Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14820 PERFORMANCE AUDIT REPORT NIGERIA TRADE POLICY AND EXPORT DEVELOPMENT LOAN (LOAN 2758-UNI) AND TRADE AND INVESTMENT POLICY LOAN (LOAN 3011-UNI) JUNE 30, 1995 Country Policy, Industry and Finance Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 14820
PERFORMANCE AUDIT REPORT
NIGERIA
TRADE POLICY AND EXPORT DEVELOPMENT LOAN(LOAN 2758-UNI)
AND
TRADE AND INVESTMENT POLICY LOAN(LOAN 3011-UNI)
JUNE 30, 1995
Country Policy, Industry and FinanceOperations Evaluation Department
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CBN Central Bank of NigeriaC&E Customs and Excise DepartmentDDS Customs Duty Drawback SchemeDSS Duty Suspension SchemeEDI Economic Development InstituteESW Economic Sector WorkFBIR Federal Board of Inland RevenueFDI Foreign Direct InvestmentFEM Foreign Exchange MarketFMF Federal Ministry of FinanceIDCC Industrial Development Coordinating CommitteeIMF International Monetary FundNCEMA National Center for Economic Management
and AdministrationNECP Nigerian Export Promotion CouncilNEPD Nigerian Export Promotion DecreeNPC National Planning CommissionPAR Performance Audit ReportPCR Project Completion ReportPIP Public Investment ProgramSAP Structural Adjustment ProgramSFEM Second Tier Foreign Exchange MarketTIPL Trade and Investment Policy LoanTPED Trade Policy and Export Development Loan
Fiscal Year
January I - December 31
FOR OFFICIAL USE ONLYThe World Bank
Washington, D.C. 20433USA
Office of the Director-GeneralOperations Evaluation June 30, 1995
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Performance Audit Report (PAR) for the Nigeria Trade Policyand Export Development Loan (TPED) (Loan 2758-UNI)and the Trade and Investment Policy Loan (TIPL) (Loan 301 1-UNI)
Attached is the Performance Audit Report (PAR) for the Nigeria Trade Policy and ExportDevelopment Loan (TPED) (Loan 2758-UNI, approved in FY87) and the Trade and Investment PolicyLoan (TIPL) (Loan 301 1-UNI, approved in FY89), prepared by the Operations EvaluationDepartment.
The Loans supported Nigeria's Structural Adjustment Program, launched in July 1986 torestructure and diversify the productive base of the economy and lessen dependence on oil, strengthenthe fiscal and external sector performance, stimulate growth with price stability, and improve theefficiency of public sector investments. The TPED supported the setting up of a second tier foreignexchange market and the unification of exchange rates, elimination of trade restrictions and pricecontrols, and the improvement of export incentives. The TIPL, in addition to reinforcing the measuressupported by TPED, supported the reform of the trade regime, liberalization of the regulatoryframework for private investment, the rationalization of capital budgeting and public investmentprogramming and other institutional development reforms.
Initially, trade and foreign exchange, export incentives and price policy reforms werevigorously implemented with positive impact on diversification and growth of the economy; but someof the measures were reversed later. Stabilization efforts were not consistently applied and werelargely abandoned during 1993 and 1994. Finally, institutional development components under TIPLwere constrained by the limited managerial capacity of the public sector.
The outcome of TPED has been rated as satisfactory and that of TIPL as unsatisfactory.Sustainability of both is rated as unlikely given the policy reversals introduced in 1994. There were,however, some indications in 1995 that the reform program may be put back on track in the nearfuture. Institutional development is rated as substantial for TPED and as negligible for TIPL.
Lessons from these two operations include that, in countries with managerial capacityconstraints, adjustment operations should focus on a few major policy and institutional reforms.Quick-disbursing operations are not adequate to induce institutional development, which is by natureslow. Moreover, the experience with support for the foreign exchange reform suggests that suchsupport should be based on clear agreement on the conditions for access, allocation, and ratedetermination; and should require consultation with the Bank prior to changing the rules. The PARalso underlines the importance of including appropriate macroeconomic targets as conditions of trancherelease.
Attachment
This document has a restricted distribution and may be used by recipients only in the performance of their officialTi duties. Its contents may not otherwise be disclosed without World Bank authorization.
2. Background ............................................................. 19The Structural Adjustment Program .................... 2..... .................. 21The Abandonment and Reversal of the SAP...................................... 22
3. Objectives and Design of the Loans.................... ....................... 23Bank Support for the SAP.....................................................23TPED...................................................................23TPL........................................................................24Shifts between TPED & TIPL .......................... ...................... 25Relations with the IMF..................................................... 26
4. SAP Implementation..................................................................................... 26Exchange Rate Reform................................................................................. 26Trade Policy and Price Reform............................................... 28Export Incentives Measures................................................. 28The Regulatory Framework for Private Investment.............. ................... 29Capital Budgeting and Public Investment Reform...................................30Technical Assistance and Study Component......................................30
This report was prepared by Gladstone Bonnick (Task Manager) and Christine Hartler (YoungProfessional). Alejandra Sarmiento provided administrative support.
This document has a restricted distribution and may be used by recipients only in the performance of theirofficial dutes. Its contents may not otherwise be disclosed wihout World Bank authorization.
2
6. Evaluation 37Relevance ......................................................... 37Design ........................................................... 37Inipementation ...................................................... 38Exchange Regime ................................................... 38Liberalization of Import Trade......................... ................. 39Demand Management................................................ 40Timing and Time Horizon ....................................... ....... 40Ownership and Commitment to iplementation ................................ 41Effectiveness of the SAP.............................................. 41Institutional Development.................................. ............... 42Sustainability........................................................ 43Evaluation of Bank Performance ........................................ 45ESI and Conditionality................................................ 45Second Tranche Release ....................................... ........ 45Conclusion ........................................................ 46
7. Lessons for the Future ......................................... ...... 47
Annex ......... .................................................... 491. Table 1. Macroeconomic Projections versus outcome, average ........ ........... 49
3
Preface
This is a Performance Audit Report (PAR) on Trade Policy & Export Development(TPED) and Trade & Investment Policy (TIPL) Loans to Nigeria. The loans were for US$452million and US$500 million, respectively. TPED was approved on October 16,1986 and wasclosed on December 31, 1991, four years behind schedule. TIPL was approved on December22, 1988 and closed on December 31, 1990, nine months behind schedule.
The PAR is based on the Project Completion Report (PCR) prepared by the CountryOperations Division, West Africa Department, and issued on December 16, 1993, thePresident's Reports, sector and economic reports, the loan documents, summaries of Boarddiscussions, program files and discussions with Bank staff. An OED mission visited Nigeria inApril 1994 and discussed the developmental impact effectiveness of these operations withGovernment officials and the private sector. Their kind cooperation and invaluable assistancein the preparation of this report is gratefully acknowledged.
The PCR provided a good and detailed account of the preparation and implementationof the structural adjustment program (SAP) supported by these two trade policy basedoperations. The PAR agrees with the ratings based on the PCR in December 1993 althoughthere have been minor changes in the rating system in 1994. The PAR rates TPED outcome assatisfactory and TIPL unsatisfactory (compared to marginally unsatisfactory based on thePCR); sustainability of both is rated uncertain; the institutional impact of TPED is rated assubstantial and that of TIPL as negligible.
5
Basic Data Sheet
Trade Policy and Export Development Plan (Loan 2758-UNI)
Credit/Loan Position (Amount in US$ Million)
Loan Original Disbursed Cancelled Repaid Outstanding
2758 452.0 451.5 0.5 90.2 445.0*
* includes exchange adjustment.
Cumulative Estimated and Actual Disbursements
FY87 FY88 FY89& +
Appraisal Estimate (US$M) 440.0 12.0
Actual (US$M) 450.0 0.5 1.0
Actual as % of Appraisal (%) 102.3 4.2
Date of final disbursement: April 9, 1992
Project Dates
Original Actual
Initiating Memorandum
Letter of Development Policy 03/09/86 03/09/86
Negotiations 25-27/08/86 25-27/08/86
Board Approval 16/10/86 16/10/86
Signing 20/10/86 20/10/86
Effectiveness 20/11/86 20/11/86
Loan Closing 31/12/88 31/12/91
6
Staff Inputs (staffweeks)
FY86 FY87 FY88 FY89 FY90&+ Total
Preappraisal 12.7 12.7
Appraisal 19 17.5 36.5
Negotiations 36.6 36.6
Supervision 29.4 33.2 4.2 14.6 81.4
Total 31.7 83.5 33.2 4.2 14.6 167.2
Mission Data
Staff
Month/Year No. of Weeks No. of Persons Weeks
Appraisal May 1986 3.8 5 19.0
Postappraisal July 1986 6.3 2 12.6
Negotiations Aug. 1986 1.4 2 2.8
Supervision I Nov. 1986 2.55 6 15.3
Supervision 11 Jan. 1987 1.2 1 1.2
Supervision III Feb. 1987 3.6 3 10.8
Supervision IV Mar. 1987 0.6 2 1.2
Supervision V May 1987 2.0 2 4.0
Supervision VI Oct. 1987 1.6 3 4.8
Other Project Data
Borrower/Executing Agency: Federal Government of Nigeria
Follow-on Project(s):
Project: Trade and Investment Policy LoanLoan/Credit No.: 3011-UNIAmount: US$500 millionBoard Date: December 22, 1 S8
7
Basic Data Sheet
Trade and Investment Policy Loan (Loan 3011-UNI)
Loan Position (Amount in US$ Million)
Loan Original Disbursed Cancelled Repaid Outstanding*
3011 500.0 500.0 0.0 18.6 555.7
* includes exchange adjustment
Cumulative Estimated and Actual Disbursements
FY89 FY90 FY91
Appraisal Estimate (US$M) 250.0 250.0
Actual (US$M) 250.0 231.9 18.1
Actual as % of Appraisal (%) 100.0 92.8
Date of final disbursement: July 31, 1990
Project Dates
Original Actual
Initiating Memorandum 11/05/87 11/05/87
Letter of Development Policy 28/11/88 28/11/88
Negotiations Aug 1988 Aug 1988
Board Approval 22/12/88 22/12/88
Loan Agreement 22/12/88 22/12/88
Effectiveness 27/12/88 27/21/88
Second Tranche Release 06/11/89 06/11/86
Loan Closing 31/03/90 31/12/90
8
Staff Inputs (staffiveeks)
FY87 FY88 FY89 FY90 FY91&+ TOTAL
Preappraisal 63.2 63.2
Appraisal 5.3 93.4 98.7
Negotiations 40.4 63.3 103.7
Supervision 57.7 52.3 2.2 112.2
Total 68.5 133.8 121.0 52.3 2.2 377.8
Mission Data
Month/Year No. of Weeks No. of Persons Staff Weeks
Borrower/Executing Agency: Federal Government of Nigeria
Follow-on Project(s):
Project: None
9
Evaluation Summary
Introduction
1. Nigeria's highly oil-dependent economy faced imminent collapse in the early eightiesas oil export earnings declined. Nigeria drew down its foreign exchange reserves andborrowed heavily to compensate for the fall in oil revenues. In 1982, 1984 and 1985 itintroduced stabilization measures, including exchange control restrictions, increase in importduties, new excises and compulsory advance deposits for imports, and slashed budgetaryexpenditures in an effort to reduce fiscal and trade deficits. These measures led to shortages,inflation, and unemployment and underutilization of capacity, but had little effect instemming the loss in reserves. Arrears in payment accumulated rapidly and credit dried up.By 1986 the external debt situation became acute; debt service reached 72 percent of exportearnings. After discussions with the Bank and IMF concerning the design of a stabilization/adjustment program Nigeria launched its Structural Adjustment Program in July 1986.
Nigeria's Structural Adjustment Program
2. The specific objectives of the SAP were to:
i) restructure and diversify the productive base of the economy and lessen
dependence on oil and on imports;
ii) strengthen the fiscal and balance of payment accounts;
iii) stimulate growth with price stability; and
iv) improve the efficiency of public sector investments.
These objectives were to be pursued through a shift from controls and regulations towardgreater reliance on market prices to guide resource allocation and on the private sector as the
source of growth.
3. The main measures included in the SAP were:
a) a market-determined exchange rate policy; by establishing a Second TierForeign Exchange Market (SFEM) after an initial devaluation of the officialrate;
b) liberalization of the trade regime; by the elimination of import and exportlicensing and reduction in number of prohibited imports;
10
d) financial sector reforms to promote efficiency and achieve positive realinterest rates;
e) privatization and commercialization of public enterprises.f) promotion of non-oil exports; through the elimination of commodity export
boards;
g) restriction of external borrowing to viable, growth-oriented projects; andfinally
h) strengthening of incentives for the private sector by changes in taxation.
4. The SAP was short-lived as the 1988 budget adopted an expansionary fiscal andmonetary stance and, after a brief return to austerity in 1989, the buoyancy in oil pricesbrought on by the Gulf crisis led again to lax fiscal and monetary policies.
Objectives and Design of Bank Support
5. Bank support for Nigeria's SAP included ESW, financial support and assistance in debtrenegotiation. Bank financial support for the SAP took the form of two loans - the TPED,approved in 1986, and the TIPL approved in 1988, for $450 million and $500 millionrespectively. Both were for quick-disbursing balance of payment support, but TPED was toprovide US$2 million for technical assistance in the form of training in export developmentand studies of the steel and petro-chemical sub-sectors.
6. Specific policy measures supported by TPED were the setting up of the second tierforeign exchange market (SFEM) and unification of exchange rates, elimination of traderestrictions and price controls, and implementation of a package of export incentives. TPILsupported the consolidation of exchange rate and trade policy supported by the TPED plusthe reform of the protection regime, implementation of export promotion, liberalization ofthe regulatory framework for private investment and the rationalization of the capitalbudgeting and public investment programming.
7. An important supplementary objective of Bank support was to facilitate themobilization of other external resources to close an estimated financing gap of US$1 8.1billion over the period 1986 to 1989.
Relations with the IMF
8. Nigeria decided early on not to use IMF resources in support of its SAP. Yet it soughtIMF endorsement of the SAP to facilitate its dealings with other creditors. Several standbyarrangements were approved by the Board of the IMF between 1986 and 1992, but the IMFdid not complete most reviews under these arrangements because of difficulties withNigerian public expenditures a,id the pricing of petroleum products in the domestic market.Because initially Bank ESW did not include a comprehensive macroeconomic framework
11
but relied on IMF analysis and reviews which were not completed, macroeconomicperformance, specifically the budget deficit, was not adequately provided for in theconditionality attached to the initial Bank operation supporting the SAP.
SAP Implementation
The Exchange System
9. The reform of the Nigerian exchange rate system-a mixed system with an official rateset by the Central Bank-involved a series of changes toward a market determined rate andback to a fixed rate. The new exchange rate system consisted of a Second-Tier ForeignExchange Market established in September 1986 covering all transactions and including anauction for official foreign exchange receipts and an interbank market based on autonomousinflows to the private sector. The official (first-tier) exchange rate was maintained forforeign debt service obligations. In July 1987 the two rates were unified. But in 1988,inflationary pressures associated with expansionary fiscal and monetary policies led to thereappearance of a differential between the auction market and the interbank market exchangerates. Subsequently, the intention of achieving a unified and market-determined rate wasundermined further by frequent policy changes and increasingly direct foreign exchangeallocation. At the time of the 1994 budget, the government announced the return to a fixedexchange rate regime; with the rate fixed at 22 Naira to I US dollar--well below the marketrate. In 1995, the government re-liberalized the foreign exchange regime, thereby reopeningthe autonomous foreign exchange market and permitting the central bank to sell foreignexchange at near market rates while restricting the use of the official rate to few transactions.Despite the incomplete reform of the exchange system, there has been no sign ofreappearance of the extreme overvaluation characteristic of the three year period before theSAP.
Trade Policy & Price Reform
10. The SAP abolished the import licensing system and reduced the import prohibitionlist from 74 to 17 items. In reality, import bans still applied to an estimated 20 percent ofindustrial production and 30 percent of agricultural products. Price controls were abolished,except for fertilizer, domestic petroleum and gas products. After October 1986, the trade-weighted average nominal tariff was reduced from 33 percent to 23 percent; but in 1988 anew regime of customs and excise tariffs raised the average nominal rate to 28 percent.Subsequently, tariff rates for a number of key products were increased to 200 percent oncertain imports competing with domestic industries, substantially reversing the importliberalization policy.
12
Export Promotion
I1. Export licensing was abolished, the list of prohibited exports was reduced, and exportduties removed. Simplified guidelines for the Customs Duty Drawback Scheme (DDS) wereintroduced at the end of July 1987; and the Duty Suspension Scheme (DSS), an extension ofthe DDS, was started in 1991. Under the revised DDS scheme decreed in early 1993, importduty payments (on raw materials for the production of export goods) were suspended andfinally waived after exportation and repatriation of export proceeds. Despite efforts tosimplify administration, even now many exporters do not use the scheme.
12. A Refinancing and Rediscounting Facility (RRF) launched in April, 1987 to providebanks with resources for pre- and post-shipment finance, between January and September1992 disbursed a total of N 1,878 million to 254 participating commercial and merchantbanks in support of 325 exporters. The Nigerian Export Promotion Council (NEPC) wasreorganized to permit greater private sector participation and to strengthen its capabilitiesand responsiveness to exporters, but has remained a relatively weak and ineffectiveorganization.
The Regulatory Framework for Private Investment
13. Nigeria established the Industrial Development Coordinating Committee (IDCC) inSeptember 1988 to provide "one-stop" facilities to expedite investment approvals and toconsider industrial policy issues. It issued an Industrial Policy Statement in 1989, containingschedules of the revised Nigerian Export Promotion Decree (NEPD). In the amended Decreethere is only one list of scheduled categories of enterprises exclusively reserved forNigerians instead of the former three lists. During the SAP period Nigeria maintained abasic policy of welcoming foreign direct investment (FDI). Among the measures to increaseFDI were privatization of public enterprises, tax exemption of dividends, elimination ofrestrictions on repatriation of profits and dividends, a debt for equity swap, the setting up ofexport processing zones and the increase in the permitted level of participation of foreignersin joint ventures.
Capital Budgeting and Public Investment Reform
14. Guidelines for a reformed capital budgeting process incorporating the use ofeconomic criteria in the development of the Public Investment Program (PIP) were adopted .However, in 1992 a Presidential Monitoring Task Force created to inspect federalgovernment projects found that many projects that should have been stopped were stillreceiving funding, and had incurred substantial internal and external debts.
13
SAP Outcome
Economic Performance
15. Although unevenly implemented, the SAP was associated with faster growth, animprovement in the external account, higher investment, and slightly higher inflation.Between 1986 and 1992 real GDP grew at 5 percent per annum in contrast with a decline of2 to 3 percent per annum between 1980 and 1986. The increase in the growth rate occurredmainly in the agriculture and the manufacturing sectors.
16. Despite export-supporting policies, documented non-oil exports have not markedlyimproved. There is some evidence of increased undocumented exports to neighboringcountries. The trade deficit net of petroleum declined during 1985-88 due to the reduction ofimports; the improvement in the trade account (including petroleum) after 1988 was duemainly to the recovery in petroleum revenues. Total Investment which had declined byabout 12 percent per year in the first six years of the decade, resumed positive growth of 1.4percent per year during 1987-1992 after reaching a trough in 1987; but its share of GDPdeclined until 1988, recovering slowly thereafter. A huge increase in Foreign DirectInvestment (FDI) in 1989 was due to foreign companies' purchases of the NigerianGovernment's shares in oil companies. The share of domestic saving in GDP recovered to 20percent (average of the seventies) from 12 percent during 1984-86.
17. The fiscal stabilization efforts under the SAP were marked by reversals. After aninitially tight fiscal stance, concessions to special interest groups and large industrial projectsincreased the budgetary deficit from 6.4 to 11.0 percent of GDP between 1986 and 1988.Tighter fiscal policies and higher oil revenues reduced the deficit to under 6 percent of GDPin 1989 and to under 3 percent in 1990. However, the failure to sterilize the Nairacounterpart of the oil windfall, together with the breakdown of fiscal discipline combined topush the deficit back up to 6 percent of GDP in 1991. Thereafter, the stabilizationunderpinning of the SAP was virtually abandoned.
18. The average inflation rate during 1986 to 1991 increased to 24 percent from 18percent during 1980 to 1985. Immediately after the inception of the SAP the inflation waslow; but increased dramatically in 1988 and 1989 to about 54 and 50 percent, due tomonetary expansion related to the 1988 re-flationary budget. From about 60 percent at theend of 1992, inflation is estimated to have reached 100 percent in the last quarter of 1993.
Debt Rescheduling and Resource Mobilization
19. Under the SAP Nigeria undertook, with Bank assistance, a complex debt reschedulingexercise involving the London and Paris Clubs and uninsured suppliers' credits. Anagreement covering trade arrears was signed in January 1988, granting a 22 year repaymentperiod and 3 years grace. Thr-e agreements were reached with the London Club and anotherthree with the Paris Club between 1988 and 1991. The debt service ratio which would have
14
averaged 66 percent during 1986-1992 in the absence of reschedulings was brought down to
an average of 29 percent as a result of these efforts.
Evaluation
20. The evaluation of TPED and TIPL is intimately bound up with the evaluation of the
SAP which they supported. The objective is to judge whether the program was of relevant
design and whether it was implemented effectively and generated the expected benefits.
Design
21. The evaluation finds that the adjustment program had all the necessary components to
address the problems (and therefore relevant) and was not flawed in design, except that the
two year time horizon announced for the initial SAP was much too short to achieve the many
structural changes needed to re-orient the system of production. The fact that people were
led to expect a complete turnaround in two years created a political problem for thegovernment as the maintenance of austerity beyond 1988 was unpopular and affected thepolitical acceptability of the program supported by the TIPL.
22. The design of TPED did not link drawdown of Bank support to performance in
macroeconomic management; which may have drawn attention at the outset to the
importance which the Bank attached to this aspect of the SAP. TIPL design attempted tocorrect this weakness by including specific conditionality regarding government
expenditures and the public investment program of state-owned enterprises. However, TIPL
was encumbered with many institutional components which proved too much for the limited
managerial capacity of the public sector.
Implementation
23. The failing of the SAP was in the implementation. This was basically because the
government made concessions in the face of domestic pressures, thereby restoring some
policy distortions and weakening the stabilization program. Initially, the SAP wasvigorously and expeditiously implemented; especially as regards reforms in the trade regime,the foreign exchange regime, export incentives and price policy measures. Progress was alsomade regarding the budgeting process, including the use of economic criteria in developingthe public investment program. However, the government failed to stop certain largeprojects that did not meet the new criteria but were already started. Thereafter, the
government reversed its tight demand management in 1988 and again after 1990 when therewas improvement in oil revenues and a shift from economic to political priorities. In spite ofthese shortcomings, the outcome of TPED, which supported the early period of the SAP, israted as satisfactory.
Ownership
24. The SAP was designed Lo emphasize country ownership. A national debate supportedthe idea of a program which would not depend on IMF financial support. The program
15
supported by TIPL and reflected in the policy matrix and the tranche release conditions isless distinctly Nigerian than the initial SAP. and did not enjoy the political acceptance of thatsupported by the TPED. Ownership at the level of the implementing agency was not securedin advance. This explains to some extent the poor performance of the institutional reforms.The unsatisfactory outcome rating of the TIPL largely derives from inadequate progress inimplementing these reforms and in curtailing investment in uneconomic projects in the state-owned industrial sector.
Impact
25. Notwithstanding some policy reversals, the SAP brought about significant changes inthe policy environment for the Nigerian private sector. The over-valuation of the Naira wasreduced, trade was liberalized, and export incentives-tax and abolition of marketingboards-were introduced. In addition, there was substantial privatization of parastatalenterprises. The SAP failed to ignite a sustained response by the private sector, after initialresponsiveness to new opportunities in agriculture, especially export crops and food, and inthe use of domestic inputs in manufacturing. This may have been due in part to signs thatthe government was not likely to stay the course and could be pressed into reversingunpopular measures. In part it may have been due to the slowness in establishing efficientinstitutions to facilitate private economic activity under TIPL, as well as to the usual inertiain accommodating to new procedures. The private sector cites uncertainty regarding thecontinuation of SAP policies after 1988 and infrastructure deficiency as the main constraintson expansion.
Sustainabilitq
26. The sustainability of the benefit of SAP reforms would have depended on thegovernment's commitment to continue to pursue the SAP policies. Beginning in 1988, theGovernment started to undo certain aspects of trade reform by re-instituting high nominaltariffs on certain imports competing with domestic production. The exchange marketreform, which had achieved unification in 1987, continued to be manipulated by theauthorities, until it was replaced with a fixed rate regime by the new government in 1994.While some parts of the SAP remained after closure of these two Bank operations, fiscal andmonetary discipline did not continue, and the institutional developments lost momentum.Based on the situation at the time of the OED mission in 1994, sustainability of both SAPs'benefits was judged unlikely since some policy reversals had in important measure restoredprevious distortions. In 1995, the exchange regime was again liberalized. Sustainability ofboth TPED and TIPL is rated as uncertain.
27. The government's willingness to make concessions seemed related to the politicalproblems associated with the perception that the burden of the SAP fell mainly on the urbanpopulation (although in the absence of the SAP the urban population would have borne mostof the burden of adjustment). The preponderance of certain tribes and vocal groups in themore seriously affected areas vas also a source of concern. In retrospect, sustainabilitywould have been more likely the design of the SAP had included a social safety net to helpthe more severely affected in the urban areas.
16
Institutional Development
28. TPED did not have ambitious institutional development objectives; hence satisfactoryperformance was easier to achieve. The setting up of a Second Tier Foreign exchangemarket within the central bank did not prove difficult and the abolition of some marketingboards had budgetary rather than staffing implications-the former proving to be lessformidable constraints. Under the TIPL several institutions were created or improved andseveral decrees were drafted and announced on schedule. Building up efficient institutionsproved more difficult, so that although all were established, they were slow to assembleadequate staff and remained lacking in effectiveness. Results varied among sectors, but,overall, institutional development under TIPL has been rated as negligible.
Conclusion
29. Nigeria launched substantial reforms at the inception of the SAP. But Nigeria did notstay the course and in many areas the policy initiatives have been reversed. The mostimportant was the correction of the over-valuation of the exchange value of the Nairathrough an initial devaluation and subsequent changes in the rate of exchange. A trulymarket determined exchange system was not established. The implementation showed thesusceptibility of imperfect market systems to abuse; and eventually the rate was fixed againat an overvalued level. Various measures against "restraints of trade"-abolition ofmarketing boards and restrictions on exports and imports have survived; but the attempt tolower the level of effective protection has been frustrated by increases in nominal tariff andovervaluation of the Naira.
30. The outcome of TPED has been rated satisfactory, and that of the TIPLunsatisfactory. The difference is due to the fact that under the first many policy measureswere taken to improve the policy environment for exports, while under the latter the creationand improvement of many institutions and in the structure of public investments proveddifficult to accomplish. Sustainability of both is rated uncertain; policy adjustments in 1995could put Nigeria's adjustment program back on track. Institutional development is rated assubstantial for TPED and negligible for TIPL.
Lessons
31. The following are some of the lessons to be learnt from the review of theseoperations:
(i) In SAL operations the Bank should focus on few policy and institutional reforms;
(ii) Bank support should be tranched and access conditioned on the client's meetingappropriate macroeconomic targets;
(iii)The Bank should _void lending to support foreign exchange markets includingauctions unless it agrees on principles to guide conditions of access, allocation,
17
rate determination, etc, and unless the client agrees to consultation prior to
changing the rules:
(iv) Quick-disbursing balance of payments support operations should not be used to
induce institutional development which is by nature slow.
19
1. Introduction
1.1 This is the Project Performance Audit of the Trade Policy and Export Development(TPED) (Loan 2758-UNI) and Trade and Investment Policy Loan (TIPL) (Loan 3011-UNI).The loans for US$ 452 million and US$ 500 million, were fast disbursing to provide balanceof payments support, except for a small technical assistance component of US$ 2 million inthe TPED. TPED was negotiated in August 1986 and became effective in November 1986.TIPL was negotiated in August 1988 and became effective in December 1988. TPED closedat the end of December 1991 four years behind schedule, leaving about US$ 0.5 million ofthe technical assistance component undisbursed. TIPL, fully disbursed, closed at the end ofDecember 1990 only 9 months behind schedule.
2. Background
2.1 During the 1970s, booming oil prices and the discovery of new reserves sharplyincreased growth but profoundly changed the structure of the Nigerian economy and itspublic finances, making it more vulnerable to changing external conditions. GDP growthaveraged over 9 percent in the fifteen years between independence and 1975. Petroleumbecame Nigeria's dominant sector, accounting for about 90 percent of the export revenuesand about 80 percent of the budget revenues. The real exchange rate was allowed toappreciate substantially with rising oil revenues-65 percent from 1970 to 1985'-leading tosevere deterioration in international competitiveness of Nigeria's non-oil exports.Agricultural exports, in particular, were adversely affected by the overvalued Naira, and bythe large share of export revenues retained by the costly and inefficient marketing boards.Domestic manufacturing industry benefitted from a protective import regime and pricecontrols well above world levels. Increased spending on construction and services led tohigh rates of wage and price inflation, especially in the non-traded goods and servicessectors.
2.2 The increase in oil revenues, by improving Nigeria's creditworthiness abroad,allowed substantial debt-financing of a massive expansion in public investment in health,education, infrastructure and industry. Many of the projects, undertaken without adequateanalysis of efficiency and financial viability, proved uneconomic, adding nothing to thecapacity of the public sector to service its debt. The stock of debt more than tripled in thesecond half of the seventies. During the period 1960 to 1975 (which includes the early yearsof the oil boom) Nigeria's debt was negligible; total debt/export ratio averaged 9.4 percentand debt service/export earnings ratio averaged less than I percent. When the oil marketweakened in the early eighties, Nigeria continued to borrow in an effort to compensate forthe fall in the oil revenues, with a dramatic jump in the stock of debt; by the end of 1985 thedebt service/export ratio reached 33 percent.
1. David Bean, Paul Collier and Jan Willed Gunning, (1992), "Nigeria 1970-1990, County Studies Number 11",International Center for Economic Growth, California.
20
2.3 The collapse of the oil export earnings after 1980 (24.7 percent of GDP in 1980 to16.4 percent in 1982), severely undermined government revenues, increased the fiscal deficitfrom 4.0 percent of GDP in 1980 to 12.8 percent in 1982, and reduced reserves to about onemonth of imports. Despite increased borrowing and drastic reduction in external reserves, asevere shortage of foreign exchange ensued; and the highly import-dependent economyrecorded negative growth during the first half of the eighties.
2.4 The collapse prompted a succession of stabilization/adjustment measures over thenext three years:
a) In 1982 there were emergency measures subsequently to become lawas the Economic Stabilization [Temporary Provision] Act, 1982. Themeasures were primarily exchange control restrictions, fiscaladjustments including increases in import duties and new excises, andmonetary policy measures involving compulsory advance deposits forimports.
b) In 1984 the authorities slashed budgetary expenditures and tightenedadministrative control of imports in the form of import licenses andimport prohibitions over certain items.
c) In August 1985 the Government of General Babangida reinforced theexisting fiscal measures (expenditure cuts-suspension of non-essential public projects), and import controls (banning of importationof food grains, maize, wheat and rice). It added incomes policymeasures (levies of 2 to 15 percent on dividends, rental incomes,wages and salaries).
2.5 Although the measures introduced were successful in bringing down the internal andexternal deficits, the lack of fundamental economic reforms-in combination with therecession in the oil market-led to acute shortages of imported inputs, reduced industrialcapacity utilization, and increased unemployment and inflation. The measures helped to re-establish a measure of control over the economy and to check the decline in reserves, but theimprovement in reserves was more apparent than real, because of accumulating arrears.
2.6 By 1986 the external debt situation became acute: the debt service beforerescheduling reached 72 percent of exports of goods and non-factor services. The onlyobvious source of relief from this burden was through debt rescheduling agreements withcreditors; but this was only acceptable to the creditors if Nigeria embarked on an adjustmentprogram approved by the IMF and World Bank. By then, the government also recognizedthat "more austerity without structural adjustment constitutes an inadequate response to thefundamental economic and financial problems confronting the country".2
2. Federal Republic of Nigeria: "Structural Adjustment Programme for Nigeria -July 1986-June 1988"; Lagos 1986.
21
The Structural Adjustment Program
2.7 It was in this context that the government tried to establish a consensus on thesolution to the country's problems. The main issues concerned whether IMF financing withits attached conditionalities would be sought, and the desirability of devaluation of the Naira.The issues were put to the country in a referendum. The people decided against seeking IMFfinancing. However, Bank and IMF endorsement of the adjustment program was expected tobe crucial for mobilizing external resources. In September 1986 Nigeria's external financinggap over the period 1986 to 1989 was estimated to about US$ 18.1 billion; and there waslittle hope of closing it without a program approved by the IMF and without Bank financing.The government (with informal advice from the Bank and IMF) designed a program whichwas as stringent a package as the Fund would have required for a stand-by agreement.Nigeria sought approval of the package by the IMF through a stand-by arrangement, butmade clear its intention not to draw on IMF resources.
2.8 The Structural Adjustment Program (SAP) was launched in July 1986, to cover theperiod to June 1988. The specific objectives of the SAP were to :
(i) restructure and diversify the productive base of the economy and lessendependence on oil and on imports;
(ii) strengthen the fiscal and balance of payment accounts;
(iii) stimulate growth with price stability; and
(iv) improve the efficiency of public sector investments.
These objectives were to be pursued through a shift from control and regulations towardgreater reliance on market determined prices to guide private sector decision making andgreater reliance on the private sector as the source of growth.
2.9 The main components of the SAP were the adoption of a market-determinedexchange rate policy, liberalization of the trade regime, adoption of tight fiscal and monetarypolicies, financial sector reforms and the privatization and commercialization of public
3enterprises. Specifically, these components were reflected in the following measures:
(i) Exchange Regime-Establishment of a Second Tier Foreign Exchange Marketin which the rate was to be market determined; elimination of the spreadbetween the official and parallel exchange rates; and reduction of theovervaluation of the Naira by a large official devaluation;
(ii) Trade Regime-Liberalization of trade by the elimination of import and exportlicensing, reduction in the number of prohibited imports;
3. For detailed information see Nigeria Structural Adjustment Program: Policies, Implementation and Impact, (1993),Western Africa Department, Report nr. 12366-UNI, World Bank.
22
(iii) Promotion of Non-oil Exports-revision of export incentives, includingauthorization of exporters to retain a portion of their foreign exchangeearnings, streamlining of documentation and access by exporters torediscounting and duty drawback facilities, and elimination or reform of thecommodity boards to reduce implicit taxation of growers;
(iv) Public Finance-to emphasize expenditure controls, e.g., freeze on publicsector hiring, reduction in salaries and fringe benefits of civil servants,reduction in central government transfers to parastatals, reduction orelimination of subsidies on petroleum products and fertilizers, accordingpriority to uncompleted projects with high economic viability, establishing theBudget Monitoring Unit;
(v) Reform of Parastatals-Other measures directed to reduce the level ofgovernment involvement in commercial activity and to improve the efficiencyof public enterprises; to be accomplished through privatization (partial andfull) and by commercialization (by charging prices adequate to cover coststhereby reducing the need for federal subsidies);
(vi) Monetary and Financial policies-aimed mainly at restricting the expansion ofcredit while shifting its distribution in favor of directly productive activities,achieving real positive interest rates, and encouraging the development of anefficient financial sector;
(vii) Measures to enhance Creditworthiness-restriction of further externalborrowing to viable, growth-oriented projects, minimizing the burden of thedebt through debt rescheduling with longer grace periods and lower interestrates, and giving preference in new borrowings to sources with concessionaryrates such as the multi-lateral institutions, e.g. the World Bank and AfricanDevelopment Bank;
(viii) Incentive Framework for the Private Sector-changes in the tax system toprovide relief to tax-payers and simplify payment of taxes. Monetary measuresto re-direct credit to particular sectors, especially to agriculture andmanufacturing.
The Abandonment and Reversal of the SAP
2.10 In 1988, in the face of rising opposition from a populace grown tired of austerity,the government decided to reflate the economy and to follow a policy of lax fiscalmanagement. After some correction in 1989, the expansionary fiscal and monetary policiescontinued through the end of 1992. In 1991 the government pegged the maximum lendingrate of interest at 21 per cent and placed a floor of 13.5 per cent under savings deposit rates,which in face of high inflationary pressures made real interest rates negative. But the
23
strategy failed to hold down the rates, and in 1992 interest rates were again liberalized. Thisreflation episode led to the failure of the stabilization component even while the growth andtrade objectives were being achieved.
3. Objectives and Design of the Loans
Bank Support for the SAP
3.1 Bank support for the Nigerian SAP was reflected in the policy dialogue and anexpanded lending program. The dialogue was widened to include macroeconomicadjustment issues and the external debt strategy. The lending program, planned for anannual level of commitment of about US$ 1 billion evenly divided between adjustment andproject lending, was substantially larger than that of the first half of the 1980's, when theBank's lending program to Nigeria averaged about US$ 300 million per fiscal year andcovered investment projects over many sectors.4 TPED and TIPL were to provide US$ 450million and US$ 500 million, respectively. In addition, TPED was to provide US$ 2 millionto finance technical assistance and training for export development and studies of the steeland petrochemicals sub-sectors. The loans were conditional upon satisfactory financing ofthe external gap, in the context of a comprehensive debt relief program.
TPED
3.2 The objective of TPED, agreed in Bank/Nigeria discussions in April 1986, was to"support the Government's effort to reform trade and export policies with the objective ofincreasing domestic output and restructuring the productive base of the economy in order toreduce its dependency on the oil sector and on imports."5 Specific policy measuressupported were:
(i) introduction of a market determined exchange rate system through
* a second-tier foreign exchange market (SFEM), adequate funding of SFEM andunification of the foreign exchange rates;
(ii) elimination of trade restrictions and price controls through
* abolition of import licensing, the 30 percent import surcharge on goods (exceptselected luxury goods) and ex-factory price controls;
* reduction of the import prohibition list from 74 to 17 items;
4. In the beginning of 1986 the agricultural sector accounted for about 43 percent of total conunitments; transport, powerand water supply for about 35 percent and education, industry, urban, health and a war rehabilitation loan for the rest.
5. Report No. P-4359-UNI, (1986), World Bank, page i.
24
* implementing an interim tariff revision to reduce the average level of import dutyand excise;
* a tariff study, formulating proposals for revised customs and excise duty schedulesconsistent with and implementing a revised customs and excise duty structure;
(iii) implementation of a package of export incentives through
* removal of export duties, export prohibitions and export licensing requirements;
* preparation and issuance of guidelines for operation of Duty Drawback Scheme(DDS)/ Suspension Scheme (DSS) and rediscounting of short-term bills forexporters, and
* preparing and issuing a Decree establishing the Reorganized Nigerian ExportPromotion Council (NEPC) with enhanced private sector participation, andpreparation and finalization of initial multi-year organizational strategy forNEPC.
TIPL
3.3. The objective of TIPL, the second policy-based loan in support of the Nigerianadjustment program, identified in May 1987, was to support the consolidation of theexchange rate and the trade policy initiatives that were supported by TPED and address thedeterminants of investment decision-making by an additional agenda:
(i) consolidation of the reform of the protection regime and institutionaldevelopments through
* establishing the Tariff Revenue Board (TRB), a secretariat to serve the TRB andthe Import Duty Monitoring Committee (IDMC);
* amendment of the Customs, Excise, Tariff etc. (Consolidation) Decree in amanner consistent with the program;
* satisfactory operation of new duty assessment and collection procedure;
(ii) implementation of export promotion measures through
* establishing a secretariat to serve the Duty Drawback Committee (DDC);
* satisfactory operatiua of the Duty Drawback System (DDS);
25
(iii) liberalization of the regulatory framework for private investment by
* establishing and satisfactorily operating the Industrial Development CoordinationCommittee (IDCC) as a "one-stop-shop" and secretariat;
* amendment of Nigerian Export Promotion Decree (NEPD) and release statement
of Industrial Policy;
(iv) rationalization of the capital budgeting process and the public investmentprogram through
* issuing of guidelines for the preparation of the 1989 federal budget and
implementation of 1989 Public Investment Program (PIP) in accordance with the
guidelines; and
adoption of a viable restructuring and development program for the steel sector.
Shifts between TPED and TIPL
3.4 TIPL was supposed to support the continuation of the reforms started under TPED.
In fact, there was a shift in focus from support for the setting up of a second tier foreign
exchange market and the elimination of regulations in restraint of trade toward the setting up
of institutions to facilitate private sector development and toward the reduction of public
sector investment in industrial white elephant projects.6 This shift involved the Bank in the
organization and operations of the Tariff Review Board, the Import Duty Monitoring
Committee and its associated Secretariat, and the Duty Drawback and Suspension Scheme
and organizations associated with it, e.g., the Department of Customs and Excise; the
Nigerian Enterprise Promotion Board and the Industrial Development Coordinating
Committee. It also involved the Bank in the restructuring plans and investment programs ofa number of state-owned industries notably, steel, and six principal subsectors in which theFederal Ministry of Industry had existing or proposed investments-paper, cement, sugar,machine tools, fertilizer and aluminum. Added to this array of concerns are those flowingfrom the Privatization and Commercialization component of the industry policy reform
under which government's interest in 106 enterprises was to be privatized or commercialized.This diffusion of Bank interest drew criticism from the Nigerians during negotiation of the
TIPL that unlike the general conditionality attached to TPED that under TIPL seemed
burdened with details. In short, the Bank was tending toward micromanagement of the
extension of the adjustment program, and this tended to undermine the Nigerian ownershipso well marked at the outset of the SAP.
6. This was the Bank's strategy as set out in SecM87-399 a report to the Board NIGERIA - Progress of the TradePolicy and Export Development Loan. A third adjustment lending operation (FY89) was to focus on financial policies.
26
Relations with the IMF
3.5. In December 1986 the IMF approved a 13-month stand-by arrangement on conditionthat Nigeria would secure the rescheduling of its debt to commercial banks; a condition thatwas met in January 1987 when most of the important creditors agreed to participate.
3.6. The Fund was unable to complete any reviews under the stand-by, on account ofdifficulties with public sector spending and with the domestic pricing of petroleum products.A second stand-by was approved by the IMF in February 1989, covering the period throughthe end of April 1990. The first review of this stand-by completed in September 1989showed that the performance criteria were met. However, as under the first stand-by,Nigeria declined to draw on Fund resources. Nigeria's macroeconomic performance beganto slip in 1990 and in 1991 the Federal Government deficit more than doubled to 6 percent ofGDP, with the result that key performance targets under Nigeria's third stand-byarrangement7 with the Fund were missed by wide margins and no review could becompleted.
4. SAP Implementation
Exchange Rate Reform
4.1 Before September 1986 Nigeria operated a fixed exchange rate system in which allexport proceeds were to be sold to the Central Bank which in turn sold foreign exchange atthe officially fixed rate for permitted uses. In reality, commercial banks functioned as agentsfor the central bank buying and selling to clients and to the Central Bank at rates determinedby the Central Bank, and there was an illegal parallel market fed by personal remittances andsome earnings from exports of services, minor merchandise, and other unidentified flows.The parallel market, where the exchange rate was determined by demand and supply,showed that the Naira had become progressively overvalued in the official market. Thespread between the official and the parallel market reached a high of 300 percent in 1985.Commercial banks, in order to manage their foreign exchange "positions", traded in foreignexchange with each other at rates which they determined among themselves in what wasreferred to as the autonomous interbank market. These rates were irrelevant to other buyersand sellers of foreign exchange.
4.2 The conversion of this mixed system to a market determined exchange rate systemwas a primary objective of the SAP. The system was allowed to evolve through a series ofchanges:
a) In September 1986 an auction based second-tier foreign exchange market (SFEM),funded by foreign exchange from oil and other official exports and from TPED loan
7. Signed in January 1991.
27
funds from the Bank, was introduced.' Commercial banks paid the Central Bank forforeign exchange at their bid rates. This first auction produced a depreciation of theNaira from US$ l=N 1.33 to US$ 1=N 4.6. The official first-tier rate-at whichpayments to service foreign debt and to international organizations and embassieswere made-was gradually adjusted downward.
b) In July 1987 the second-tier market was merged with the first-tier into the ForeignExchange Market (FEM). At unification, the gap between the market and the officialexchange rate reached an all-time low of 3.6 percent. The Central Bank continued toinfluence the rate in the FEM; and the autonomous interbank market continued toexist.
c) In January 1989, the autonomous market was merged with the FEM to form theInterbank Foreign Exchange Market which purchased funds from holders of non-oilexport earnings and sold them to importers and other users of foreign exchange.Daily bidding was introduced, and the exchange rate was determined by using acombination of factors. The decision was taken in 1989 to license bureaux de changefor small scale transactions.
d) In December 1990 the Dutch Auction System was re-introduced; Banks wererequired to pay for their allocations at bid rates and the marginal rate determined theofficial rate.
e) In March 1992 it was decided to completely deregulate the FEM with the rate beingdetermined by the market and the CBN only buying or selling to stabilize the rates.
f) In the budget for 1994, it was announced that the exchange rate is to be fixed at 22Naira to I US dollar-well below the market rate.
g) In the budget for 1995, the reopening of the autonomous foreign exchange marketwas announced, thereby permitting the use of a market exchange rate for all butgovernment transactions which continue at the official rate of 22 Naira to I USdollar.
4.3 Several problems arose in the implementation of the exchange regime since theintroduction of the SAP. First, the authorities initially funded the market at unsustainablelevels at the expense of debt service and the accumulation of reserves. Second, some foreignexchange was earmarked for financing special public investment projects, thereby not goingthrough the market. Third, periodically high inflation led to a large spread between the ratessince the auction rates reflected guidance from the authorities about responsible biddingbehavior. Fourth, banks were essentially guaranteed a fixed share of foreign exchangeregardless their bids; their quotations provided the basis for fixing the rate and failed to
8. The market was funded with the prc ceds of oil exports and external resources. Apart from the beginning, thebuying rate was set at the marginal bid which exhausted the amount offered for sale at fortnightly sessions. The sellingrate was set at maximum 1 percent above the buying rate. The maximum shares of foreign exchange which authorizeddealers could bid for was 5 percent (4 largest banks) and 3 percent (for all other banks).
28
reflect true market conditions. Finally, although sales of foreign exchange by the centralbank are currently taking place at a rate around the market rate, the system is characterizedby discretionary rate fixing by the central bank and is still lacking in transparency.
Trade Policy and Price Reform
4.4 The trade liberalization objective of the SAP was to be pursued by the immediatelifting of direct controls, the replacement of quantitative restrictions with tariffs and theeventual adjustment of nominal tariffs. The ultimate objective was to reduce the level ofeffective protection to induce producers to become more efficient. With the launching of theSAP the import surcharge of 30 percent introduced in the 1986 budget and the importlicensing system were abolished; and the import prohibition list was reduced from 74 to 17items. In reality, import bans still applied to an estimated 20 percent of industrial productionand 30 percent of agricultural products. Price controls were abolished, except for fertilizer,domestic petroleum and gas products.
4.5 However, the adjustment of tariffs was not always consistent with the original SAPobjectives. While, in October 1986 an interim schedule of tariffs and excises reduced thedispersion of tariffs and lowered the trade-weighted average nominal tariff from 33 percentto 23 percent; some high nominal rates remained, and in 1988 a new regime of customs andexcise tariffs raised the average nominal rate to 28 percent. Subsequently, tariff rates for anumber of key products were increased to 200 percent on certain imports competing withdomestic industries such as soap, light bulbs and footwear. In 1991 steel tariffs were raisedto a level where Delta Steel could break even at a 15 percent capacity utilization rate.
4.6 In addition to adjusting tariffs, the Government set up some institutions to deal withanomalies and hardships and to ensure that the revenue collection was not compromised. In1988 a Tariff Revenue Board (TRB) including representatives from both the public and theprivate sector was set up to consider complaints on the new import and excise dutyschedules. A new import duty collection system which relied on offshore, pre-shipmentinspection of imports and assessment of duties was introduced. In 1988 the Import DutyMonitoring Committee (IDMC) responsible for import duty collection was established.Variability in the membership of these institutions has been a source of uncertainty for theconstituency of interest they were to serve.
Export Incentive Measures
4.7 At the inception of the SAP, export licensing was abolished, the list of prohibitedexports was reduced, and export duties were removed. In addition, the operationalguidelines for the Customs Duty Drawback Scheme (DDS) were simplified and streamlinedand nominally brought into operation at the end of July 1987. Subsequently, the DutySuspension Scheme (DSS), which is an extension of the DDS, was approved in 1988 andcame into force in 1991. Under a revised DDS scheme decreed in early 1993, import dutypayments (on raw materials fo- the production of export goods) were suspended and finallywaived after exportation and repatriation of export proceeds. To reduce the administrativesteps involved for exporters, the processing and administration of "routine" (almost all) duty
29
drawback/suspension applications by exporters, including payment of rebates by means oftax credit certificates, was delegated to authorized commercial and merchant banks.Initially, problems with DDS arose from the resistance at the Department of Customs toverify underlying import and export transactions. Despite the revised guidelinesimplemented in December 1989, implementation problems persisted and even now manyexporters do not use the scheme. 9
4.8 A Refinancing and Rediscounting Facility (RRF) for exporters' short-term bills waslaunched in April, 1987 to provide banks with resources for pre- and post-shipment finance,especially for first-time non-oil exporters. The RRF interest rate was set at 1 percent aboveCBN's minimum rediscount rate, the maximum duration at 1 year, and maximum financingat 75 percent. The amount granted under the facility increased from N 552.4 million in 1988to N 1,371 million in 1990. Between January and September 1992 a total of N 1,878 millionwas disbursed to 254 participating commercial and merchant banks in support of 325exporters.
4.9 The Nigerian Export Promotion Council (NEPC) was reorganized to permit greaterprivate sector participation and to strengthen its capabilities and responsiveness to exporters.Since its inception in 1978, it had been a relatively weak and ineffective organization, besetwith budget and staffing problems, largely because of the lack of firm governmentcommitment to export promotion.
The Regulatory Framework for Private Investment
4.10 The Industrial Development Coordinating Committee (IDCC) was established inSeptember 1988 as an inter ministerial committee comprising 7 ministries to provide "one-stop" facilities to expedite investment approvals and to consider industrial policy issues. Itwas to be assisted by a technical committee (TC) of officials from the various Ministrieswith functional responsibilities for approving aspects of investment and expediting IDCCmatters in their parent Ministries, and by a secretariat in the Federal Ministry of Industries.
4.11 The Industrial Policy Statement was issued in 1989 and contained schedules of therevised Nigerian Export Promotion Decree (NEPD). In the amended Decree there is onlyone list of scheduled categories of enterprises reserved for Nigerians instead of the formerthree lists. The activities reserved for 100 percent Nigerian ownership include assembly ofradios, TV's and other electrical appliances, manufacture of travel goods, poultry farming,garment manufacture, grain millet products, manufacture of jewelry, and a number ofservices. In any unscheduled categories, Nigerians as well as foreigners, are free to own upto 100 percent equity of the enterprises. Foreigners are allowed to invest even in thescheduled enterprises with a minimum capitalization of N 20 million for large-scaleproduction of exports.
9. By May 1989 only 12 transaction .,d been processed through the stage of receiving tax credit certificates fromCES. In 1991 N22.2 million was refunded and in 1992 a total of 41 companies received refunds amounting to N 36.4million.
30
4.12 During the SAP period the government maintained a policy of welcoming foreigndirect investment (FDI). Among the measures to increase FDI were:
* privatization of some of the enterprises acquired by the government during the1970s;
* exemption of new FDI from taxation on dividends for three years (in some casesfive years) between 1987 and 1992;
* a debt for equity swap program initiated in 1988;
* elimination as from January 1991 of the restrictions on the repatriation of bonafide dividends and profits. (However, all remittances have to be approved by theMinistry of Finance and it is not uncommon for delays of up to 1 year inobtaining remittance approval); and
* implementation of Nigerian Export Processing Zones (EPZ) in 1991.
Capital Budgeting and Public Investment Reform
4.13 In the initial stage progress was made regarding the budgeting process. Guidelineson securing external financing for public investment projects were issued and implemented.The guidelines stipulated that a project to be cleared for foreign financing must be supportedby a feasibility study and its internal rate of return must be at least as high as the cost ofborrowing. Guidelines for a reformed capital budgeting process incorporating the use ofeconomic criteria in the development of the Public Investment Program (PIP) were adopted.These priorities originally suggested in the Onosode Report of the Projects ReviewCommittee in 1984 were reflected only partly in the 1989 budget and subsequent capitalbudgets. Noting that the share of capital expenditures recovered to 40 percent in 1992 afterfalling sharply from 42 percent of total federal expenditures in 1986 to 24 percent in 1987, aPresidential Monitoring Task Force created to inspect federal government projects found thatmany projects that should have been stopped were still receiving funding, and had incurredsubstantial internal and external debts. Ministries were once again spreading resourcesthinly among a growing number of projects rather than concentrating on a few viable ones.
Technical Assistance and Study Component
4.14 The petrochemicals sub-sector study was completed in September 1987. The studyidentified a future investment strategy compatible with the size of the domestic market andthe likely export market. The study led to a scaling down of the proposed public sectorinvestment in new plant from over US$ 2 billion to about US$ 0.8 billion. Further, at theBank's recommendation the government pursued joint venture arrangements for the project.
4.15 The steel sub-sector -tudy, presented to the government in September 1988,focussed on the incremental -pital costs to complete steel projects then under constructionand the size of the domestic and export markets relative to projected capacity. Various
31
small, in terms of cost, technical assistance and training services were recommended forfinancing.
5. Outcome
Economic Performance
5.1 While the effects of SAP policies cannot be isolated from those of other factors onthe performance of the macroeconomic magnitudes, the direction and movement of thesemagnitudes can give a firsthand indication of the impact of the SAP. Thus it seems that theNigeria SAP was associated with faster growth, an improvement in the external account,higher investment by foreigners, and some acceleration in inflation.'
5.2 Between 1986 and 1992 real GDP grew at 5 percent per annum in contrast with adecline of 2 to 3 percent per annum between 1980 and 1986. The increase in the growth rateoccurred mainly in the agriculture and the manufacturing sectors; although judging from theoutput of cars, not among import-dependent producers of import substitutes." In theagricultural sector, there was an overall shift to tradable crops and crops with bettertechnologies. The growth in the manufacturing sector (7.3 percent p.a. between 1987 and1992) was due to greater use of local domestic inputs for manufactures of food andbeverages, soap and detergents, tires and tubes, textile and clothing.
5.3 Despite export-supporting policies, the performance of non-oil exports did notmarkedly improve, although there is some evidence that un-documented cross-border exportshave increased. Figures I and 2 below show the performance of oil and non-oil exports,respectively. Non-oil exports increased during the initial phase of the SAP but subsequentlydeclined. Cocoa, by far the dominant agricultural export, increased by more than 100percent in volume between 1987 and 1988 but then fell back to about the 1986 level. Thiswas not fully reflected in export earnings as the price of cocoa declined by about 65 percentbetween 1986 and 1990, recovering somewhat in 1991. Other agricultural exports-such ascocoa butter, rubber and palm kernels-also have been affected by price in the world market.The expansion of agricultural exports has been hindered by export prohibitions, re-institutedin 1987 after having been abolished in 1986, and later extended to many crops including rawpalm kernels, cassava, maize, yam, rice, beans, timber and raw hides. Manufactured andsemi-manufactured exports increased slightly since the SAP, but with little impact on totalexport earnings. In 1991 they accounted for less than 2 percent of total exports.
5. 4 The improvement in the trade account after 1988 was due mainly to the recovery inpetroleum revenues at the time of the Gulf crisis. During 1986 to 1988 the trade account netof petroleum showed a decline in the deficit due to a drastic reduction in imports. Imports
10. The information in this paragraph draws on "Structural Adjustment in Sub-Saharan Africa: A Case Study ofNigeria", (1993), Office of the Chief Eco mist, Africa Region, World Bank, Washington.
11. Op.Cit. - Bevan, Collier and Gunning; 1992.
32
did not recover to the 1985 level before the end of 1992, and imports averaged US$ 6.8billion per year during the period 1986 to 1992 compared with US$ 12.8 billion per year inthe 1980 to 1985 period. Import bans still apply to an estimated 20 percent of industrialproduction and 30 percent of agricultural products.
Figure 1: Petroleum Exports (fob)
14
12
L* 10
8
0 6C
4
2
0
1986 1987 1988 1989 1990 1991 1992
Year
Source: Nigeria, Structural Adjustment Program: Policies, Implementation and Impact, (1993), World Bank.
Figure 2: Other Exports (fob)
0.7
0.6
* 0.5
00.400.3
0~0.2
0.1 -
0
1986 1987 1988 1989 1990 1991 1992
Year
33
5.5 While it true to say that "the SAP, by promoting import substitution, allowed theeconomy to economize on foreign exchange usage", the dramatic decline in 1986 and 1987of real volumes of imports appear to have been induced by the shortage of foreign exchangerather than by resurgence of domestic production. Agriculture, the main source of GDPgrowth during the SAP period, decline slightly in 1987; and the massive increase in cropoutput did not occur until 1988. Manufacturing and services showed growth of 3 billionNaira in 1987, but even if all this growth had been induced by SAP (which is doubtful) thiswould hardly explain the fall of over 10 billion in imports. Certainly an important part of theexplanation must lie in the reduced capacity to import due to deterioration in the capitalaccount as there was net repayment of loans and as Nigeria liquidated over U$$3 billion inarrears (more than four times the previous year).
Imports and Exports of GNFS (Constant Prices 1987 100)
Year Import GNFS Exports
1984 56.3 26.1
1985 53.0 28.7
1986 50.3 34.1
1987 26.9 31.2
1988 26.7 31.8
1989 26.8 35.1
1990 30.3 38.4Source: IBRD World Tables 1992
5.6 Beginning in 1988, the growth of imports was slower, and the improvement in thetrade account greater, as a result of the expansion in food production than they would havebeen in the absence of what appears to have been a veritable revolution in agriculture.
Investment and Consumption, 1986-1990 (1986 = 100)
Savings RateYear Investment Consumption percent
1986 100.0 100.0 14.2
1987 58.5 99.1 15.3
1988 60.8 107.7 12.8
1989 63.6 114.7 18.2
1990 91.1 120.3 24.2Source: D. Bevan, P. Collier, J.W. Gu ng, in :Nigeria 1970-1990: Country Studies Number I1; International Centerfor Economic Growth; 1992a.
34
Public and Private Consumption and Investment, 1986-1990 (1986 = 100)
Consumption Investment
Year Private Public Private Public
1986 100.0 100.0 100.0 100.0
1987 102.0 84.3 69.8 54.9
1988 111.5 88.3 79.3 47.7
1989 120.5 85.3 75.0 55.0
1990 123.9 102.2 105.1 83.7Source: D. Bevan, P. Collier, J.W. Gunning. 1992a.
5.7 Gross Domestic Investment, which had declined at 12 percent per year during thefirst six years of the decade, reached a trough in 1987, grew at 9 percent per year during1987-90, then slowed to under 5 percent during the next two years. It declined as a percentof GDP during the period 1986-1988 from 22.6 percent to 15.1 percent, but recovered to 17.0percent in 1990 and fell back to under 16 percent in 1992; - investment bearing a greaterburden of adjustment than consumption during the SAP period. These figures based on thedata in the World Bank's: World Tables differ somewhat from the those in Bevan, Collierand Gunning, but both exhibit the same pattern--decline after 1986 followed by somerecovery after 1987 or 1988. The behavior of Fixed Investment was similar to that of GDIexcept that in 1987 there appears to have been a reduction in inventories. At the same timethe composition of investment shifted from large public sector industrial projects to lesscapital intensive private enterprise dominated sectors, e.g., agriculture, food processing andother small manufacturing, and services. There was a huge increase in Foreign DirectInvestment (FDI) in 1989. However, about 90 to 95 percent of the FDI during the period1987 to 1989 was accounted for by foreign companies' purchases of the Nigeriangovernment's shares in oil companies. Other sources of FDI were reinvested earnings of oilcompanies and proceeds from debt conversion. The data available, until 1991, shows thatthere was very little FDI in the non-oil sector in recent years despite the government'sefforts.'l
5.8 After the introduction of the SAP savings increased to an average of 22 percent ofGDP for the period 1986 to 1991, recovering fully to the 20 percent average of the 1970safter the decline to 12 percent during 1984-1986. Per capita consumption fell by more than50 percent in 1987 from its 1981 oil boom peak, but partially recovered between 1987 and1992. The difference between the savings performance and that of investment was reflectedin the increase in Nigeria's external reserves.
Figure 3: Foreign Direct Investment (excl. portfolio investment)
2000 - -
-A1500
10000
-500
.0 0-
E 81 82 83 84 85 86 87 88 89 90 91 92-500
-1000.......-----
Year
Source: IMF Balance of Payments Statistics, various issues.
5.9 Government's fiscal stabilization efforts under the SAP were marked by reversals.After an initially tight fiscal stance, concessions to special interest groups and thereappearance of large industrial projects, accommodated by expansionary monetary policies,resulted in an increase in the budgetary deficit from 6.4 to 11.0 percent of GDP between1986 and 1988. A return to tighter fiscal policies and a resurgence in oil revenues in 1989reduced the deficit to under 6 percent of GDP and to under 3 percent in 1990. However, thefailure to sterilize the Naira counterpart of the oil windfall, together with the breakdown offiscal discipline leading to massive extrabudgetary outlays, and the delay in removingsubsidies on fertilizer and domestic petroleum products combined to push the deficit back upto 6 percent of GDP in 1991. Thereafter the authorities failed to tighten fiscal policies, andthe stabilization underpinning of the SAP was virtually abandoned.
5.10 Contrary to the SAP objective of non-inflationary growth of the economy, theaverage inflation rate during 1986 to 1991 increased to 24 percent from a rate of 18 percentfor the period 1980 to 1985. Nigerian inflation has been characterized by a high degree ofinstability; three major inflationary episodes occurred during the last ten years-two sincethe SAP. Immediately after the inception of the SAP the inflation was kept low.' 3 In 1988and 1989 the inflation increased dramatically to about 54 and 50 percent, due to monetaryexpansion related to the 1988 re-flationary budget. After a resurgence to about 60 percent bythe end of 1992, inflation is estimated to have reached 100 percent in the last quarter of
13. As a result of the sharp deprecial n at the inception of the SAP (paragraph 11) one might have expected a largeinitial increase in the inflation. One explanation why this did not happen might be that the economy already to someextent traded implicitly at the parallel exchange rate.
36
1993. This recent episode was also related to a significant increase in banking system net
credit to the government and the associated increase in money supply.
Debt Rescheduling and Resource Mobilization
5.11 After the introduction of the SAP, Nigeria undertook with Bank assistance acomplex debt rescheduling exercise involving the London and Paris Clubs and uninsuredsuppliers' credits. A rescheduling agreement was signed in January 1988, granting a 22 yearrepayment period and 3 years grace for the trade arrears originating from uninsured suppliersin 1982 and 1983. Three agreements have been reached with the London Club-oneagreement including a buy-back and a swap for par bonds backed by a US governmentsecurity and two rescheduling agreements.14 Agreements with the Paris Club were reached inDecember 1986 and in the beginning of 1989 on conventional terms-10 year repaymentperiod and 5 years grace-and a third agreement was reached in January 1991. Thus, debtservice ratio which would have averaged 66 percent during 1986-1992 in the absence ofreschedulings was brought down to an average of 29 percent as a result of rescheduling.
5.12 The importance of rescheduling may be appreciated by noting that "during the SAPera net capital flows associated with official borrowing were systematically negative".15 Thenet transfer position on a cash basis was persistently negative, averaging about US$2.1billion per annum. In part this was due to the fact that the Nigerian government consistentlyrefused to draw on credit from the IMF, but other resources mobilized in support of the SAPwere limited. The only important commitment was US$ 200 million in co-financing fromthe Japanese Overseas Economic Cooperation Fund (OECF); but drawdown has been slow.Promises of support from bilateral donors were secured at the informal donors meeting thatthe Bank arranged in early 1989, but few commitments resulted in inflows of anysignificance.
Income Distribution
5.13 The policies pursued within the framework of the SAP resulted in a substantial shiftin resources from the urban to the rural sector. Improved earnings in the agricultural sectorresulted from the depreciation in the real exchange rate, the abolition of the marketingboards, relaxation of price controls, and the reforms in the trade regime. Nigeria's relativelyflexible labor markets facilitated movements from the urban to the rural sector; the majorityof the returning labor force going back to their own farms and almost 20 percent findingemployment in the agricultural wage-labor market.
14. In November 1989 US$ 1.7 billion in medium and long-term maturities falling due between April 1986 wasrescheduled and in December 1987 US$ 3.0 billion in arrears on letters of credit was rescheduled. In April 1989 the entire
stock of debt (excluding interest in arrears) was rescheduled over a 20-year period (15 years for the letters of credit) with3 years grace. In 1992 a third agreement was reached including a buy-back of US$ 3.4 billion of commercial debt at a 60percent discount and the swap of US$ 2 billion for par bonds.
15. World Bank, Western Africa Department, Country Operations Division; Nigeria:Structural Adjustment Program,-Policies, Implementation, and Impact; May 13, 1994. (CEM).
37
6. Evaluation
6.1 Bank operations are usually evaluated on the basis of the principal criteria ofrelevance, efficacy and efficiency. The evaluation of support for a SAP is intertwined withthat of the adjustment program itself. Evaluation focusses on two sets of issues. The firstconcerns the adjustment program that was supported. Here the objective of evaluation is tojudge whether the program was of appropriate design and whether it was implementedeffectively and generated the expected benefits. The second concerns the support providedby the Bank. Here the objective is to judge whether the support was provided in the mostappropriate form and conditionality, given the need to facilitate the program while beingconsistent with the overall development of the country.
Relevance
6.2 The relevance of an intervention depends mostly on the extent to which its design isappropriate to the problem in its content and emphases. The SAP grew out of an awarenessthat it was necessary relax the foreign exchange constraint on Nigeria's very importdependent economy enough to reverse the fall in income and employment that had resultedfrom the drastic reduction in earnings from oil in the first half of the eighties. TheGovernment accepted that restriction of trade and non-payment of overseas obligationswould not increase foreign exchange availability. It also recognized the need to lower theforeign exchange required to service the debt and to reduce Nigeria's dependence on oil. Thereform program had to restrain demand for imports, encourage non-oil exports and win Bankand Fund support of Nigeria's debt renegotiation efforts with the Paris and London clubs.
Design
6.3 In order to deal with the foreign exchange shortage, the reform program had to bedesigned to restrain demand for imports, encourage non-oil exports and win Bank and Fundsupport of Nigeria's debt renegotiation efforts with the Paris and London Clubs. The SAP, asdesigned in 1986, addressed the policy and institutional impediments to non-oil exports -over-valuation of the Naira, the pricing policies and inefficiency of agricultural commodityboards, export restrictions, and the overly protective trade regime-by abolishing commodityboards, establishing new pricing regimes, removing restrictions on exports and replacingquantitative restrictions on imports with import tariffs. The demand for imports was to becontained by curtailing aggregate demand and by reducing the overvaluation of the Nairathrough the switch to a market-based exchange regime. This design was straightforward andclearly relevant to the problems to be solved.
6.4 The TPED was designed to provide quick-disbursing support and as suchconditionality was limited to the essentials of the SAP. Thus, the setting up of a Second TierForeign Exchange Market and trade liberalization were the main concerns of TPEDconditionality. The actions to fulfill the conditions mainly involved the taking of decisionsand would have imposed less f load on the bureaucracy than the plethora of specificcontrols and restrictions whion characterized the earlier Nigerian response to the crisis.Fiscal and monetary measures to curtail aggregate demand, though not precisely identified,
38
were part of the general understanding but not subject to specific conditionality. Thus the
design of Bank support covered the important issues and was reasonable in its demands on
the client.
6.5 TIPL was supposed to support the continuation of the reforms started under TPED,but its scope was broadened to include the setting up of institutions for private sectordevelopment. Conditionality attached to TIPL was more varied and detailed than that of
TPED--the policy matrix listing ten (10) conditions for second-tranche release, including"satisfactory progress in carrying out the agreed federal budget and public investment
program"-reduction in investment in white elephant industrial projects, e.g. steel mills, andconditionality dealing with public expenditures. The last two were to ensure greaterNigerian adherence to the contractionary macroeconomic policy stance appropriate to thestabilization objectives, a desirable response to Nigeria's failure to keep the fiscal deficitunder control after drawing the second tranche of TPED. The design of TIPL to includesupport for developing many institutions responded to the private sector's needs but mayhave been unrealistic given the scarcity of capable staff to manage the institutional
developments and staff the institutions in a short period.
6.6 The design of the SAP, reflecting the Government's view of priorities, sought toaddress the policy and institutional impediments to non-oil exports.16 Over-valuation of theNaira and the pricing policies and inefficiency of agricultural commodity boards effectivelyimpeded the growth of non-oil exports. Under the SAP the over-valuation of the Naira wasto be reduced initially by overt devaluation of the rate in the first tier market andsubsequently by setting up a second tier foreign exchange market in which market forceswould determine the rate, while containing the exchange rate movement within politicallysustainable bounds.
Implementation
Exchange Regime
6.7 In implementing a new exchange rate regime to accomplish the needed correction inthe overvaluation of the Naira and subsequent maintenance of an appropriate rate severaloptions were available, ranging from a large discrete devaluation of the official rate, throughvarious crawling adjustments in response to specified indicators, to the setting up of a mixedmarket, to the setting up of a totally free market. In addition, there were several issues to bedecided, including: level of funding, sources of funding, conditions of access for buyers,enabling regulations for sellers, the mechanism for allocating foreign exchange amongbuyers, and the determination of the price or rate of exchange.
6.8 The Bank suggested an auction-the option most politically palatable to Nigeria.The main issue agreed was the level at which it should be funded. Other particulars of thesystem were left unspecified, leaving the way open for frequent changes in the regime-different types of auctions, variation in the weights used for determining the rate,
16. There were Bank loans directed at infrastructure during the SAP period.
39
intervention by the central bank, introduction of bureaux de change, announcement ofallocations, etc. These changes left the system lacking in transparency and subject tomanipulation and abuse by players in the market; not the least among which was thegovernment itself. Initially, the auction was overfunded at the expense of reduction inarrears or accumulation of reserves in order to keep the Naira from rapid devaluation.Progress toward a fully market determined exchange rate regime was slow as thegovernment persisted in earmarking some foreign exchange for public purposes outside thebudget, thereby undermining the development of trust in the permanence of theGovernment's policy intentions. A uniform exchange rate was finally realized in March1992 when the dual system was unified. By early in 1993, with foreign exchange reservesnearly depleted the authorities switched back to a non-price system of allocation. Themarket determination of the exchange rate has not been sustained.
6.9 Bank staff assessment of the centerpiece of the Nigerian adjustment program isreflected in the following excerpts. "Exchange rate reform has been one of the mostimportant achievements of the Nigeria program. ... The dramatic fall in the exchange rateenabled it to approach a competitive rate, but intermittent efforts to regulate exchange ratesmade it deviate, sometimes significantly from an equilibrium rate as reflected in theobserved divergence between the official and parallel market rates." "CBN's occasionalinterference in trying to fix the rate also has contributed to the problem. Overall, theexchange rate reform, although significant if compared to initial conditions, was underminedby a lack of consistency in implementation and by contradictory movement (or development)in other policies such as increasing fiscal deficit and putting a cap on the interest rate.""While this evaluation concurs in the essence of the statements above, it is of the view that theregime was under-designed; too many of the salient aspects were not discussed beforehandand there was no provision that the Bank be informed beforehand of any changes in the rules.This seems to have been due to the inadequacy of Bank ESW on exchange rate reform - asubject usually left to the IMF.
Liberalization of Import Trade
6.10 The liberalization of the trade regime followed an accepted track, founded onwidely accepted theory, that had been followed by other countries . In addition, Bankeconomic and sector work dealing with trade reform provided adequate analytical andinformation bases on which to proceed; Bank staff and consultants had for years beenworking on Nigerian tariff reform. Thus quantitative and licensing restrictions were wellknown and were targeted for immediate reform which was achievable by simple decisionsabolishing them, and where appropriate, replacing them with tariffs. Subsequently, the rangeof tariffs was narrowed to provide more uniform protection across industries. Finally, camethe trade-weighted average level of tariffs was to be reduced from 33 percent to 23 percent,the objective being to avoid increasing the level of protection when the over-valuation of theNaira was reduced.
17. World Bank; Structural Adjustment Programs in Sub-Saharan Africa: A Case Study of Nigeria Office of the ChiefEconomist, Africa Region; April 1993.
40
6.11 While the objectives and design of these reforms were relevant to Nigeria's
situation, the extent and speed of reduction in the average level of tariffs cannot be derived
on the basis of theoretical reasoning and must be judged by appeal to other criteria, e.g.
minimizing disruption of production and employment. In Nigeria the changes were
compressed into a short period in 1986 (subsequent changes being mainly back-pedalling);
and although provision was made for dealing with anomalies there was significant negative
reaction leading to substantial upward adjustment in the average and the restoration of some
exorbitant rates by 1988. Although a significant part of the reform survived to have the
desired effect of reducing earlier distortions and discrimination against tradeables, tariff
change may have been less disruptive and less subject to reversal if it had been done at a
more measured, pre-announced pace determined after discussion with affected parties.
Demand Management
6.12 An important requirement for containing exchange rate movement within politically
reasonable bounds-the restraint of imports through management of aggregate demand-
was not addressed effectively in the design of the SAP. The TPED did not emphasize it, but
by the time the TIPL was being negotiated the importance of adequate control of the public
sector deficit was well appreciated and the terms included conditionality regarding the size
and content of the public investment program. Prior to the SAP the demand for imports was
largely controlled by a system of restrictions, licensing of imports, and controlled access to
foreign exchange. The abolition of the system of controls called for under the SAP meant
there had to be greater reliance on the management of aggregate demand. But there was no
incentive or sanction to ensure adherence to public finance and monetary targets once the
stabilization aspects of the program had been ruled acceptable by the IMF. The Fund did not
successfully conclude most scheduled reviews under three stand-by arrangements between
1986 and 1991. Yet, Nigeria was not in danger of preclusion from Bank financing, since
tranche release of Bank financing was conditioned on improvements in trade policy and notadequately tied to performance of the budgetary deficit. This is not to suggest that from the
outset Nigeria had no intention of trying to make the program work, but Nigeria may have
tried harder to contain discretionary budgetary expenditures had a tranche (Bank or IMF)
been at stake.
Timing and Time Horizon
6.13 The timing of the SAP immediately after the coming to office of the Babangidagovernment was appropriate in the sense that it took advantage of a popular hope for and
expectation of a change from the approach of earlier governments which emphasizedplanning and controls and public sector domination of the economy. Unfortunately, the two
year time horizon announced for the SAP was much too short to achieve the many structural
changes needed to re-orient the system of production. The result was that people were led to
expect that there would be a complete turnaround in two years and that in addition theeconomy would be less vulnerable to the vagaries of the international economy andespecially the oil market. This created a political problem for the Babangida government inthat the maintenance of auster..y beyond 1988 was difficult to sell to the populace. Therewas no general overhaul or restatement of the program at the end of 1988 when the Bank
41
approved the TIPL to continue SAP reforms and intensify them. Premature reflation of the
economy, the resurgence of fiscal deficits and the accentuation of inflationary pressuresfollowed in rapid succession. In this unstable macroeconomic climate the response tostructural adjustment policies was delayed and muted by declining investment inflow and
renewed capital flight.
Ownership and Commitment to Implementation
6.14 The SAP supported by the TPED was owned by Nigeria. As early as June 1985 theBank's Lagos office arranged several seminars to involve civil servants and the businesscommunity in discussions about structural adjustment. In early January 1986, the
government announced a budget which contained a number of important reform measures.General Babangida appointed a small group of Nigerian officials to draw up the outlines ofthe program, guided by the results of a referendum put before the country. The Committee'sreport was reviewed by a Ministerial Sub-Committee, which incorporated comments by theBank and IMF. Finally, President Babangida announced the program in a speech to the
nation on June 27, 1986.
6.15 The program supported by TIPL as reflected in the policy matrix and the conditions
of drawdown of the TIPL tranches is less distinctly Nigerian than the initial SAP supported
by the TPED. At the time of negotiation of TPED the Bank sought agreement on the
treatment of several major capital projects in the PIP, but the Government would not accept
that PIP conditionality should be made part of a trade policy loan. However, such conditions
became attached to the TIPL, the conditionality of which cast a wide net trying to procure
institutional change simultaneously in many parts of government. At that stage the program
did not enjoy the popular support initially enjoyed by the SAP, and there was little political
support for austerity at the top of the government. Some Nigerian officials recall that as time
passed it became clear that some changes in the program were needed, but these were mainlysuggested by outside experts while the studies and strategies put forward by Nigerian expertsfound little support. Ownership at the level of the implementing agency was not secured inadvance, which explains to a large extent the poor performance of the institutional reforms.
Effectiveness of the SAP
6.16 GDP growth recovered after 1988, partly due to SAP measures and the increase in
external resources triggered by the SAP, and higher earnings from oil. The agricultural
sector contributed substantially to this performance through an increase in the output of foodcrops. The quantity of agricultural exports increased despite the continued weakness in thedemand on international markets. Manufacturing and mining also registered substantialgrowth, the latter reflecting recovery in petroleum production. Capacity utilization in thepublic industrial sector continued to be low mainly because of financial and maintenanceproblems. The current account of the balance of payments improved, but not due to non-oilexports which responded only modestly to policy measures. Imports have grown slowlysince reaching a trough in 1988; with a slight shift from consumer goods to capital goods andraw materials. Contrary to S, .'objectives, inflation intensified-the consumer price levelincreasing at 24 percent per year during 1986-1992 compared to the previous 5 years.
42
6.17 The SAP was essentially ineffective in stabilizing the Nigerian economy insofar as
the fiscal deficit, monetary magnitudes and price inflation are concerned. Although thedeficit in the Consolidated Budget which had risen from 6.4 to 10.9 percent of GDP between
1986 and 1988 fell back to 2.8 percent in 1990, it rebounded to 9 percent in 1992." Thetemporary improvement in the public finances was due to a sharp rise in oil revenues asinternational oil prices rose during the Gulf crisis and the Naira was devalued. But as extra-
budgetary expenditures continued to climb in 1991 and 1992 while international oil pricesturned downward, there was a resurgence in the deficit. The SAP achieved little by way ofreducing the deficits of the public enterprise sector. Monetary policy complied with therequirements for financing the federal deficit. These were accompanied by three episodes of(40-50 percent) inflation in 1988, 1989 and 1992.
6.18 The SAP brought about significant changes in the policy environment facing theprivate sector in Nigeria. However, the program failed to ignite an enthusiastic response bythe private sector, with the result that the hoped for shift in economic leadership to thatsector has not really occurred. The dominance of the public sector in the economy could notbe reversed in such a short time. Partly it was because some incentives, e.g. the DutyDrawback Scheme, were revised but remained unattractive because of administrativecomplexities. Furthermore, within the public sector investment in infrastructure was cutback
to allow major public sector industrial projects to continue. The private sector still citesinfrastructure deficiency as the main constraint on expansion. Private sector response wasalso adversely affected by uncertainty regarding the continuation of SAP policies after 1988,especially whether future price adjustments would allow full pass through of the higherinvestment costs. Much of the output response came not from new investment but from
greater utilization of existing capacity; and there was a slight shift toward resource-basedactivities and away from import intensive ones.19
6.19 Based on these considerations the TPED was partially effective and its outcome israted as satisfactory; but the TIPL was ineffective in bringing about a significant privatesector response and its outcome is rated unsatisfactory.
Institutional Development
6.20 TPED did not have ambitious institutional development objectives; there was agreater sense of ownership at the beginning of the SAL; and there was no evidence yet of
softness in the government's resolve to go ahead with reforms; hence satisfactoryperformance was easier to achieve. The setting up of a Second Tier Foreign exchange
market within the central bank did not prove difficult and the abolition of some marketingboards had budgetary rather than staffing implications - the former proving to be lessformidable constraints. Institutional development is rated substantial under the TPED.
18. Op. Cit. World Bank Report No. 33-UNI
19. World Bank - Nigeria: Industrial Sector Report; Report No 8868-UNI; July 1990
43
6.21 Under the TIPL several institutions were to be created or improved and severaldecrees were to be promulgated. In general the decrees were drafted and announced onschedule. Building up efficient institutions proved more difficult, so that although all wereestablished, they have been slow to assemble adequate technical staff and are lacking ineffectiveness. Results have varied among sectors. Regulatory financial institutions havebeen quicker to become effective, perhaps as a necessary response to the rapid growth of thesector. "In a good number of cases, most notably in steel and petrochemicals, financialproblems are aggravated by more complex technical, managerial and structuralconstraints."20 Partly, the simultaneous drive for institutional development across so manyentities increasingly began to run into the constraint of the limited pool of available talentwithin the public sector and into the limited quantity of studies and research available toguide action plans. Clearly, the coordination of this endeavor became increasingly complexand demanding on the time of top officials in the central ministries, and the appetite forreform soon waned. The experience with TIPL tranche release showed that conditionalityattached to institutional aspects is not likely to be allowed to delay tranche release, hence theBank lost leverage to continue these reforms. Institutional development under TIPL hasbeen rated as negligible.
Sustainability
6.22 The design of a sustainable adjustment program must foster appreciation of the needfor fundamental reform by the society as a whole. Despite the referendum on use of IMFsupport, the view is held by Nigerian officials and Bank staff that the Nigerian people werenot sold on the need for fundamental reforms, and were not prepared for the dislocations thatwere implied by abolition of the system of rent and margin gathering from permits andprivileges in a highly controlled and regulated economy. Instead, the reform program wassold as a quick fix which would bring quick relief in two years. As such, its continuance waspolitically difficult once the increase in international oil prices at the time of the Gulf crisisbrought some relief by relaxing the constraint on imports and on government spending. Theomission of a strategy to popularize reform may not have been a major shortcoming whenthe SAP was designed for Nigeria had been under a military government at the time, butcertainly became one as Nigeria moved toward the establishment of a civilian government tobe chosen in free elections.
6.23 It is important to take into account the distribution of the burden of economicadjustment and the distribution of power of different groups when designing a sustainableadjustment program.21 Behind every policy distortion is a beneficiary group whose size,cohesiveness and political power must be duly considered when planning to eliminate thedistortion. In some cases, where groups are too politically powerful or the potential for
20. OM, dated January 21, 1987; NIGERIA: Economic Mission, Trade Policy & Export Development Loan (TPED)Supervision Mission - Back to Office and Full Report.
21. In early 1989 there were widesp "ad riots sparked off by protests against the economic measures and fueled byrumors that Babangida and his wife he a extensive personal fortune overseas. As a response the government announceda relief package, including the proposed creation of 62,000 new jobs. [Keesing's Record of World Events, News Digest forJune 1989.] The measures reduced tensions temporary but no coherent program of relief was offered.
44
disruption too great, the best short-term approach may be to deal with other impediments torecovery and leave some distortions in place. Predictably in Nigeria, the burden of theincrease in price of imports due to devaluation and the elimination of subsidies on petroleumproducts would have fallen mainly on the urban population, while the rapid erosion ofprotection and the cut-back in the public sector threatened actual and potential jobs in urbanareas. The pressures for policy reversal may have been less if a suitable strategy had beendevised for ensuring that the burden of adjustment did not fall unduly on cohesive, vocal andpolitically powerful groups, or that they would be compensated at least in part. At the veryminimum thought should have been given to a social safety net component to help the moreseverely affected.
6.24 The granting of concessions diluting the SAP seems to have been due in part to thedistribution of the adjustment burden away from the rural (northern and eastern) and onto theurban (southern) Nigeria and the tensions which this distribution created in the political life
and economic management of the country. Tensions between the countries largestethnic/religious groups: the muslim Hausa in the north, the christian Ibo in the south-east andthe christian/muslim Yoruba in the south-west helped to make the political environment veryunstable; and since independence, coups and attempted coups, riots, protests and clasheshave been frequent. Nigerian leaders have to be sensitive to these realities if they wish tosurvive politically. Thus when the SAP was seen as causing loss of jobs and rising prices
and there was unrest especially in the urban south-west; the government softened its stance.
6.25 Sustainability of reforms frequently depends on the manner in which opposition ishandled during implementation. As early as February, 1987 the Bank's ResidentRepresentative in Lagos warned that "notwithstanding favorable developments, internalopposition to the SAP has started to intensify". The main causes were: new tariff structuremaking it cheaper to import finished goods than to manufacture them locally; credit ceilings
preventing increase in capacity utilization; high cost of agricultural inputs (imported)undermining production for domestic market; multiplier effect of reduction in Governmentexpenditure deflationary; increase in price level affecting salaried workers; rising
unemployment. All the above point to enormous burden of short term transitional costswhich are usually the trigger for opposition to reform. In retrospect the design of such
reforms should include provisions to ease the burden of transitional costs or at least providefor their financing. The government did seek to assure that there was adequate credit
flowing to the private sector but credit had to be kept fairly tight in view of the inflationarypressures that developed when the fiscal deficit got out of control in 1987/88.
6.26 The government made concessions to domestic producers and consumers in the
1987 budget and again on Feb 26, 1987 involving large increases in nominal or effectiveprotection well outside the guidelines agreed with the Bank. Nigeria temporarily abandonedthe required fiscal and monetary discipline in 1988 and again after 1991. This reversal ofsome trade policies, the failure to establish a market determined exchange rate and the returnto a loose fiscal stance in the budget announced in 1994 should have led inevitably to theconclusion that the sustainabil'v of the benefits of the program must be rated as unlikely.However, in the 1995 budget tnere are indications of a return to the liberalized foreign
45
exchange regime envisaged by SAP, justifying a more positive sustainability outlook and arating of uncertain rather than unlikely.
Evaluation of Bank Performance
ESW and Conditionality
6.27 Bank support for Nigeria's SAP included ESW, lending and assistance in debtrenegotiation. As early as 1981 a Bank mission started to discuss the need for structuraladjustment with the Nigerians but the main thrust of ESW was work focussed on the tariffreform being done by the Industry Division in the Projects Department. In 1983, ESWexpanded to include work on the public expenditure program. By then, Nigeria was
attempting to stimulate economic expansion through massive debt financed governmentprojects. Some Bank ESW kept pace with the evolving difficulties regarding external debt,but most dealt with trade liberalization and tariff reform. Thus, when the government of
General Babangida seemed to favor a stabilization/adjustment approach some relevant BankESW was able to provide a basis for dialogue, although some work critical of Nigeria's whiteelephant public investment projects was rejected by Nigerian officials.
6.28 Bank support for Nigeria's SAP and the conditionality attached to it reflected theESW of the Industry Division rather than Country Operations Division. One result was thatconditionality regarding performance of macroeconomic objectives, e.g. the budget deficit,was not adequately provided for in the TPED. Nigeria's adherence to fiscal and monetary
targets was free of the sanctions inherent in conditional access to drawings in the upper IMFtranches. With the responsibility for TIPL shifting to the Country Operations Division,specific attention was given to the inclusion of macroeconomic conditionality. Another, wasthat ESW did not question the usual presumption by the Bank that immediate and rapidimport liberalization is always desirable.22 However, the timing and pace of importliberalization, where there is risk of undermining the recovery of industrial activity whichhas been built on the domestic production of import substitutes behind protective barriers
and of aggravating unemployment, can weaken the political support for reform. The issue ofwhether the Nigerian case warranted a slower approach was apparently never raised at theoutset; although later on, staff dealing with Nigeria were not all agreed that rapid importliberalization was desirable.
Second Tranche Release
6.29 Under TPED Nigeria drew the second tranche before the fiscal and monetaryperformance became inconsistent with the stabilization objectives supported by the loan.Conditionality attached to TIPL was more varied and detailed than that of TPED, and therewas significant fuzziness in meeting this conditionality, with the result that there was delay
22. The usual Bank view that devaluation of the exchange rate provides an opporhmty for reducing the average level
of tariffs without damage to the level r nrotection would however not have been valid in the Nigerian case to the extent
that importers were in fact paying t parallel market rate for foreign exchange before the reform of the exchangemarket.
46
in release of the second tranche. The policy matrix for the TIPL listed ten (10) conditions forsecond-tranche release. Of these at least three related to the satisfactory operation of newsystems and/or institutions and one to the adoption of a restructuring and developmentprogram for an industrial subsector (steel). These were among conditions not met at the timeof the supervision missions in May 1989 and in September 1989. Although, in a memo tothe Board dated November 1, 1989 the SVOP indicated that five of the conditions had beensubstantially met, the same memo indicated that the FMGN had been informed that thesecond tranche was available for immediate disbursement. These conditions included thosementioned above and, significantly, the one regarding the "operation of the ForeignExchange Market according to market principles"-the very heart of the SAP. A promise bythe Government to limit investment at Ajaokuta tipped the decision in favor of trancherelease.
6.30 It is doubtful whether Nigeria was ever committed to satisfying the conditionalityregarding steel; for although in a September 1989 memorandum of understanding theGovernment agreed to limit investment at Ajaokuta in 1990 to US$45 million, in May 1990the Bank learned that there had been a prior contract with French and Germancontractors/suppliers to undertake work at the rate of US$20 million monthly through March1990. Clearly, clients should expect that conditionality will be heeded by the Bank.
Conclusion
6.31 Nigeria launched substantial reforms at the inception of the SAP. The mostimportant is judged to have been the correction of the over-valuation of the exchange valueof the Naira. Although a truly market determined exchange system was not established, theunification of the official system and the market system subjected the public sector to theinfluence of more realistic foreign exchange costs. The implementation showed thesusceptibility of imperfect market systems to abuse. Also important was the abolition ofmarketing boards and elimination of restrictions on exports and imports. In spite of theinstability arising from frequent changes, resource-based activities in the real economyresponded well.
6.32 Policy reversals since 1990 threaten the gains achieved. In the budget for 1994 areturn to interventionist policies was announced including measures such as (i) a ban onrepatriation of export proceeds and requiring all foreign exchange to be paid into the CentralBank, (ii) reduction in interest rates to 12-15 percent making them negative in real terms,(iii) adoption of a fixed exchange rate of 22 naira to the dollar (free market at about 48) and(iv) imposition of stiff import duties on a range of selected goods. If these measures remainin effect the pre 1986 distortions will be mostly restored to the Nigerian policy framework.
6.33 The outcome of TPED has been rated satisfactory, and that of the TIPLunsatisfactory. The difference is due to the fact that under the first macro-policy measureswere taken, while the latter called for the creation and improvement of many institutionswhich proved difficult to accomplish. Sustainability of both is rated uncertain given reversalin the 1995 budget of the poli distortions introduced by the new government in 1994 when
47
it decided to abandon some essential aspects of SAP. Institutional development is ratedsubstantial for TPED and negligible for TIPL.
7. Lessons for the Future
7.1 Some of the lessons to be learnt from the review of these operations are thefollowing:
(i) The slippage/ reversal/ abandonment of the adjustment program discussed abovecan to a large extent be attributed to political reasons mainly the redistributionof real income from the vocal urban groups to the rural sector and to thetransitional costs imposed on producers. In retrospect, some compensatorymechanisms may have been helpful in making adjustment more palatable.
(ii) Especially in relation to TIPL the Bank should have focussed on fewer keypolicy reforms (either fewer components or an explicit list of priorities) indesigning the conditionality for the loan;
(iii) Bank support should be tranched and access conditioned on the client's meetingappropriate macroeconomic targets;
(iv) The relative importance of infrastructure deficiency and policy distortions shouldbe carefully examined and weighed in designing adjustment programs and theprivate sector consulted, in order that the main impediments to expansionreceive appropriate priority;
(v) The Bank should avoid lending to support foreign exchange markets includingauctions unless it agrees on principles to guide conditions of access, allocation,rate determination, etc, and unless the client agrees to consultation prior tochanging the rules, in order to ensure transparency;
(vi) Quick-disbursing balance support operations do not seem to be the best vehiclethrough which to procure institutional development which is by nature slow.Besides, conditionality attached to these aspects is not likely to be allowed todelay tranche release. After tranche release the Bank loses leverage to
continue institutional reforms.
48
Annex A
Table 1: Macroeconomic Projections Versus Outcome, Average.
Price of crude oil per barrel, US$ 14.4 17.1 15.5d/ 18.8d/
a/ Consumer price index.
b/ Debt outstanding and disbursed.
c/ Post rescheduling incl. debt service of non-guaranteed private sector debt, as percent of exports ofgoods and non-factor services. The debt service paid 1987-90 was, on average, 25.2 percent.
d/ 1988-1989.
소� ‘샌� A & & 」．� 珊� :
트G r F ,, & 노� . ���� 조� 』｝& 』� [& y[r�긱�� t 스� A 트
