CHAPTER ONE
1.1 INTRODUCTION
BACKGROUND OF THE STUDY
The Nigerian economy has since the early 1990’s been faced with adverse financial constrains especially in its international trade. This can be traced to the responsible fiscal policies enacted during the oil boom period. The sought increase in the volume and value of oil exports since the early 1990’s especially in 1990/91, placed the oil sector as the mainstay of the Nigerian economy, not only in terms of foreign exchange earnings but also as the source of government revenue and domestic liquidity. The huge revenue from oil stimulated a phenomenal increase in government expenditure and increased the public sector participation in the whole economy, such excessive government spending spilled into the rest of the economic sector and generated an unsustainable growth in economic activities. In particular, the pattern of investment shifted mainly to construction and services sectors to the detriment of productive sector that is industrial and agricultural sector which had hitherto been the sole earner and should provide the basis of economic growth.
The slump in oil prices created a weakening of the international oil market from the early to mid “90”s. This phenomenon, exacerbated the problem already existing from the imbalance experienced in the preceding decade. Following the glut in the market, oil price dropped from $40 to $35.5 per barrel and continued to slide thereafter till it reached to roughly $12 per barrel. Consequently, oil export revenue which had accounted for about 95% of Nigeria’s exchange earning dropped sharply. Moreover, the glut also forced production down by 0.4 million barrels per day as at the middle of 1991, and dropped further to 0.6 million barrels per day, during the first quarter of 1992. the oil glut and the attendant low unit prices of oil signaled the beginning of economic recession for Nigeria. As a result of there economic recession, the country’s ability to meet its trade obligations became seriously compromised. It became necessary for trade partners to request new terms of trade and re – negotiation of existing loan and credit, subsequently, the country external payment position was adversely affected.
A good example of this was manifested in the extort value which declined from the peak of N14.2 billion in 1990 to N8.6billion in 1992 but the total import expenditure rose from N9.1 billion in 1990 and 12.6 billion in 1992. With a deficit of appropriate approximately N4.0 billion. The ripples of the oil glut was also felt on the domestic front as was observed on the sharp decline in both state and federal government’s allocations in real monetary terms. Secondly, the declining oil earning for the government to resort to alternative means of finance for its numerous projects. In most cases, both private and public banks at home and abroad were approached to provide such needed funds in the form of loans and advances. Consequently, Nigerian’s external debt rose to nearly N15 billion in 1993. Thirdly, in the light of mounting foreign debt and with the reluctance of the foreign trade partners to provide for the much needed finance, the government was forced into counter trade arrangements as a means of making payment on goods purchased, several attempt were made to stem the declining economic fortunes of the country. First, it was the General Ibrahim Babangida’s SAP measure that was signed to restrict imports to a manageable level. This witnessed the advent of the import license, which rather than curtailing the foreign expenditure, increased it. A more constructive approach was adopted in 1991 by the Barbangida’s administration under the structural adjustment programme (SAP) and re – aligning aggregate domestic expenditure and production pattern in order to minimize dependence on imports.
The objectives of the programme are thus:- To restructure and diversify the production base of the economy in order to reduce dependence on the oil sector and import of finished goods. To achieve a viable fiscal balance of payment over the medium term. To lay the basis for a sustainable non – inflationary growth over the medium and long – term by insisting on a workable balance budget. However, sustaintial improvement were recorded with these adjustments. Instance, Nigeria’s balance of payment showed an overall surplus of N1,946.3 million in 1993 compared with the surplus of n561 million in 1994. This continued to decline even to a deficit. Despite the measure introduced by (SAP), aggregate inflow of foreign exchange continued to decline by 7.1 percentages from $12,353.9 million in 1992 to $3,567.1 million in 1993. Total foreign exchange outflow also declined by about 20.8 percent. Moreso, as foreign exchange cash flow problem intensified, Nigeria importers found it increasing difficult to secure confirmed lines of credit overseas. Although the foregoing countries portray (SAP) in a negative light, economic experts who made it their duty to monitor the economic performance of the country, held the view that some sanity had been brought back into the economic system of the country.
The problem of the world’s economic recession has affected considerable the issue of international cash flow. It become more difficult for the less developed countries who were non – cultural and have little or nothing to export to gain foreign exchange. It was even worse then the economy strictly import – oriented. In such cases, the little reserve would be very much insufficient and inadvertently lead to economic manipulation by the creditors Nigeria happens to fall within this group and it was in respect of the above problems that the government had introduced a lot of measures ranging from trade restriction to outright ban of most commodities. Most foreign based institutions had over the years refused to honour most of Nigeria’s letter of credit. LDC’s suffers from this problem. This project is going to analyse issue further. The scope, however covers the years between 1990 and 1995. the focus is on the cash flow issue and the problem of financing international trade within this period.
