The Structural Adjustment Program (SAP) came under fire recently by opponents of a more liberal Foreign Exchange (FX) system in Nigeria, especially during the heated campaign period before the last Presidential elections.
So was SAP actually a negative for the Nigerian economy when it was implemented some 35 years ago?
Under the Structural Adjustment Program (SAP) introduced in 1986, Nigeria reformed its foreign exchange system, trade policies, and business and agricultural regulations.
Like the causes of the 2016 recession, the background to SAP was a sharp fall in the international price of oil in the early 1980s, which saw Nigeria’s export revenues and budgetary receipts fall as well.
Before then the Nigerian Government had gone on a petro-dollar funded spending spree, leading to bizarre outcomes like the Cement Armada (1975 – 1980) when hundreds of cement-laden ships (ordered by the FG) arrived en masse at Lagos, creating severe multi-year-long port congestion during the height of the 1970s oil boom.
The steep expansion in Government spending then changed the structure of relative prices and wages in Nigeria.
Rising wages and an appreciating currency squeezed the profitability of non-oil exports and undermined their competitive position internationally, while cheap food imports muscled out domestic food production.
When the music stopped (oil prices collapsed) in the early 1980’s, the Government failed to adjust its spending to match the realities of the time, leading to Nigeria building up large fiscal and external deficits.
To finance its domestic deficits, the Government of the time relied on borrowing and money printing, while to finance its foreign deficits, it drew down its international reserves.
The decreasing availability of foreign exchange caused the private sector to incur arrears with suppliers abroad.
In 1984, in an attempt to reduce the country’s financial imbalances, Nigeria introduced budget-tightening measures.
Economic activity and employment contracted.
Rather than allowing the exchange rate to depreciate as a way of stimulating the economy, the Government focused on maintaining the artificially high value of its currency in an effort to contain inflation.
Despite these efforts, inflation increased, while decreased availability of foreign exchange boosted import prices and domestic costs.
This sounds eerily similar to Nigeria’s policy responses and outcomes during the recent 2016 – 2018 recession.
By the time SAP was introduced in 1986 the economy was in dire straits.
So what were the economic impact of SAP which included reforms to macro policy, exchange rate/trade policies, financial sector, public enterprises and expenditure?
The data shows that despite difficulties in implementation, the policies incorporated by the SAP-particularly the large depreciation of the real effective exchange rate (REER) -produced results.
According to World Bank data in contrast to an average decline of 2-3 percent per annum between 1980 and 1986, Nigeria’s real GDP grew by about 5 percent per annum between 1986 and 1992, primarily reflecting a recovery in agriculture and manufacturing.
This success notwithstanding, per capita income was still only $320 in 1994 and consumption and income were a little higher (in real per capita terms) than they were in the early 1970s before the oil boom.
According to the World Bank data, with GDP then growing at 5 percent per year and population at 3 percent, per capita income grew at 2 percent per annum, and at that rate, it would have taken about 30 years for Nigeria to recover its peak living standard (achieved in 1981) from its low point at the start of SAP.
Today, following the last recession (2016) and oil price collapse there are also various back and forth commentary about whether the actions of Government worsened the economic situation or actually helped to make it less bad than it could have been.
Extensive interviews with firms doing business in Nigeria conducted by the Economist Intelligence Unit (EIU), shows the shortages of foreign currency that followed the collapse of oil export earnings in 2014-16 and the imposition by the Federal Government and central bank of severe restrictions on the availability of FX created problems for businesses.
“Companies dependent on imported raw materials were unable to obtain them and, in some cases, had to close. A requirement for naira to be lodged at a bank for six weeks in order to obtain FX put pressure on working capital. At the same time, consumer demand collapsed owing to the decline in real incomes. Many retailers with rent costs indexed to the dollar went bankrupt,” the EIU report released last week said.
What is also clear is that there were some winners from the rationing of FX, and banning of 42 imported items from accessing FX in the official window by the CBN.
These include some players in the Agriculture space like farmers and agro-processors as well as a few manufacturers that embraced import substitution.
In the SAP era, while the macro economy and greater number arguably benefited, a few urban civil servants and workers in import-substituting industries-bore the cost of adjusting to the downturn in oil.
Today the larger macro economy (and greater number of people) bears the brunt of current policies (in the form of soaring unemployment, low growth, high inflation) while a few are beneficiaries.
In Nigeria in the past, a lack of credible and authoritative platform that documents the nation’s economic history often leads to revisionism, a practice in which, economists and non-economists, lay men and all comers, reinterpret traditional views of causes and effects, decisions, and data.
Today BusinessDay is around and everyday the paper (through all its platforms) document’s Nigeria’s true economic history, for posterity and lessons to be learnt.