Between 1978 and 1986, except for 1979 and 1985 when GDP showed positive growth, the economy continued to register negative growth rates. There were also high inflation, high unemployment rate and fiscal imbalance. The stabilisation and austerity measures of the Shehu Shagari regime (1979-83) did not arrest the deepening crisis.
The balance of payment did not improve. There was an increase in external loans which further accelerated the debt over-hang situation. It was clear that the economy was suffering from stagflation. The country's industrial capacity utilisation, which was 73.6 per cent in 1981, declined consis tently during the period such that by 1989, it was 31 per cent. Manufacturing which grew at 14.6 per cent in 1981 reduced to 3.2 per cent in 1989. This poor performance occurred despite various stabili sation policies of the 1980s. The structure of the economy made it vulnerable to external shocks and policies. The problems were so severe that restruc turing of the economy was inevitable.
Consequently, a comprehensive economic reform package was introduced in 1986. The package aimed at changing and realigning aggregate domestic expenditure and production patterns so as to minimise dependence on imports; enhance the non-oil export base, and bring the economy back on the path of steady and balanced growth. Specifically, the objectives of the programme were designed, amongst others:
Some of the policy measures adopted in pursuance of these objectives were:
a. adoption of a realistic exchange rate policy;
b. further rationalisation and restructuring of tariffs in order to aid the promotion of industrial diversification;
c. improved trade and payments liberalisa tion;
d. reduction of complex administrative controls simultaneously with a greater reliance on market forces;
e. adoption of appropriate pricing policies, especially for petroleum products and public enterprises; and
f. commercialisation and privatisation of public sector companies.
The economic reform programme appeared to have intensified speculative and trading activities rather than increasing production. The proliferation of merchant banks, finance houses, de-regulation of interest rates, privatisation of the economy and the new industrial policy did not bring in the needed foreign direct investments. The private sector did not live up to expecta tions, despite the then favourable environment. During structural adjustment, the private sector was supposed to serve as an engine of growth. Rather sadly, after eight years of structural adjustment measures, the private sector was not able to respond adequately to the desire for increased pro duction, employment and stable prices. The share of manufacturing in GDP was still low, while capac ity utilisation was a little above 30 per cent.
Essentially, the performance of the Nigerian private sector vitiated the major assumption that underlies an IMF adjustment programme to the effect that the private sector has the capacity to respond to sup ply-side incentives. Regarding privatisation and commercialisation, the public utilities had taken them to mean increased prices without corresponding efficiency and productivity. The unjustifiable price hikes (sometimes in the range of 500-2000 per cent) compounded problems for the industrial sector and the provision of social services.
The increased prices paid by consumers further reduced the lat ter's already declining real wages. It is not clear why imports were liberalised in an economy that was suffering from inadequate for eign exchange. The reform programme had sought to encourage export promotion, but traditional exports could not bring in the much-needed foreign exchange. Commodity prices fell and for a crop like cocoa, there was a glut in the market. Furthermore, the prices of export commodities were outside the control of the Nigerian economy.
Hence, eight years into the adjustment programme, non-oil exports remained insignificant. The persistent depreciation of the Naira vis-a-vis other major currencies creat ed further distortions in the economy. The instabili ty in the exchange rate created uncertainty and fuelled inflation. Indeed, there was a direct correla tion between movements in the exchange rate and inflation. The external balance remained in disarray despite the devaluation of the domestic currency, while external debts mounted. The mismanagement of the foreign exchange market resulted in huge profits for the financial sector. This was due to the wide differential betwee the official and the parallel market rate Consequently, there was a boom in the financi sector, although not in the other sectors of the eeoi omy. For example, there was paralysis in the re sector.
Manufacturers were unable to procure fo eign exchange tor their imports nor could they rais funds generally, given the high cost of borrowir money. While there was a fair consensus that the slic of the Naira needed to be halted, opinions on ho best to stop the further decline of the domestic cu rency differed. There were those who preferred th intervention of government either in 'fixing' tt exchange rate and/or creating a multiple exchanc rate regime. This option could be likened to the o system of import licensing with its attendant corrui tion. In the torex system, the banks and other final cial outfits did not have a precise criterion for sellir torex to their customers; hence, corruption. Another opinion quarrelled with the mechanisi for determining the exchange rate. It argued th, the introduction of the Foreign Exchange Marki (FEM) was improper and that what was needed ; that time were minor adjustments for inflation whic would have resulted in a variable exchange rate f( the Naira, and urgent action to reduce the budgi deficit.
The budget itself, it was suggested, ought I be prepared in both domestic and foreign currel cies. That way, government's use of torex would 1: limited to what is allocated to her in the foreig exchange budget. If Government wished to us more torex, then she would obtain it from the fre market, like other economic agents. A reduction the budget deficit, all things being equal, woul increase investment, production and growth. Th same scenario would have positive impact on exte nal debts. A situation in which 50k out of MI earne was used to service external debts could not help i reducing the budget deficit. Instead, resourc mobilisation would assist in determining a viabi exchange rate for the Naira.