Nigeria - The Role of Government in the Economy

Government Finance

A major cause of political conflict in Nigeria since independence has been the changing formula for allocating revenue by region or state. Before 1959 all revenues from mineral and agricultural products were retained by the producing region. But after 1959, the region retained only a fraction of the revenue from mineral production. This policy was a major source of dissatisfaction in the Eastern Region, which seceded in May 1967 as the would-be state of Biafra. By contrast, the revenue from agricultural exports was retained by regional marketing boards after 1959, but the agricultural exports of eastern Nigeria were smaller than those of the other major regions.

The rapid growth of petroleum revenue in the 1970s removed most of the severe constraints placed on federal and regional or state budgets in the 1960s. Total federal revenue grew from N306.4 million in 1966 to N7,791.0 million in 1977, a twentyfivefold increase in current income in eleven years. Petroleum revenue as a percentage of the total went from 26.3 percent in 1970 to more than 70 percent by 1974-77.

During the civil war, most of the twelve new states created in 1967 faced a revenue crisis. But a 1970 decree brought the states closer to fiscal parity by decreasing the producing state's share of export, import, and excise duties, and of mining rents and royalties, and by increasing the share allocated to all states and the federal government. Also, in 1973 the commodity export marketing boards, which had been a source of political power for the states, were brought under federal control. Other changes later in the 1970s further reduced claims to revenue based on place of origin. In the 1970s, the federal government was freed to distribute more to the states, thus strengthening federal power as well as the states' fiscal positions. Statutory appropriations from the federal government to the states, only about N128 million in FY1966, increased to N1,040 million in 1975 with the oil boom, but dropped to N502.2 million in 1976, as oil revenues declined.

The burgeoning revenues of the oil boom had encouraged profligacy among the federal ministries. Government deficits were a major factor in accelerated inflation in the late 1970s and the early 1980s. In 1978 the federal government, compelled to cut spending for the third plan, returned much of the financial responsibility for housing and primary education to state and local governments. Federal government finances especially drifted into acute disequilibrium between 1981 and 1983, at the end of President Shagari's civilian administration, with the 1983 federal government deficit rising to N5.3 billion (9.5 percent of GDP) at the same time that external debt was increasing rapidly. The state governments' deficit compounded the problem, with the states collectively budgeting for a deficit of N6.8 billion in 1983.

Falling export prices caused the military governments between 1983 and 1988 to continue cutting real spending, especially for capital, imports, civil service and armed forces salaries and consumer subsidies. Many parastatals also had their subsidies cut, while others were sold off entirely. The result of these actions was a substantial reduction in the federal deficit. The announcement of the spending reductions that would be part of the fifth plan coincided with the military coup of August 1985. Unlike earlier plans, the fifth plan (put back to 1988-92 party because of the coup) allocated the largest amounts of capital to agriculture and stressed the importance of private investment.

In 1988 the federal budget was still highly dependent on oil revenues (taxes on petroleum profits, mining rents and royalties, and Nigerian National Petroleum Corporation earnings). Altogether, oil receipts accounted for 77 percent of total federal current revenue in 1988. The federal government retained 62 percent of the revenue it collected in 1988, while the rest of the funds were distributed to the state and local governments by a formula based on population, need, and, to a very limited extent, derivation.

International aid designated for domestic Nigerian development constituted a minor source of government revenue. In 1988 such official assistance amounted to US$408 million, or US$1.1 per capita, which placed Nigeria lowest among low-income and lower-middle-income aid recipients. This aid represented 0.4 percent of Nigeria's GNP, far less than the average of 2.4 percent received by all low-income countries, a group that included much states as China, India, and Zambia.

More about the Economy of Nigeria.

Before 1945 the colonial government undertook no serious comprehensive planning. Nigeria's earliest national plans, the 1946-55 Ten-Year Plan of Development and Welfare (with plan revisions, 1951-55) and the 1955-60 plan (later extended to 1962), were framed by colonial administrators. As the authors of the First National Development Plan, 1962-68 (henceforth, first plan) wrote, these "were not `plans,' in the truest sense of the word . . . [but] a series of projects which had not been coordinated or related to any overall economic target." After 1960, however, development planning had a broad scope, encompassing government policies to achieve national economic objectives, such as accelerated growth and higher levels of average material welfare. This planning affected the policies of such agencies as the central bank, state-owned enterprises, the Ministry of Education, marketing boards, state-level departments, and extension services.

Nigerian plans included economic forecasts, policies toward the private sector, and a list of proposed public expenditures. Plans did not constitute commitments by public departments to spend funds. Although Nigerian political leaders made decisions about general objectives and priorities for the first plan, foreign economists were the main authors of the actual document. Its authors favored decentralized decision making by private units, disregard of major discrepancies between financial and social profitability, and high economic payoffs from directly productive investments (as opposed to indirect returns from social overheads). They discouraged increased taxes on the wealthy (out of a fear of dampening private incentive), and advocated a conservative monetary and fiscal policy emphasizing a relatively small plan, openness to foreign trade and investment, and reliance on overseas assistance. Foreign aid was set at onehalf of public sector investment.

Nobel economist W. Arthur Lewis has suggested that the main weaknesses of the 1962-68 plan were incomplete feasibility studies and inadequate evaluation of projects, accompanied by meager public participation, followed by excessive political intervention in economic decisions. Moreover, insufficient attention was paid to the small indigenous sector, and the machinery for implementing developments in the public sector was unsatisfactory. Lewis noted that the most important aspects of Nigeria's 1962-68 plan were "how the government proposes to raise the money and to recruit the personnel to carry out its objectives."

Postwar reconstruction, restoring productive capacity, overcoming critical bottlenecks, and achieving self-reliance were major goals of the Second National Development Plan (1970-74). The replacement cost of physical assets damaged and destroyed in the civil war with the secessionist Igbo area in the southeast, then known as Biafra, was estimated to exceed N600 million (then about US$900 million).

The United Nations (UN) Center for Development Planning, Projections, and Policies observed that Nigeria's real growth in GDP between 1970 and 1974 was 12.3 percent per year. The annual target had been only 6.2 percent. Nigerian growth could be explained by factors largely outside the planners' purview--rapid oil industry growth and sharply increasing oil prices.

Announced in March 1975, the Third National Development Plan (1975-80) envisioned a twelvefold increase in the annual rate of public capital expenditures over the previous plan period. This document included the statement, "There will be no savings and foreign exchange constraints during the third plan period and beyond." The document outlined ambitious plans to expand agriculture, industry, transport, housing, water supplies, health facilities, education, rural electrification, community development, and state programs. The third plan also designated substantial funds for prestige projects, such as Festival of African Culture (FESTAC) in Lagos.

Amid the euphoria of the 1974 oil price boom, the Ministry of Economic Development approved and added numerous projects for other ministries not supported by a proper appraisal of technical feasibility, costs and benefits, or the technical and administrative arrangements required to establish and operate the projects. According to Sayre P. Schatz, who advised the Ministry of Transport while it prepared feasibility studies for the plan in 1974,

"Economic reasoning gave way before economic enthusiasm," and the necessary coordination and implementation were ignored.

Inflationary minimum wage and administrative salary increases after October 1974, in combination with the slowing of the economy, made budget shortfalls inevitable. In June 1975, several state and local governments did not receive their monthly subsidies from the federal government. Just before the July 29, 1975, coup in which head of state General Yakubu Gowon was toppled, government workers in several areas threatened to impair vital services unless their June wages were paid.

In March 1976, in response to an economy overheated by demands for new programs and higher wages, General Olusegun Obasanjo, then head of state, pointed out that petroleum revenue was not a cure-all. Many projects had to be postponed, scaled down, or canceled when oil-revenue-based projections made in 1974-75 later proved too optimistic. Projects tended to be retained for political reasons, not because they were considered socially or economically useful by the Central Planning Office of the Supreme Military Council.

The civilian government that tack office on October 1, 1979, postponed the beginning of the fourth plan (1981-85) for nine months. Whereas the plan's guidelines indicated that local governments were to be involved in planning and execution, such involvement was not feasible because local governments lacked the staff and expertise to accept this responsibility. The plan was also threatened by falling oil revenues and an increased need for imported food that had resulted from delays in agricultural modernization. Projected to rise 12.1 percent annually, exports actually fell 5.9 percent yearly during the plan, as a recession among the nations of the Organisation for Economic Co-operation and Development reduced demand for Third World imports. As exports declined, the capacity to import construction materials and related capital goods also fell, reducing growth in the construction, transport, communications, utilities, and housing sectors.

Nigeria was heavily dependent on agriculture, with the sector accounting for more than 40 percent of pre-1973 GDP. But in the decade up to 1983, agricultural output in Nigeria declined 1.9 percent and exports fell 7.9 percent. Agricultural imports as a share of total imports rose from 3 percent in the late 1960s to 7 percent in the early 1980s. Nigeria's unfavorable agricultural development resulted from the loss of competitiveness among farm exports as the real value of the Nigerian naira appreciated substantially from 1970 to 1972 and from 1982 to 1983.

Thanks in large part to the overthrow of Nigeria's second civilian administration, the Second Republic headed by President Shehu Shagari, at the end of 1983 and of the military government of General Muhammadu Buhari in 1985, the Fifth National Development Plan was postponed until 1988-92. Continuing the emphases of the SAP, the fifth plan's objectives were to devalue the naira, remove import licenses, reduce tariffs, open the economy to foreign trade, promote nonoil exports through incentives, and achieve national self-sufficiency in food production. The drafters of the fifth plan sought to improve labor productivity through incentives, privatization of many public enterprises, and various government measures to create employment opportunities.

In late 1989, the administration of General Ibrahim Babangida abandoned the concept of a fixed five-year plan. Instead, a three-year "rolling plan" was introduced for 1990-92 in the context of more comprehensive fifteen- to twenty-year plans. A rolling plan, considered more suitable for an economy facing uncertainty and rapid change, is revised at the end of each year, at which point estimates, targets, and projects are added for an additional year. Thus, planners would revise the 1990-92 threeyear rolling plan at the end of 1990, issuing a new plan for 1991-93. In effect, a plan is renewed at the end of each year, but the number of years remains the same as the plan rolls forward. In Nigeria, the objectives of the rolling plan were to reduce inflation and exchange rate instability, maintain infrastructure, achieve agricultural self-sufficiency, and reduce the burden of structural adjustment on the most vulnerable social groups.

The role of government

Some of Nigeria's political leaders have advocated African socialism, an ideology that does not necessarily coincide with the Western socialist concept of the ownership of most capital and land by the state. Instead, the African variety usually has included the following: a substantial level of state ownership in modern industry, transportation, and commerce; a penchant for public control of resource allocation in key sectors; a priority on production for domestic consumption; and an emphasis on the rapid Africanization of high-level jobs. Despite the socialist rhetoric of some politicians, in practice Nigeria worked toward a mixed economy, with the directly productive sector dominated by private enterprise, the state investing in infrastructure as a foundation for private activity, and government providing programs and policies to stimulate private (especially indigenous) enterprise.

None of the major Nigerian political parties controlling national or regional governments from 1951 to 1966 (or 1979 to 1983) was a socialist party or a party strongly committed to egalitarianism. Even the Action Group, led during the first republic by the ostensibly anticapitalist Chief Obafemi Awolowo, had as its foundation the rising new class of professionals, businesspeople, and traders.

After Nigeria's 1967-70 civil war, petroleum output and prices increased rapidly. The government's control of the extraction, refining, and distribution of oil meant that, the state became the dominant source of capital. By the mid-1970s, petroleum accounted for about three-fourths of total federal revenue. To the most vigorous, resourceful, and well-connected venture capitalists (often politicians, bureaucrats, army officers, and their clients), productive economic activity lost appeal. Manipulating government spending became the means to fortune. Because of the rapid growth of the state bureaucracy and the establishment of numerous federally funded parastatals, the size of the government sector relative to the rest of the national economy hit a peak in the late 1970s.

In an effort that culminated in the 1970s, the Nigerian government gradually expanded its controls over the private sector, levying differential taxes and subsidies, increasing industrial prices relative to farm prices, favoring investment in key sectors, providing tariff and tax incentives to vital sectors, protecting favored industrial establishments from foreign competition, awarding import licenses to selected firms and industries, and providing foreign exchange to priority enterprises at below-market exchange rates. While the ostensible reasons for this policy of favoritism were to transfer resources to modern industry, expand high-priority businesses and sectors, encourage profitable enterprises, and discourage unprofitable ones, in practice the government often favored urban areas by promoting production that used socially expensive inputs of capital, foreign exchange, and high technology. Market intervention helped political and bureaucratic leaders protect their positions, expand their power, and implement their policies. Project- or enterprise-based policies (unlike reliance on the market) allowed benefits to be apportioned selectively, for maximum political advantage. Government made it in the private interest of numerous individuals to cooperate in programs that were harmful to the interests of producers as a whole. However, market-clearing prices (for farm commodities or foreign exchange), whose benefits were distributed indiscriminately, inspired little or no political support among farmers and businesspeople.

Beginning in 1979, the policy prescription of the World Bank (and IMF) was for African countries to refrain from interfering in foreign exchange and interest rates, wages, and farm prices; to privatize state-owned enterprises (especially agro-processing, farm input distribution, insurance, and retail and wholesale trade); to relax restrictions on foreign capital; and to encourage indigenous business ventures. By the early 1980s, Nigeria faced substantial international payments deficits in the midst of declining export prices and rising import prices, rising external debt payments, and negative economic growth. The government consequently undertook an its own SAP that was patterned along World Bank guidelines in 1986, with World Bank conditions including devaluation of the naira, reductions in real government spending, abolition of official agricultural marketing boards, the sale of public enterprises, liberalized trade, and reduced quotas and licenses.

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