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Attainment of Potential Growth Rates in Nigeria under Balance of Payments
ATTAINMENT OF POTENTIAL GROWTH RATES IN NIGERIA UNDER BALANCE OF PAYMENTS CONSTRAINTS: EXTENT, OBSTACLES AND THE WAY FORWARD / 18Adeolu O. Adewuyi and Tunde, W. Adeoye
Background
Growth performance of the Nigerian economy has been determined by both domestic production and consumption activities as well as foreign transactions in goods and services. Specifically, it has been acknowledged that foreign trade is an Aengine of growth and development@. Further, in an economy that is characterised by macroeconomic stability and favourable investment climate, attractive trade policies would encourage foreign investment, technological advancement and exports which will in turn attract massive inflow of foreign exchange. With all these, the economy would be able to meet its growth and development requirements in terms of capacity to import capital goods, raw materials and technology.
Prior to the discovery of oil in 1960s, the Nigerian government was able to execute investment projects through domestic savings, earnings from agricultural product exports and foreign aids. However, the capacity of the economy to accumulate domestic savings to finance investment was limited. There was therefore, the inability of government to generate sufficient foreign exchange due to persistent balance of payments problem arising from the reliance on monoproduct primary export which is not competitive at the international market. This consequently led to unfavourable terms of trade and instability in government revenue. All these have served as checks on demand (import demand) and a constraint to effective implementation of national development plans.
After the discovery of oil and its massive exportation in the 1970s, one would expect that more foreign exchange earnings will accrue to the economy, and the economy would be able to undertake viable investment projects that will lay a basis for sustainable growth and development. Between 1970 and 1975, savings-GDP ratios ranged between 16.7 and 36 per cent, while investment-GDP ranged between 16.9 and 26.0 per cent (Table 18.1). The positive savings - investment gap/GDP recorded during this period and which reached its peak in 1974 was not unconnected with massive inflow of foreign exchange receipts from exports as a result of oil boom. This enabled the economy (GDP) to grow in real terms at an average of 8.4 per cent between 1971 and 1975 (Table 18.1) All these suggest that financial resource was not a constraint to growth during this period. This was also evident by deficit-GDP ratio which was very low but positive in some cases (Table 18.2). The positive balance of payments (BOP) position recorded also signalled that the economy was financially buoyant during the 1971\75 period (Table 18.2).
The subsequent period 1975 to 1980 also witnessed relatively high savings and investment rates. The low and negative savings - investment gap-GDP ratios suggest that more external financial resources were utilised to execute investment projects since the balance of payments positions were unfavourable (negative) for most of the years during this period. The oil boom of 1978/79 should be noted for its impact on capital accumulation. During this period, the balance of payments position was positive, investment rate was high, savings rate was about 30 per cent and the ratio of savings-investment gap to GDP was more than six per cent. Therefore, one would have expected that the economy would grow at a higher rate. However, the real income (GDP) growth rate for the period 1975 to 1980 was only 2.8 per cent (Table 18.1). This low growth performance of the economy could be attributed to the type of development strategy (public sector-led strategy) adopted during this period, which emphasised the expansion of public sector activities, particularly the development of public enterprises to provide basic infrastructural facilities and social amenities. The government also embarked on income distribution policy through various awards and other welfare packages. Trade policy during this period also favoured imports and little or no control was exercised on government finances and balance of payments position.
The negative price shock in the world market in the early 1980s resulted in a substantial reduction in export earnings that accrued to government. The aftermath of this was huge and recurring fiscal deficits, balance of payments and debt crises, due to unsustainable huge public sector expenditure and lack of alternative source of export earnings. Therefore, the early 1980s witnessed deficits in current accounts and the deficit-GDP ratio rose to 12 per cent in 1982 from four per cent in 1980. The ratio of savings - investment gap to GDP widened and the total debt - GDP ratio increased.
Table 18.1: Savings, Investment and Growth Performance of the Nigerian Economy
Year / Investment- GDP ratio / Savings-GDP ratio / Savings-Investment gapGDP ratio / Real GDP growth / Growth Rate of export receipts / Growth Rate of Import value1970 / 16.9 / 16.7 / -0.2 / - / - / -
1971 / 20.6 / 21.3 / 0.7 / 21.4 / 46.1 / 42.6
1972 / 22.9 / 25.8 / 2.9 / 5.5 / 10.9 / -8.2
1973 / 23.4 / 29.3 / 5.9 / 6.4 / 58.9 / 23.7
1974 / 17.1 / 36.0 / 18.9 / 11.7 / 154.3 / 41.8
1975 / 26.0 / 27.4 / 1.4 / -3.0 / -15.0 / 114.2
1976 / 31.8 / 31.9 / 0.1 / 11.1 / -37.1 / 38.4
1977 / 31.3 / 30.8 / -0.5 / 8.2 / -13.0 / 37.8
1978 / 29.2 / 25.1 / -4.1 / -7.4 / -20.5 / 15.8
1979 / 23.6 / 30.0 / 6.4 / 2.4 / -78.7 / -9.0
1980 / 22.2 / 32.3 / 10.1 / 5.5 / -30.9 / 21.7
1981 / 28.3 / 21.8 / -6.5 / -26.8 / -22.3 / 41.2
1982 / 21.4 / 14.2 / -7.2 / -0.3 / -25.6 / -16.1
1983 / 14.7 / 11.0 / -3.7 / -5.4 / -8.6 / -17.3
1984 / 9.5 / 11.4 / 1.9 / -5.1 / 21.1 / -19.4
1985 / 9.0 / 12.6 / 3.6 / 9.4 / 29.0 / -1.6
1986 / 15.1 / 11.7 / -3.4 / 3.2 / -15.3 / -15.3
1987 / 13.7 / 17.6 / 3.9 / -0.6 / 240.3 / 198.5
1988 / 13.5 / 14.5 / 1.0 / 10.0 / 2.7 / 20.1
1989 / 14.1 / 22.5 / 8.4 / 7.3 / 85.9 / 43.9
1990 / 14.6 / 29.5 / 14.9 / 8.2 / 89.6 / 48.2
1991 / 16.3 / 22.7 / 6.4 / 4.8 / 10.6 / 90.3
1992 / 18.2 / 22.7 / 4.5 / 3.0 / 70.5 / 67.7
1993 / 23.3 / 20.2 / -3.1 / 2.7 / 100.1 / 13.8
1994 / 19.6 / 20.6 / 1.0 / 1.3 / -5.8 / -2.0
1995 / 16.3 / 18.4 / 2.1 / 2.2 / 361.4 / 363.9
1996 / 14.2 / 34.9 / 20.7 / 3.4 / 37.8 / -25.5
1997 / 17.4 / 24.6 / 7.2 / 3.2 / -5.5 / 33.5
1998 / 24.1 / 19.6 / -4.5 / 2.4 / -65.1 / -1.0
1999 / 22.3 / 18.2 / -4.0 / 2.8 / 36.8 / 2.9
2000 / 17.7 / 33.4 / 15.7 / 3.8 / 38.9 / 10.4
Sources: (1) World Bank, (various issues) World Tables and World Development Indicators, Washington, DC (2) Central Bank of Nigeria, (various issues) Statistical Bulletin & Annual Report and Statement of Account.
Table 18.2: Nigeria: Trends in Balance of Payments Positions and Fiscal Deficits
1970 / 0.1 / -0.1 / 0.1 / -455.1 / -9.0
1971 / 0.1 / -0.2 / 0.3 / 171.6 / 3.0
1972 / -0.04 / -0.3 / 0.3 / -58.5 / -1.0
1973 / 0.2 / 0.1 / 0.1 / 166.1 / 2.0
1974 / 3.1 / 3.1 / -0.01 / 1796.8 / 10.0
1975 / 0.2 / 0.04 / 0.1 / -427.9 / -2.0
1976 / -0.33 / -0.3 / -0.1 / -1090.8 / -4.0
1977 / -0.5 / -0.7 / 0.2 / -781.4 / -2.0
1978 / -1.3 / -2.4 / 1.1 / -2821.9 / -8.0
1979 / 1.9 / 1.0 / 0.8 / 1461.7 / 3.0
1980 / 2.4 / 2.4 / 0.1 / -1975.2 / -4.0
1981 / 3.0 / -4.0 / 0.9 / -3902.1 / -8.0
1982 / -1.4 / -4.9 / 3.5 / -6104.1 / -12.0
1983 / -0.3 / -3.1 / 2.7 / -3364.5 / -6.0
1984 / 0.4 / 0.0 / 0.2 / -2660.4 / -4.0
1985 / 0.3 / 2.2 / 1.8 / -3039.7 / -4.0
1986 / -0.8 / -3.0 / -1.9 / -8254..3 / -11.0
1987 / 0.2 / -0.3 / 1.7 / -5889.7 / -5.0
1988 / -2.3 / -1.0 / 0.1 / 12160.9 / 8.0
1989 / 8.7 / -9.2 / -12.7 / 15134.7 / 7.0
1990 / -5.8 / 19.4 / -2.2 / -35755.2 / -8.0
1991 / -15.5 / -12.6 / -94.2 / -39625.3 / -11.0
1992 / -101.4 / -5.1 / -19.7 / -107753 / -7.0
1993 / -41.7 / -19.5 / -19.7 / -70270.6 / 15.0
1994 / -42.6 / -52.3 / 11.3 / -70270.6 / -11.0
1995 / -195.2 / -186.1 / -3.3 / 1000 / 0.0
1996 / -53.2 / 240.2 / -290.2 / 37049.1 / 1.0
1997 / 1.1 / 36.0 / -30.5 / -5000 / 0.0
1998 / -220.7 / -331.4 / 116.7 / -133389.3 / -4.7
1999 / -326.6 / 46.3 / -336.8 / -285140.7 / -8.4
2000 / 314.1 / 713.0 / -390.3 / -103777.3 / -2.9
Sources: Central Bank of Nigeria (various years). Statistical Bulletin & Annual Report and Statement of Account, Lagos (now Abuja)
In an attempt to address the various macroeconomic problems in the economy, government adopted the demand management policy in 1982 when the problems were perceived as demand driven. In effect, various stabilisation measures were introduced. Such measures include imposition of tariffs and application of contradictory fiscal and monetary policies in order to reduce the level of aggregate demand and achieve fiscal and balance of payments equilibrium. Consequently, the deficit - GDP ratio fell from 12 per cent in 1982 to four per cent in 1985. The overall balance of payments position which was negative between 1982 and 1983 became positive in the 1984 to 1985 period. All these have consequences for imports, savings and investment and growth particularly in developing countries such as Nigeria which depends heavily on imports for its capital goods and raw materials. Total debt - GDP ratio rose from 9.6 per cent in 1980 to 24.1 per cent in 1985. With all these constraints on domestic financial resources and the inability of the private sector to champion the course of growth and development, the real GDP declined by 3.8 per cent between 1980 and 1985 (Tables 18.1 and 18.2).
The persistence of the macroeconomic problems in the economy even after the introduction of a number of stabilisation measures made the government to adopt the structural adjustment programme (SAP) in 1986. This was meant to further strengthening the existing demand management policies; restructure and diversify the productive base of the economy and reduce dependence on the oil sector and on imports; and to achieve fiscal and balance of payments viability, among other underlying objectives (Philips, 1987).
Further, the SAP policy package includes trade and payment liberalisation which suggest that there was no serious balance of payments constraint during the period of implementation of SAP compared to what obtained before SAP. This is because there was absence of serious constraint on import demand, as a result of the implementation of trade liberalisation under SAP where the levels of both tariff and non-tariff barriers to trade were reduced. It should be noted that with the introduction of SAP in Nigeria, the procedures hitherto used in allocating foreign exchange and which consequently serve as a mechanism for controlling demand for foreign exchange was abolished. Thus, the foreign exchange market was deregulated. This policy aims at making foreign exchange available to whoever could afford the prevailing exchange rate. Moreover, the SAP period (1986 to 1993) was said to be characterised by persistent and significant capital and current accounts deficits (Table 18.2) unlike the first period (1970 to 1985).
Between 1986 and 1993, the ratio of investment to GDP ranged between 11.0 and 18.5 per cent, while the ratio of savings to GDP was between 10.0 and 28.5 per cent. The savings-investment gap-GDP ratio which was negative between 1986 and 1987, became positive in the subsequent years (Table 1). This suggests that the SAP period was characterised by relatively low level absorptive capacity of the economy since some proportions of savings were not translated into investment (Adewuyi, 2000). Moreover, since terms of trade fluctuated during this period, nominal growth in trade components also fluctuated while deficits were recorded in both current and capital accounts as well as the overall balance of payments. Apparently, this poor performance of the major macroeconomic variables affected the overall growth performance of the economy as the real GDP growth rate which rose from 3.2 per cent in 1986 to 10.0 per cent in 1988, declined continuously from 8.2 per cent in 1990 to 2.7 per cent in 1993. Further, the relatively low level absorptive capacity of the economy continued in the subsequent period (after SAP) as the savings-investment gap -GDP ratio was positive, while the external trade performance indicatiors did not show significant improvements. The ratio of fiscal deficit to GDP reached a peak of 11.0 per cent in 1994, while the real GDP growth rate was less than 4.0 per cent in the period 1994 to 2000.
Given the foregoing, it is considered important to examine the extent to which balance of payments position and other factors hinder Nigeria from actualising its growth potential. This study therefore quantifies the potential growth rates of the Nigeria economy under balance of payments constraint. It also measures and analyses the extent to which actual growth rates of the economy deviate from the potential growth rates. It examines some obstacles and the way forward to the realisation of the potential growth rate in Nigeria.
The rest of this paper is structured as follows; section 2 contains review of literature, while section 3 presents analytical framework and the estimated models. Section 4 discusses methodology and empirical results. Summary of findings and concluding remarks are discussed in section 5.
Review of Literature
Conceptual Framework
The term Abalance of payments constrained growth@ can be defined as the situation where the performance of a country in foreign markets as well as the response of the world to this performance constrain the growth of the country to a rate less than the rate required for addressing domestic economic problems. That is, problems such as the prevalence of unemployment and underemployment, and the existence of idle resources and capacity (McCombie and Thirlwall, 1994 and Hussain, 1999).