IMF's Structural Adjustment Program Reform for Nigeria

IMF & NIGERIA
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IMF & Nigeria
Structural Adjustment Programs (SAPs) are economic reforms that countries in economic crisis must adhere to as a condition for receiving a loan from the International Monetary Fund (IMF) and the World Bank (WB). SAPs are generally geared towards adjusting the borrowing country’s economic structure and reducing its government deficit by eliminating inflation, encouraging economic growth, and liberalizing trade and foreign investment. The IMF and World Bank have long imposed SAPs as conditions on their loans or reduction of interest rates on existing loans (World Bank, 1994). Counties are generally required to perform all or some of the following: devalue their currencies to lower government deficits, reduce public spending, privatize state-controlled industries, improve domestic tax collection, and implement favorable policies to attract foreign investment. SAPs have attracted a lot of controversy in developing nations, which have largely failed to benefit from the imposed economic reforms.
Although SAPs are intended to lower poverty, reduce balance of payments deficits, and increase economic growth, a majority of low-income countries have failed to record meaningful economic growth or strengthen their balance of payments. For instance, most African countries that received the conditional loans from IMF and World Bank in the 1980s experienced a contractive economic impact that persists to this day (Business Perspectives, 2014). While issues like corruption, ownership of resources, and political interests have undermined the efficacy of SAPs in developing nations, most of the structural adjustments demanded by international financial agencies as a condition for new loans stifle long-term economic growth by restricting public investment and transferring resources to richer nations. This research will investigate the impact of IMF’s SAP on Nigeria’s economic growth after the 1986 international oil price collapse. The essay theorizes that the SAP conditions imposed by the IMF in 1986 including devaluation of the naira, commercialization and privatization of state-controlled industries, deregulation of interest rate, and removal of subsidies resulted in the stagflation of Nigeria’s economy.
Nigeria’s oil boom of the 1970s had a widespread impact on the country’s economy. The revenues generated from oil exports provided the funds required to develop the country’s infrastructure. The country’s oil revenues also helped expand other sectors of the economy such as health and education, which had been greatly undermined by the civil war of 1967 to 1970. However, despite the successes in developing numerous social services, many public investment projects were implemented without considering their long-term sustainability. Many of the public agencies tasked with implementing Nigeria’s public investment projects lacked sufficient capacity to make them economically viable. Moreover, the rapid expansion of social services was accompanied by an increase in public expenditure on wages. Non-oil tradeable sectors, particularly agriculture, were severely impacted by the price and wage increases, which lowered producer incentives (Washington, 2021). Within ten years after the oil boom, Nigeria was producing fewer export crops and the country was dependent on food imports. As a consequence of the country’s overreliance on oil exports, the government was unable to fund federal and state functions when the oil market slumped in the early 1980s.
Nigeria’s federal and state budgetary expenditure had already begun to exceed the revenues generated from oil exports even before the oil crisis. Rapid wage increases, rising exchange rates, negative real interest rates, and import licensing had resulted in an overreliance on imported inputs and capital-intensive technology. The country’s overdependence on oil revenues and imported inputs rendered it susceptible to external market shocks. Nigeria’s federal and state government budgetary expenditures exceeded revenues generated from oil production despite the country’s growing earnings from oil exports. When the oil market slumped in the early 1980s, Nigeria was already contending with external and internal deficits as well as declining foreign exchange reserves. Unfortunately, the government’s slow response to the economic crisis resulted in further borrowing, increasing the country’s total debt from less than $1 billion to about $12.8 billion within a span of five years. The government responded to the growing debt crisis by implementing largescale austerity measures which reduced fiscal spending but created an economic recession. This downturn was exacerbated by the dramatic fall in oil prices in 1986, prompting the Nigerian government to consider economic reforms rather than relying on austerity measures alone.
The IMF implemented an ambitious SAP in June 1986 as a condition for a 3-year extended facility loan of $2.3 billion. Nigeria’s SAP program included seventeen conditions focused on restructuring the country’s economy and supporting fiscal stability. The Babangida government introduced the SAP in July 1986 and promised to reduce the country’s overreliance on oil, eliminate widespread imbalances in the economy, and reduce imports of consumer and producer goods. Reducing the country’s overdependence on oil and imported inputs would not only restore balance of payments but also increase price stability. The specific objectives of the SAP were to diversify the country’s productive economic base, increase capitalist accumulators in the economy, reduce government deficit by cutting spending on unproductive public investments, and set the foundation for sustainable non-inflationary development (World Bank, 1994). To achieve these aims, the Nigerian government strengthened demand management policies, instituted a realistic exchange rate policy through the Second-tier Foreign Exchange Market (SFEM), provided domestic producer incentives, implemented progressive trade and payments laws, and commercialized state-controlled industries.
While the SAP program initially appeared to improve capacity utilization in non-oil sectors such as agriculture and manufacturing, the economic reforms worse long-term economic, social, and political outcomes. During the course of implementing the economic reforms, the government was faced with several economic distortions, particularly the progressive devaluation of the naira in foreign exchange markets. For instance, the heightened capacity utilization in non-oil manufacturing industries was curtailed by insufficient foreign exchange needed for spare parts and raw materials. The depreciation of the country’s currency made imports expensive for manufacturers, a challenge that was impossible to solve given the country’s growing external debt (Isiani et al., 2021). Although the SAP aimed at diversifying the country’s economy by stimulating industrialization, larger fiscal problems like sky-rocketing inflation, growing unemployment, high interest rates, burgeoning external debt, social unrests, and unsustainable financial deficits remained intractable. Furthermore, the devaluation of the naira resulted in a massive inflationary trend. For instance, after the implementation of the SAP, Nigeria’s inflation rate grew from 5.4% in 1986 to 40.9% in 1989.
For instance, the removal of subsidies affected non-oil sectors like agriculture. The government’s action of banning food imports led to increases in food prices owing to the country’s weakening currency. Moreover, the high cost of imported inputs like fertilizer and agrochemicals undermined agricultural production by making it less profitable for farmers. Furthermore, the disbanding of commodity boards, which were responsible for controlling the prices of goods and services, led to run-away inflation. Ending agro-allied boards contributed to a price collapse: local farmers could not compete favorably with foreign food imports and many families lost their farm holds. On the whole, the devaluation of the naira affected ...