MOST of us, including those too young to have lived a single day through it, associate the Structural Adjustment Program (SAP) of the 1980s with the darkest period in Nigeria’s economic history. The popular narrative generally considers SAP to have both caused the problems and failed to fix them, laying the blame squarely at IBB’s feet.
It’s not quite that simple.
SAP reforms were introduced in mid-1986 as a precondition for Nigeria’s borrowing from the World Bank/IMF. We didn’t have much choice.
So what lessons did we learn/should we have learnt from our economic history in the 1980s?
First, The Dynamics Of The Nigerian Economy Pre-SAP Are Very Similar To Those Playing Out Today
- Oil prices crashed by 70% to below $10 per barrel between 1980 and 1986, and government revenues fell 75% in the same period. We ran consistent deficits to fund the civil service and sustain government spending, and eventually had to borrow heavily after depleting foreign exchange reserves.
- The Naira was clearly overvalued. The official rate was being artificially held at just under 1 Naira to the Dollar, despite the sustained fall in oil prices.
The spread between the official and parallel markets widened over time, reaching over 300% by 1985, when 4 Naira traded for 1 Dollar in the parallel market. The divergence was fueled in some part by FX rationing which drove people to the black market.
- Successive governments resisted calls to devalue the Naira, fearing inflation. Instead, they implemented austerity measures, including FX rationing and import licensing restrictions. By 1984, inflation had risen to around 40%, from roughly 10% four years earlier.
- Non-oil sector growth collapsed. Manufacturers struggled under import restrictions and the overall economy slowed to negative growth. People lost their jobs. We recorded a 2–3% per annum decline in the economy on average between 1980 and 1986, and incomes dropped to roughly $240 per capita from around $870.
1986 was a particularly tough year for us. Most of the falls in oil prices and household incomes happened in that year alone. It was the same year of course that we were required to implement SAP, with the result that people tend to blame SAP for the outcome of a series of actions and events that happened in its run-up.
Second, SAP Was Far From An Unqualified Failure
The economic policies SAP advocated were more proactive and coherent than any that had come before it. And, at least initially, SAP achieved what it set out to do — that is, to drive growth in sectors outside oil.
- Exchange rate policy was at the core of the SAP strategy; the idea was to allow market forces greater influence to do their work. The currency would depreciate towards fair value, import demand would restrain itself as a consequence, domestic production and non-oil exports demand would be stimulated as Nigerian goods would price more competitively at home and abroad, and black market activity would fall with the rate spread in the parallel market.
- Other priorities were tariff/export policy reform, privatisation of state-owned enterprises and a general reduction in the running costs of government.
- Inflation risk was real and acknowledged, but not unmanageable. The government needed to maintain tight monetary and fiscal policy in order to keep it reigned in.
- In the first two years, the results of SAP were a return to positive economic growth, a resurgence of agriculture, higher exports and lower import demand. GDP growth averaged 5% per annum between 1986 and 1992 and agricultural output grew by 4% a year. The textile and agro-processing industries did particularly well. For example, within one year of SAP, the production of Nigerian cotton textiles increased by more than 3x, and synthetic fabric production by more than 6x.
5.But growth was skewed towards the farmers and rural classes. Middle class Nigerians and civil servants felt a significant drop in their living standards, driven by slower wage growth and reduced government spending on social infrastructure, as it tried to maintain the required tight fiscal policy stance to keep inflation in check.
- Between 1986 and 1992, the Naira depreciated roughly 80% against the Dollar in real terms. Most of this depreciation happened at the first SFEM (Second Tier Foreign Exchange Market) window in September 1986. Despite a 70% devaluation that year, inflation increased by a relatively modest 10 percentage points.
Third, SAP’s Biggest Issues Were Political, Not Economic
- SAP turned the economy around, but not quickly enough for Nigerians to overlook the corruption of IBB’s government. With just 5% aggregate growth and 3% population growth, per capita incomes were rising only 2% a year, and would have taken roughly 30 years to recover to peak levels seen in 1980, just 6 years earlier.
- IBB did not have the people’s support. The perception was that belt-tightening was being unfairly meted out to the non-political classes, while IBB and his cronies enriched themselves at the cost of public infrastructure. The typically more vocal middle classes were particularly unhappy and the first protests were led by students in 1989.
- Implementation eventually began to suffer as IBB’s government tried to hold on. They loosened the reigns on fiscal and monetary policy in a bid to turn the political tide. Flip-flopping monetary policies and extra-budgetary spending became the norm, and inflation was predictably erratic. Between 1987 and 1988, accelerated government spending drove inflation from 16% to 55% and by 1990, inflation fell drastically again to below 7%. It was back up to around 50% by the end of 1992.
We cannot afford to simply relegate the past to the distant memory, or to allow incomplete or inaccurate narratives about its events to sustain.
SAP was not a catalyst for the decline in Nigeria’s economy. That’s a myth. We were at the verge of a crisis when SAP was introduced. The issues started six years before SAP, with oil prices as a catalyst. Successively poor economic management (including resistance to the economic logic of devaluation) exacerbated the challenges SAP was intended to address.
Two of those decline years were spent under President Buhari’s government and 1983/4’s tightening of austerity measures, which included further FX rationing, were his government’s actions. These measures contributed to the collapse of the manufacturing sector, and similar actions are being repeated 30 years later.
SAP itself had its successes and its failures, no doubt. But its failures cannot be categorically attributed to the policies themselves. The greater culprits were the IBB government’s failure of leadership and the resulting weak implementation.
Where Does That Leave Us In 2016?
A major personal challenge President Buhari will face is resisting the urge to repeat his actions of the 1980s, in view of similar economic conditions in 2016; to do things differently would be to admit past mistakes.
But, he owes it to this generation of Nigerians, we who have taken an extraordinary leap of faith in a former military dictator, to take empirical approaches, listen to experts and let go of the emotional.
The task of economic diversification will be long and probably painful, but ironically, the early wins of ‘IBB’s SAP’ prove that it is imminently achievable, if wealth creation could be spread faster and more evenly this time. Its failures also tell us that political support and policy consistency will be critical if President Buhari’s leadership will succeed.
Murdering the Naira
Devaluation is equivocally not equivalent to “murdering the Naira”. My colleagues and I would be very happy to “convince” Mr. President of this in any forum he chooses. Inflation risk is not unmanageable if our monetary and fiscal agencies rise to the challenge of actively engaging the same policy instruments used successfully by many governments across the world.
But, the real task is in driving a sufficient level of growth, not holding inflation at bay. Like it did in the 1980s, the fear of inflation must not be allowed to drive Mr. President to shun legitimate strategies for growth, particularly if he is to create those 3 million jobs a year.
The first step on the path to growth is devaluation. But in the context of a holistic strategy for economic reform and management, including coherent and consistent fiscal, monetary and trade policies to stimulate investment by the private sector. The private sector needs to be given the means and confidence to fly.
“We cannot solve our problems with the same thinking we used when we created them.” – Albert Einstein (allegedly).
* Eloho Omame is a finance professional with fifteen years’ experience across the fields of investment banking and private equity. She holds a BSc. (Hons) in Economics from the London School of Economics and an MBA from the London Business School. Eloho writes at medium.com/@Eloho and tweets as @ElohoOmame.