EFFECTS OF FINANCIAL REFORMS ON THE NIGERIAN ECONOMY



The liberalization reforms introduced into any repressed financial system is supposed to work in the following ways. First free interest rates especially after a long-time of being kept low by regulation, this move tends to encourage higher level of savings. In the face of increased savings all the investment projects at the margin can now find funding. What is more-with freedom of entry into the system the increased competitions is supposed to ensure that the interest rates are kept within reasonsable limits. The liberalization reforms that brings a financial sector is expected to transform the traditional sector (Patrick 1966) by making large available (which for instance can transform a traditional subsistence agricultural implements, sellings etc). and also making available technical expertise.

            The freedom of credit to move is supposed to promote efficiency in resource use, as credit is expected to move in response to the rate of return on it in a given sector. this is in contradistinction to the previous movement of credit to supposedly socially desirable sectors but that are not able to provide the expected rate of return. As productive sectors access funds, productivity is expected to rise, output is expected to rise the rise in output is expected to bring down prices.
            The increasing deepening and expansion of the financial system is expected to lead to increased variety of financial instruments not only in the banking subsector but also in the capital market. Financial deepening can be measured using several kinds of indices, a few of these are: the ratio of the growth rate of broad money (M2) to that of the gross domestic product; ratio of Total banking assets to GDP, Gross Savvings in the economy to GDP as well as Gross Domestic Investment to GDP as well as the Interest Rate Spread (i.e the difference between lending rate and deposit rate). The more deepened the financial system the more expanded the level of output and the rate of growth of output are supposed to be.
            A look at the Nigerian economy since the onset of liberalization reforms in 1986, especially financial sectors reforms, which started in 1987 really give cause for concern. As shown in section 1 tables 2 and 3 all of the macroeconomic indicators after the first three years of reform seem to have taken a plunge downwards. For instance the real GDP growth rate which used to be in the order of 2.8% to 3% in the 1980 – 1987, climbed as high as 8.20% by 1990. However from 1991 it started a steady plunge downward which reached its lowest ebb by 1994 when it hit the 1.33%  mark. Thereafter the economy struggled to improve but could not. For the rest of that decade up to the new millennium the real GDP growth rate did not reach the IMF/WB recommended 5%, nor the millennium development Goals of 7% nor the Asian countries performance of 9%. Inflation climbed down initially from its 2-digit level to get as low as 7.5% in 1990, but by 1995 the season of mass bank failure and general distress in the financial system, inflation rose to be as high as in different sectors of the economy to as low as 6.6% by 1999, since the new millennium however it has started an upward rise again.
            As for financial deepening the result of our analysis shows that midway into the era of reforms the earlier results of increased financial deepening started to reverse itself. The table below shows the pre-Reform and post reform level of financial deepening in Nigeria using some of the includes of financial depending.
            In its editorial of 30th July 2001 the financial times (FT) warned both the International Monetary Fund (IMF) and the executive arm of the Government of Nigeria (GON) against “perpetuating a façade of reform”. According to the FT editorial, in the last one year, “the government of President Olusegun Obasanjo has pretended to reform its economy, and the IMF has pretended to monitor the process. For the sake of Nigeria, and for the credibility of the IMF and the World Bank, it is time to call a halt to this policy of pretence.
            Discussions between the IMF and the executive arm of the GON have always been shrouded in secrecy. This secrecy has left important stakeholders that include business leaders international investors, labour movement, the press, general public, academia, and even legislators in the National Assembly guessing about key economic policies.
            This has tended to heighten economic uncertainty and bred strong distrust towards the IMF in the country. Many have often openly blamed the nation’s economic woes on wrongful advice from the IMF. The secrecy has also tended to undermine the accountability  of the executive arm of government to the generality of Nigerians, and also to the National Assembly.
            The two chambers of the National Assembly have openly dissociated themselves from a few economic policy announcements by the executive arm in the last couple of years. The unilateral increase of the pump prices of the petroleum products in May 2000 and the executive campaign for “deregulation” or “liberalization” of the downstream sector in 2001 are a couple of examples.
            In both instances the executive arm clearly saw no need to for accountability at least to the National Assembly before announcing economic policy changes that could have far reaching effects on the lives of Nigerians. In both instances, there has been stout resistance from the assembly, labour and generality of Nigerians. In the case of the first example the executive was forced to reverse its decision by a nationwide strike action by workers, who received open support from a good number of state governors. In the case of the second example, the executive has been forced to soft-pedal and get inputs from Nigerians before deciding on the best course of action.
            The IMF was widely accused of pushing the executive into the steps taken in both cases, making a few to suggest that the IMF was undemocratic in its disposition. The IMF has largely ignored the criticisms of its role in Nigeria by domestic stakeholders. Although it also now tries to carry the national assembly along in appreciating some of the suggestions it makes to the government, it has not pushed it to the point of making public the full details of its discussion with the executive.
            The executive arm on its part has often openly denied the influence of the IMF on many of its questionable and politically risky economic policy intentions. Eager to clear itself of the FT accusation of pretence in its relations in Nigeria, the IMF sought and got the consent of the Obasanjo administration to publish in full the IMF Staff Report on discussions with the GON. The reports were released on he IMF web site on the 6th of August 2001, so that the readers can make their own judgment.
            Thus, whatever fears the GON had in restraining the IMF from publishing the full details of its discussions with the IMF can now be dispelled. The nation is in a position to know what policies the IMF urged, why, which ones were sensible or right, and which ones were not.
            The public disclosure of the full discussions between the IMF and Nigeria is a healthy development. We note that while the reports published by the IMF are useful, they do not have much more than post-mortem values. It would have been better if the key agreements and critical benchmarks had been made public ex-ante, with the IMF and the GON ready convince Nigerians of the rationale behind proposed reform measures until Nigerians consciously accept or reject them. It is cowardly to hide key reform measures from public debate and undemocratic to try to force such down the throat of innocent Nigerians. Little surprise that the report is more or less a catalogue of economic policy filatures.
            Their discussions and proposed agreements before they are signed. That will increase accountability of the executive arm to the nation and foster public debate that will enable the nation to buy in. the knowledge that everybody is watching will also lead to more sensible policy suggestions from the IMF. Finally, once the entire nation become the watchdog of the executive arm with respect to the agreed benchmarks, there will be a higher level of compliance of the GON with credibly agreed reform measures, as the government will find it politically difficult not to comply.
            Nigeria joined the IMF on the 30th of March 1961. From 1987 to date, the country has a total of four standby arrangements (SBA) with the IMF: Jan. 1987 to Jan 1988, Feb. 1989 to April 1990, Jan. 1991 to April 1992, and August 2000 to August 2001.
            Each arrangement usually involves a credit line from the IMF and a set of policy reform measures that GON should put in place. Nigeria has never drawn down on any of the four loans. Successful completion of the SBA is usually needed to secure debt rescheduling from the country’s creditors. This is why the SBA is important to the GON. The IMF now has a senior Resident Representative in Abuja since June 2000, assisted by a Deputy Resident Representative since August 2000. with their presence in the country, Nigeria has benefited from a series of far-reaching technical assistance from the IMF through the instrumentality of the benchmarks stipulated in the SBA Two of the most striking ones are the Certification of Due Process for Capital Expenditure and the Review of the 2001 capital expenditure project .
            Of the 14 benchmarks that the Nigeria was expected to meet between September 2000 and March 2001, the country only met four. The other ten are yet to be met.
            The Nigerian government argues that the remaining benchmarks will be met if the SBA is extended. In spite of serious doubts about the ability of the Nigerian government  to meet the remaining benchmarks, the IMF has extended the termination data of the current SBA from August to October 2Q01. If the IMF is satisfied at the end of the extension, discussions will start on a successor 3 year arrangement that should enable the country to qualify for generous debt rescheduling from the various creditors, plus a genuine possibility of debt reduction.
VIEWS THAT IMF NEED TO RECONSIDER   
            One  would readily commend the IMF for urging the government to undertake measures that will increase transparency and accountability in the use of budgetary resources (due process tests, review of capital projects etc). urging the government to establish legal and institutional arrangements for successful completion of the privatization of key utilities is also a good idea.
            Some of the suggestions and comments of the IMF on fiscal and monetary arrangements in the country are however strongly objectionable. The IMF suggested the following: Imposition of an absolute cap on government spending. It would have been more sensible to focus on the structure government spending, and encouraging the government to spend in such a way to stimulate a higher level of economic activity. What is undesirable are increase in direct spending by the government. Incidentally, government. Incidentally, government now has a lot to spend, given the proceeds of privatization and commercialization, which must be added to the mini oil boom.
            But private spending is not only stagnant but have been contracting, reflecting the impact of resources extracted from the economy by the government. These are currently being spent on questionable projects. Ensuring that these funds are transferred back into the personal through higher pay for government workers would appear a more sensible line of action. This would stimulate output infrastructure bottlenecks through accelerated privatization will still required sustained local demand to work. Purchasing power has been weak and increased pay in the public sector is a way of reviving spending to stimulate a non-oil sector growth. The prospects for the region are promising. With the expansion in global output set to continue, IMF country teams are projecting that, barring shocks, most countries will grow faster in 2011 than in 2010: for the median country, growth is set to increase by more than ½ a percentage point between the tow years, and in aggregate, average economic growth fro the region is expected to be 5½ percent in 2011 compared with just under 5 percent this year. It is important to note, however, that this assumes that no country will have negative growth in 2011. the diversity in experience and prospects between different countries in sub-Saharan Africa can be effectively conveyed by considering the five countries that have performed least effectively over the last three years. Boxes 1.1 and 1.2 show the main features of these countries’ backgrounds, policies, and economic developments.

THE PROSPECTS AND CHALLENGES IN THE FIVE LARGEST ECONOMICS  
            The five largest economies (South Africa, Nigeria, Angola, Ethiopia, and Kenya) account for two-thirds of the region’s output and just under half of its population. The group is also quite diverse, comprising a middle-income oil importer, two oil exporters (one of which is also now middle income) and tow low-income oil importers in the last two countries are quite different – about US$330 in Ethiopia and US$840 in Kenya. This diversity mirrors the heterogeneity of the region. All told, therefore, prospects in these five countries should be a useful proxy for trends in the region. All told, therefore, prospects in these five countries should be a useful proxy for trends in the region. 
            Among the five, only South Africa went into recession in 2009. it felt the impact of the crisis particularly strongly both because of its stronger trade and financial linkages and because the crisis hit the country after economic growth had already started decelerating. The effect was quite brutal, leading to the loss of about 1 million jobs. Angola was also affected heavily by global developments, particularly the volatility in oil prices, and growth decelerated from more than 13 percent in 2008 to under 1 percent in 2009. the other three countries fared much better. In Nigeria and Kenya, growth actually increased slightly; whereas in Ethiopia the marginal fall still left growth at almost 10 percent.
            The five countries are set to grow on average by some 5 percent this year and 5½ percent in 2011, playing off the global recovery. But this will require addressing the following challenges:
            In South African, the growth momentum, after three quarters of acceleration, showed signs of tapering off in the percent projected for 2010-11. in this context, the key for macroeconomic policy is to strike the right balance between supporting the ongoing recovery and strengthening policy buffers, including external reserves. Reforms to improve the effectiveness and efficiency of labor and product markets could help to raise potential growth and to make such growth more labor intensive.
            In Nigeria, strong non-oil growth in recent years, in particular in agriculture, looks set to continue. GDP growth of about 7½  percent is projected for 201-11. with growth at potential, it will be important to ensure that fiscal policy is appropriately countercyclical to avoid overheating the economy and to replenish the oil savings account improvements in infrastructure and business environment can further increase Nigeria’s growth potential.
            In Angola, the government’s adjustment program, supported by an IMF stand-by arrangement, has largely succeeded in restoring macroeconomic stability, following the initially destabilizing effects of the 2009 oil price production. Large government payment arrears to domestic contractors and suppliers have weighed on output in the non-oil sector; resolution of these arrears will be needed if growth objectives are to be realized. Further fiscal consolidation is also needed to strengthen the external position and fully stabilize the economy.
            In Ethiopia, the economy has recently enjoyed strong and broad-based growth, including rising contributions from the service sectors and industry. Macroeconomic imbalances heightened sharply in 2008-09, but a strong tightening of monetary and fiscal policies since late 2009 has helped reduce inflation to single digits and rebuild international reserves. Exchange rate adjustments have also helped. GDP growth of 8-8½  percent is projected for 2010-11. monetary policy has been recast to support demonetization. Structural reforms and liberalization will  be needed to improve the business environment and secure a robust supply response from the private sector.
            In Kenya, a fine line should be followed between maintaining the recovery through further fiscal stimulus measures and ensuring that there are no risks to debt sustainability. Similarly, monetary policy will need increasingly to be directed toward inflation objectives. Although growth is recovering well, it is expected to stay.
Sub-Saharan African’s growth performance has kept pace with or surpassed that of other developing regions through the global downturn. In particular, sub-Saharan Africa’s performance has most closely paralleled that of developing Asia in having avoided a contraction in output (Figure 1.6). certainly, some countries in both region ser hit very hard (South Africa in sub-Sahara Africa and Malaysia in developing Asia, for instance). But, no the whole, most centuries in these regions escaped with a slowdown in growth in 2009 rather than a recession. They are also enjoying a fairly robust rebound in activity through 2011. It is only in 2011 that the profiles of the projections for the two regions part, with growth in developing Asia set to decline slightly; while growth in sub-Sahara Africa is projected to increase moderately.
            While our central scenario remains very much for the global recovery to be particularly well, downside risks to the global recovery have heightened in recent months. This begs the question, how will region fare if there is a hiatus in the global recovery?
            The July 2010 World Economic Outlook update included estimates of the possible growth impact of heightened financial stress and contagion as a result of mounting sovereign risk. Assuming shocks to financial conditions and domestic demand in the euro area as large as those experienced in 2008, the illustrative model simulations suggested that would growth next year would be reduced by some 1½ percentage points relative to the baseline – that is, global growth just below 3 percent rather than the 4¼  percent currently projected for 2011.
            Under such a downside scenario, projected growth in sub-Saharan Africa for 2011 would drop from about 5½ percent to 4 percent. About half of this drop would stem from an assumed cutback in oil production as oil exporters respond to lower OPEC quotas. Growth in oil-importing countries would be about ¾ of a percentage point lower than in the central scenario. Within this group, countries heavily dependent on exports to and tourist receipts from Europe would be hit particularly hard. The impact on their external balances, however, would be mitigated by a reduction in import growth, as demand growth slows, and by much lower oil prices. Assuming only limited responses in government spending, fiscal balances in oil-importing countries would generally deteriorate by less than 1 percent of GDP, but some oil exporters could experience a significant slowdown in global growth would be to dampen growth in the region quite markedly, and delay further the effort to rebuild policy buffers.
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