THE IMPACT OF DEVALUATION OF NAIRA ON NIGERIA’S BALANCE OF PAYMENTS

CHAPTER ONE

INTRODUCTION

1.0      BACKGROUND TO THE STUDY

Prior to 1958, when Nigeria exported crude oil for the first time, Nigerian economy had relied on export of cash crops for her foreign exchange. It was only in the early 1970’s when oil boom of the mid 1970s and the resulting favourable balance of payments position led to an era of liberal food import policy. Import restrictions were lifted in some cases and import duties were either abolished or reduced in others. The short spell of depression in the oil market in the late 1970s gave rise to tightening of food import tariffs and import prohibition, which was again relaxed as the oil market situation improved the total government revenue to N98.2 billion (NNPC publication, September 1978).The period 1981-1986 was one of economic depression and balance of payment crisis. Trade controls were reintroduced to correct the severe distortion. Huge tariffs or outright bans were imposed on most food imports. Export bans and duties were also reviewed to address principally the domestic inflation problem. Centralized marketing was reinforced to increase government revenue.The 1986 budget introduced the trade liberalization regime as a component of the structural adjustment programme (SAP). The regime included abolition of the import licensing system, reduction of import restrictions, modification of advance payment of import duties, overhauling of custom and excise duty schedules, establishment of tariff review board, allowance of domiciliary accounts operation, abolition of export prohibition, dissolution of commodity boards, and establishment of an export development fund, guarantee scheme, insurance scheme and export promotion zone. The main objectives of SAP include the following:

1.  To restructure and diversify the productive base of the economy in order to reduce dependence on the oil sector and imports.

2.  To achieve fiscal and monetary balance of payment viability over the period.

3.  To lesson the dominance of unproductive investment in the public sector, improve the sector’s efficiency and enhance the growth potential of the sector.

The main element of accomplishing the objectives of SAP in Nigeria was the adoption of the realistic exchange rate regime through the adoption of the second tier foreign market: SFEM, FEM, IFMS Bureau de change etc.

The intention here was to remove the over valuation of the naira through the market forces of demand and supply to determine the realistic exchange rate of the naira.

Between 1975 and 1985 the naira was considered to be over value. In fact the structural problems of foreign exchange scarcity, liquidity problems, over invoicing of import can be traced back to this over valuation. It was hoped that these structural problem would be gotten rig if a realistic exchange rate could be achieved so that incentives can be created for non-oil exports, capital flow can be discouraged and most of all balance of payment can be solved.