Plan, 1970–74, Tables 9(B) and 10, p. 54; Table 1, p. 301; and Table 2, p. 302.

Estimate.

Local authorities’ expenditure is assumed to equal revenue.

Difference between current expenditure and government consumption is shown in Table 2.

As revised in Table 2.

Table 5.

Nigeria: Gross Savings by Origin, 1970/71–1973/74

(In millions of Nigerian pounds)

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Sources: Table 4; Federal Ministry of Information, Second National Development Plan, 1970–74, pp. 301, 302, and 307.

Although the public sector’s annual savings will increase throughout the plan period, those of the private sector are presumed to decline substantially in the latter half of the period. The state governments are expected to contribute nearly half of the projected public savings, and the Federal Government nearly one third. Private savings, as a percentage of income available to the private sector, will decline from 12.7 per cent in 1970/71 to only 1.5 per cent in the last year of the Plan. Such a large decline in the rate of private savings is obviously unrealistic and is counter to the overall objectives of a development strategy. Given that the overall rate of saving in the years immediately preceding the launching of the Plan was substantially lower than that envisaged for the first two years of the Plan, we may expect that the realized rate of saving of the private sector in those two years will fall short of the plan target. On the other hand, the target rate for savings is likely to be exceeded in the last two years of the Plan. It would appear, therefore, that the annual flow of private savings may well be different from the one implied in the plan document.

IV. Intersectoral Flow of Funds and Monetary Developments

In the previous section we identified how much saving is to be generated by the public sector, households, the non-oil corporate sector, and the oil sector. Investment requirements of these sectors, however, will not correspond to the resources available to each of them from domestically generated savings and the projected capital inflow, and they will be either borrowing from or lending to the other sectors. In this section the attempt is made to construct a flow-of-funds account showing us what these sectors will do with the proceeds of their savings: whether they use them for investment in capital goods or in financial assets. In this way we should have a clearer picture of the process by which one sector’s saving is made available to another for investment. The flow-of-funds tables as developed here, however, comprise only financial transactions implied in the Plan and are based on simplifying assumptions as to the behavior of the various sectors.

Table 6 shows the surplus or deficit of sectors after taking into account their investment requirements, internal savings, and the projected net external capital inflow. The public sector is considered as one single sector, since the Plan does not specify amounts likely to be invested by the statutory corporations and the marketing boards. Furthermore, while the public sector’s investment program is broken down between the Federal Government and the state governments, this breakdown refers only to nominal investments rather than to the investment net of underspending, which the Plan recognizes is likely to occur and which it takes into account in the national accounts projections. The Plan does not identify underspending by subsectors.

Table 6.

Nigeria: Projected Investment, Savings, Capital Inflow, and Transfers, by Sector, 1970/71–1973/74

(In millions of Nigerian pounds)

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Sources: Tables 4, 5, and 14; Federal Ministry of Information, Second National Development Plan, 1970–74, pp. 307–10.

It is assumed that the entire unrequited transfers from abroad will accrue to the public sector.

Table 6 shows that after taking account of the external capital inflow the public sector and the household sector will be in deficit, while the corporate sector will be in surplus for the plan period as a whole. In addition, there is an unidentified private saving of £N 140.2 million, including the surplus of £N 21.4 million generated by the NPF. The public sector will have positive domestic borrowing requirements in the first three years but will be a substantial net lender in the last year of the Plan. A greater reliance is being placed on the public sector’s borrowing from the Central Bank in the first two years, and there is an implied reduction in the public sector’s net liabilities to the private sector in the first year of the Plan. In contrast, in the last two years of the Plan, when the public sector is expected to repay a substantial amount of its borrowing from the Central Bank, its borrowing from the private sector will be stepped up.

The oil sector is expected to meet its investment requirements fully by a fresh capital inflow and to generate a domestic surplus of £N 47.3 million, which it would lend to the other domestic sectors. The basis for this expectation is somewhat questionable, as the oil sector may wish to use its internally generated savings for its own investment before borrowing abroad. In that event, the net capital inflow into that sector would be lower than envisaged and the overall balance of payments deficit higher, unless the other sectors correspondingly increase their borrowing abroad.

The lower part of Table 6 summarizes the sectoral information in order to show domestic intersectoral transfers. The table shows an overall financial surplus of £N 65.2 million, which is equivalent to the projected increase in reserves (£N 15.2 million) and the envisaged reduction in external payments arrears (£N 50 million).

The information in Table 6 can now be used to conduct the flow-of-funds tables: Table 7 for the plan period as a whole and Tables 811 for each of the plan years. The left-hand column for every sector indicates the uses (U) of resources by that sector and the right-hand column gives the sources (S) of resources for that sector. For the banking sector, use of resources equals an increase in assets and source of resources equals an increase in liabilities. Thus, an increase in assets would be a positive entry in the U column and an increase in liabilities would be a positive entry in the S column. Similarly, a decline in assets would be a negative entry in the U column and a decline in liabilities a negative entry in the S column. Table 7 sets forth the following information for the entire plan period.

Table 7.

Nigeria: Flow-of-Funds Account, 1970/71–1973/74

(In millions of Nigerian pounds)

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Source: Table 6.

U = use of resources.

S = source of resources.

Table 8.

Nigeria: Flow-of-Funds Account, 1970/71

(In millions of Nigerian pounds)

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Source: Table 6.

U = use of resources.

S = source of resources.

Table 9.

Nigeria: Flow-of-Funds Account, 1971/72

(In millions of Nigerian pounds)

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Source: Table 6.

U = use of resources.

S = source of resources.

Table 10.

Nigeria: Flow-of-Funds Account, 1972/73

(In millions of Nigerian pounds)

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Source: Table 6.

U = use of resources.

S = source of resources.