THE IMPACT OF IMF’S STRUCTURAL ADJUSTMENT PROGRAMME ON THE ECONOMIC DEVELOPMENT OF NIGERIA (1986-2008)
The adoption of the International Monetary Fund (IMF) Structural Adjustment Programme (SAP) in 1986 resulted in the transition from fixed exchange rate regime to floating exchange rate regime in Nigeria. Ever since, the exchange rate of naira vis-à-vis the U.S dollar has attained varying rates all through different time horizons. On this basis, this study examines the reliability, persistency, and severity (degree) of volatility in exchange rate of Nigerian currency (naira) vis-a-vis the United State dollar using monthly time series data from 1986 to 2008.
International Monetary Fund (IMF) is a large organization, a system of government that functions by rules. They give loan and advices to member states. IMF was envisaged as a financial institution with lending power designed to aid members respond to balance of payment deficits without disparaging measures to national or international prosperity, and to facilitate the expansion of balance growth of international trade. The economic crises in Nigeria since 1970’s was caused by high unemployment rate, high inflation rate, disequilibrium in the country’s balance of payment, management of internal and external debt and all these contributed to the decline in the living standard of the people. The standard Purchasing Power Parity (PPP) model was used to analyze the long-run consistency of the naira exchange rate while the time series properties of the data was examined using the ADF and PP approach, the stationary process, and order of the incorporated series. The ARCH and GARCH models were used to examine the degree or severity of volatility based on the first difference, standard deviation and coefficient of deviation estimated volatility series for the nominal and real exchange rate of naira vis-a-vis the U.S dollar. These economic problems stated in Nigeria as a result of glut in world’s oil market, the prices of oil fell, resulting in the decline in foreign exchange earnings that were mainly coming from the oil sector. The policy formulation in Nigeria has been strongly influenced by the IMF Since 1986 to 2008. Although government rejected the IMF loan in 1985. It directly or indirectly adopted the IMF conditions as official policies in 1986 through the World Bank supported structural adjustment programs (SAP).Our recommendation is that since government has adopted most of the IMF recommendations as official policies. It should go ahead and obtain the IMF loan and make sure that the loan is effectively and efficiently utilized In productive and development projects.
This however proves the ineffectiveness of monetary policy in stabilizing exchange rate and therefore, calls for the need of more tightened measures especially in controlling the high demand for foreign currency.
BACKGROUND TO THE STUDY
The Nigeria economy experienced a major increase in its revenue subsequent the increase in output and prices of crude petroleum in the 1970s and early 1980s. This led to the building of a network of inter-state roads, expansion of educational infrastructure in the form of universities, construction of shell plants reference, petro-chemical facilities, vehicle assembly plants etc. The relatively steady growth in real gross domestic growth (GDP) achieved over the period 1960 to 1975 increased until lately when it slumped. The rapid descent that followed the period of boom resulted in a clear crumple of the economy in that many sectors of the economy suffered due to neglect from the government and consequently output and the nations GDP decreased. The economy had in fact fallen off gear and needed serious restructuring. There exist in the economy huge debts owned foreign countries and individuals, a good proportion of which is short-term trade debts. The level of imports of the country had been far in excess of its current foreign earnings from exported and therefore, the trade debts were getting larger and larger.
This is so because the policy orientation and management style of the earlier years had encouraged heavy dependence on imported raw materials, foods, spare parts and technology, thus all manufacturing and other establishments depended on some imported items. Tastes and consumption were oriented towards international standards. Because of near total dependence on imported goods and services to fuel productive facilities, a drastic fall in national foreign exchange resources meant a national calamity. As a result of this import and consumption pattern that was very quickly established during the 1975-1976 oil boom years when export receipts began to fall imports could not be restrained. million The origin of external debt in Nigeria can be traced back to the first decade of existence as an independent sovereign nations. External debt is defined according to oyejide(1985) as a repayable obligation that has either a maturity of up to one year,(that is short-term debt), or a maturity of over one year,(that is medium and long-run term debt), is owned to non-residents and is repayable in foreign currency. The country’s foreign indebtedness during its first decade of existence reached, at its peak, first over half a billion US dollars. Thus in 1970, total debt outstanding including undisbursed, was N690.7 out of which N458.8 million was disbursed. By 1972, total debt outstanding had gone over the billion-dollar mark, and by 1974 disbursed debt itself stood at $1.22 billion. Total debt rose by about $2billion or about 160% between 1976 and 1978. There was another “quantum jump” from $3.28 billion to $8.84 billion (a further 170% increase between 1978and 1980. By 1983, Nigeria external debt obligations were well in excess of $18 billion (World bank, 1985). The country’s external debts were owned largely to multi-lateral organizations and bilateral sources of concessional laws of financial resources.
The government had to commence refinancing (a device for transforming short term debt obligation into long term ones) and re-scheduling (re-negotiation of the term of an outstanding debt which depends on an agreement with the lender country institution to become effective arrangements). These arrangements led to the conversion of $1.9 billion of these short-term trade credits into public medium term debt at floating interest rates in 1983.The establishment of the international monetary fund was conceived in July 11944 during the united nations monetary and financial conference, originally with 45 government representatives that met in the mount Washington hotel in the area of Bretons woods. New Hampshire, united states, with the delegates to the conference agreeing on a framework for international economic cooperation. The IMF was formally organized on December 27, 1945, when the first 29 countries signed its articles of agreement, with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system. On April 17, 1943, the secretary of the United States treasury published a preliminary draft outline of a proposal for an international clearing union was published by the United Kingdom government. The IMF describes itself as “an organization of 187 countries (as of July 2010), working to foster global monetary cooperation secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty.
The IMF’s influence in the global economy steadily increased as it accumulated more members including the international bank for reconstruction and development (IBRD). The member of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the soviet bloc. The expansion of the IMF’s membership, together with the changes in the world economy, has required the IMF to adapt in a variety of ways to continue serving its purpose effectively. The main objectives of the IMF is to promote a freer system of the world taste and payment leading to the expansion and balanced growth of international trade which is geared towards “the promotion and maintenance of high levels of employment and real income essential to an improvement in living standards (Richard a, 1970).
SPECIFIC OBJECTIVES IN TERMS OF IMF
- Deletion of trade reconstruction and so to facilitate the settlement of international financial obligations or indebtedness.
- Achieving stability in exchange rate. The IMF performs the following functions.
- It regulates international payments.
- It acts as a consultants in providing a centre for international co-operation as well as advice and technical assistance for its members and finally.
- With resources amounting to over $20 billion, it acts as a banker prepared to lend on short-medium term to member countries faced with balance of payment deficits.
There has considerable date over the decision to accept or not to accept the IMF loan as a result of loan conditionality. Conditionality, according to the managing director of IMF. Dr. Lawscere refers to the economic and financial measures which are needed in a particular country in order to restore a sustainable external position at the end or towards the end of a fund program, that is, a deficit that can be financed by long-term capital flows without undue burden or strain on the service position of the country in question (IMF 1984).
These conditionalities include;
- Devaluation of the domestic currency.
- Trade liberalization.
- Cancellation of government subsides.
- Wage control and higher interest rate or loan to local businessmen.
In order to meet IMF conditionalities, the country introduce SAP on July 1, 1986. According to Andre Martins (1987), SAP is generally designed to perform many roles as,
- Stabilization towards reducing total domestic demand.
- Efficiency towards increasing supply through the better use of factors of production.
- International competitiveness, devaluation of national currency.
- Growth towards increasing supply through an expansion of endowment of the production factors.
- Institutional discipline.
STATEMENT OF THE PROBLEM
In critical observations, some schools of thought believe that Nigeria’s economic problems originated from economic mismanagement. Some hold the views that the civil services and the parastatals as they were constituted at the time were not able to formulate and put into practice sound economic programmes. In any case, the problem could be stated in many other ways. There was inadequate sense of priorities, poor management information system, project and programmes were implemented which had minimal impact on growth and development. White elephant projects were often time given preference over projects that could stimulate the economy in a way to greatly benefit majority of the people. Statistical and accounting information flows were inadequate to monitor performance of operational and capital budgets. Argentina, which has been considered by IMF to be a model country in its compliance to policy proposals by the Breton woods institutions, experienced a catastrophic economic crisis in 2002, which some believe to have been caused by IMF-induced budget restrictions which undercut the government’s ability to sustain national infrastructure even in crucial areas such as health, education and security and privatization of strategically vital national resources. Since 2005, IMF is constantly making mistakes when it appreciates the country’s economic finances. Accounts of governments were in arrears of over five years in some cases. Thus, inefficiency, fraud and corruption were hidden. The magnitude of finance as well as its sources and uses were only partly revealed, so were the performance achievements and failures.
OBJECTIVES OF THE STUDY:
In view of general objectives, the intention of the study is to; among a few others access the collision of IMF on Nigerian economy via policy formulations of the past ten years or thereabouts. It is also hoped that the study will bring forth the extent of awareness and precaution generated on Nigeria as a result of her indebtedness to external creditors.
Besides, it is the objective of the study to use the above findings to offer suggestions and recommendations on well-organized management of resources and policy formulation. The IMF provides policy advice to member countries primarily in the context of its “surveillance” of their economic policies and its financial support for their adjustment programs. The objectives of IMF policy advice to member countries are to contribute to the promotion and maintenance of high levels of employment and real income to the development of their productive resources.
The specific objectives are;
- To know position of the of Nigeria’s foreign reserve before and after SAP.
- To evaluate the conditionalities attached to IMF policy formulations
- To relate the IMF policy formulation to Nigeria’s economic growth (or backwardness).
- What are the possible factors that affect adversely the management information system, project and programmes on the growth and development of IMF?
- What is the relationship between the IMF policy formulation and Nigeria’s Economic Growth?
- What are the adjusted programs on Nigeria’s economy and development facilitated by IMF?
- What are the effective IMF policies that will assist the economic and growth of Nigeria?
STATEMENT OF HYPOTHESES
H0: Inadequate sense of priorities, poor management information system, project and programs were implemented which had minimal impact on growth and development which cannot resolve the problems of IMF.
H1: Inadequate sense of priority, poor management information system, project and programs were implemented which had minimal impact on growth and development can resolve the problems of IMF.
H0: there is no significant relationship between the IMF policy formulation and Nigeria’s Economic growth.
Hi: there is a significant relationship between IMF policy formulation Nigeria’s Economic growth.
SIGNIFICANCE OF THE STUDY:
Nevertheless, the study is considered important in a number of ways, but first in the area of enlightenment. There is compensatory and contingency financing facility (CCFF). The compensatory element provides resources to a member an export short fall or excess in cereal import costs that are due to factors largely beyond the member’s control.
Then, this study is considered essential as it analyses critically most financial decisions of government in the areas of budgeting and policy with respect to her indebtedness to external creditors. Creditors and blames would be appropriately apportioned irrespective of the consequences of such decision. With this, it is hoped that the study will be contributing to the economic development of Nigeria and hence beneficial to the Nigerian public.
SCOPE OF THE STUDY:
On a wider note, the scope of this study is to find out how much pressure the IMF has brought to bear on Nigeria with respect to the latter’s economic policy formulation from 1988-2003. The scope of this work therefore will cover what necessitated the debt, the extent of indebtedness, IMF’s conditionality, the impact of the economic policy formulation in Nigeria especially as reflected in her budget and other economic policy prouncements during the period under consideration. The objective of the IMF’s policy discussion in developing countries (Nigeria) has their focused on economical ways to retain basic elements of equity in the new social security arrangement s within a sustainable fiscal policy framework.
The IMF has drawn attention to a broad range of social policy issues, including unemployment and labour market issues in industrial countries, the economic benefits of reducing unproductive expenditures, institution, building and human capital investment in developing countries, and labour market policies and social safety nets in transition economies.