Download meeting the challenges of macroeconomic convergence criteria

MEETING THE CHALLENGES OF MACROECONOMIC CONVERGENCE
CRITERIA IN THE SECOND WEST AFRICA MONETARY ZONE (WAMZ):
THE CASE OF NIGERIA
By
Tunji Akande
A. O. Adewuyi
and
B.W. Adeoye
Nigerian Institute of Social and Economic Research
(NISER), Ibadan. NIGERIA.
An Interim Technical Report Submitted to WECAPREN
August, 2005.
TABLE OF CONTENTS
I.
Synthesis of the report content ………………………...3
II.
Introduction …………………………………………….4
III.
Research Problem ………………………………………4
IV.
Review of Literature ……………………………………6
V.
Objectives and Rationale for the Study ………………..9
VI.
Scope and Methodology ………………………………..10
VII.
First Research Outcomes ………………………………12
VIII. Summary and Conclusion ……………………………...18
IX.
Next Step ………………………………………………..19
X.
References ………………………………………………20
2
SYNTHESIS OF THE REPORT CONTENT
The purpose of this study is to examine in some details how Nigeria as a member
of WAMZ monetary union, has progressed in meeting both the primary and secondary
convergence criteria stipulated for the merging of WAMZ and UEMOA. The study
specifically attempts to provide answers to the following questions. What, for instance, is
the status of Nigeria’s compliance with each of the conditions under WAMZ? What are
the problems Nigeria confronts in the process of meeting the convergence criteria? Are
these political, economic and institutional in nature? What could be done to remove all
obstacles still confronting the country and thereby ensuring its preparedness to be a
member of the monetary union? How consistent has Nigeria been able to achieve the
limit set for each of the criteria from year to year? Have there been policy slippages and
incoherence since the commencement of the implementation schedule? If Nigeria has
held back would this be as a result of domestic realities, particularly macroeconomic
performance and the challenge and desire to meet the yearnings and aspirations of her
citizens? What external factors within and outside ECOWAS and in the other WAMZ
countries in particular tend to influence Nigeria’s reaction to and implementation of the
convergence criteria?
The findings so far show that all the four primary criteria have not been fully met
although a considerable progress has been made. The inflation rate remained at two-digit
rather than one-digit level planned during the period; with exception of year 2002, budget
deficit/GDP ratio was kept at less than 5 per cent; Central Bank financing of budget
deficit remained zero per cent; and the 3 months of imports criterion was achieved in
2000, 2001, 2002 and 2003. With respect to the secondary convergence criteria, the trend
shows that Nigeria still has a lot to put in place in terms of policy fine tuning that will
assist in achieving these criteria.
3
I.
INTRODUCTION
When the Economic community of West African States (ECOWAS) was founded
in 1975, the envisioned and ultimate goal was the formation of a monetary union. This
was expected to lead to a common currency under a unified exchange arrangement, a
common monetary policy and a common monetary authority in the sub-region. The
socio-economic benefits expected from the monetary integration in the sub-region are
generally stated to include promotion of trade through the enhancement of the payments
system for goods and services in the region; creation of a larger regional market and
broadening of business and trade-related income earning opportunities for the citizens of
the sub-region; labour mobility and strengthening of social, cultural, political and
economic cooperation; development of regional infrastructure such as trans-regional
highway, oil and gas pipeline, ECONAIR, ECOMARINE, etc. and promotion of
competitiveness, exploiting economics of scale and reduction in transaction costs. In
order to promote the monetary integration certain measures were taken. The ECOWAS
monetary Cooperation Programme (EMCP), for instance, was adopted so as to achieve
the objectives of improving and strengthening payments systems under the West African
Clearing House (later changed to West African Monetary Agency ,WAMA).
However, by the close of the 20th Century and 30 years since the existence of
ECOWAS the pace of implementation of EMCP, especially the establishment of the
single monetary zone, had not been realized. It has become obvious that the political
will and commitment of sub-regional leaders could not be taken for granted.The
economic management practices among ECOWAS member countries were disparate,
lacked harmony and driven largely by domestic considerations. Indeed, there exists a
dichotonomous monetary systems such that the Francophone West African countries
have a monetary union of their own, Union Monetaire L’ Quest Africaine (UMOA)
and an economic and monetary union, Union Economique et Monetaire l’ Quest
Africaine (UEMOA) while the English-speaking countries retained their individual
currencies and did not engage in having a unifying single currency until lately. A further
problem towards integration is the perceived similarity in the production base of the
individual economies in the sub-region, which is characterized by almost homogenous
agricultural primary commodities and therefore, offering limited scope and opportunity
for shared benefits among the countries. However, little advantages have been taken of
the opportunities of adding value to the primary commodities through processing and also
diversifying the economic base in a way that promotes trade among the countries.
II.
RESEARCH PROBLEM
By 1999 it was generally observed that the pace of implementation of EMCP,
especially the establishment of the single monetary zone, had not matched the
expectations of the founding fathers. Some perceived major obstacles to successful
implementation of the programme included lack of political will and commitment; non
uniform adoption of required macroeconomic framework and lack of policy coordination
and harmonization between Francophone west African countries(with the exception of
the Republic of Guinea), which had already established a monetary union (Union
Monetaire l’Quest Africaine - UMOA in 1961) as well as an economic and monetary
Union (Union Enomique et Monetaire l’Quest Africaine - UEMOA in 1994) and the non-
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UEMOA (Anglophone) countries. Another constraint was withholding of support for the
EMCP by critics who maintained that the production of almost homogenous agricultural
primary commodities by countries in the sub-region did not augur well for increased flow
of and derivation of benefits from trade among the countries. The question, however,
remained whether these countries could not add value to their primary commodities
through further processing and whether their economies could not be diversified to
produce other tradeables among them.
It was the recognition of this problem that necessitated Heads of State and
Government of ECOWAS, to adopt a strategy of a Two-Track (“Fast-Track”) approach
to economic and monetary integration. This was initiated by Nigeria and Ghana. The
Government of the Gambia, Ghana, Guinea, Liberia and Sierra Leone undertook
consultations, while the Heads of state and Government, at their summit in Bamako, Mali
in December, 2000, agreed to the establishment of the West African (second) Monetary
Zone, WAMZ; the setting up of a common central bank; and the introduction of single
common currency in the zone in 2003, for eventual merger with UEMOA zone in 2004
under the ECOWAS integration programme. The West African Monetary Institute
(WAMI) was, therefore, established in January 2001 to commence preparatory work
towards the introduction of a single currency and a common central bank in the WAMZ.
Under the “Convergence, Stability, Growth and Solidarity pact” adopted by the
member countries, the WAMZ countries were required to meet certain convergence
criteria in order to be eligible for inclusion in the monetary union. These convergence
criteria focus on price stability, sustainable fiscal deficit, and limited deficit financing by
the central bank and maintaining desirable levels of foreign exchange reserves. These
were to be achieved within a specified time period. In broad terms, the convergence
criteria may be classified into primary and secondary categories. The primary
convergence criteria which each of the WAMZ countries must achieve include the
following macroeconomic status at some specific times:
(i)
(ii)
(iii)
(iv)
single digit inflation rate by 2000 and 5 percent by 2003;
fiscal deficit (excluding grant)/GDP ratio of no more than 5 per cent by
2000 and 4 per cent by 2002.
budget deficit financing of not more than 10 per cent of previous year’s
Tax revenue by 2000; and
maintenance of official foreign reserves of at least 3 months of imports
by 2002, and at least 6 months by 2003.
The secondary criteria specified are:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
no new domestic debt arrears and the existing ones must be liquidated by
the end of 2003;
tax revenue to GDP ratio should not be less than 20 per cent;
wage bill to total tax revenue ratio should not be more than 35 per cent;
public investment as a ratio of total tax revenue to be greater than 20 per
cent;
maintenance of exchange rate stability; and
achievement of positive real exchange rates.
5
It was planned that the primary and secondary convergence criteria should be a
coherent and integrated package which must all be satisfied and WAMZ member
countries have no luxury to choose or select but meet all the conditions (Nnanna, 2002).
The purpose of this study, therefore, is to examine in some details how Nigeria
has progressed in meeting the convergence criteria, both primary and secondary. It is
obvious that by the end of 2004 the monetary union had not been formed which implies
that WAMZ member countries have not been able to meet all the conditions stipulated for
the merging of WAMZ and UEMOA. This naturally leads to some questions deserving
specific answers. What, for instance, is the status of Nigeria’s compliance with each of
the conditions under WAMZ? What are the problems Nigeria confronts in the process of
meeting the convergence criteria? Are these political, economic and institutional in
nature? What could be done to remove all obstacles still confronting the country and
thereby ensuring its preparedness to be a member of the monetary union? How
consistent has Nigeria been able to achieve the limit set for each of the criteria from year
to year? Have there been policy slippages and incoherence since the commencement of
the implementation schedule? If Nigeria has held back would this be as a result of
domestic realities, particularly macroeconomic performance and the challenge and desire
to meet the yearnings and aspirations of her citizens? What external factors within and
outside ECOWAS and in the other WAMZ countries in particular tend to influence
Nigeria’s reaction to and implementation of the convergence criteria? These are the
major pertinent research questions addressed in this study.
III.
REVIEW OF THE LITERATURE AND CONCEPTUAL ISSUES
The convergence criteria are means to an end, which is the formation of a
monetary union. The concepts of the monetary union and monetary integration which are
aspects of economic integration, involve exchange rate unification and currency
convertibility. Monetary integration, in a broad sense may consist of monetary union or
a common currency area (Corden, 1972 and Ojo, 2001). It signifies an existence of a
single monetary zone with a high degree of monetary stability in furtherance of economic
integration. Monetary integration may be viewed as an arrangement which commences
with “optimum currency area” and terminated with monetary union. It may be limited in
the sense that the currencies in the zone, through some agreed mechanism, are fully
convertible into one or the other at fixed exchange rates.
Monetary union, as defined by Mankiw (2003), is a group of economies that have
decided to share a common currency and thus a common monetary policy. A variant of
this definition by Masson and Pattillo (2001) states that a monetary union is a zone where
a single monetary policy prevails and inside which a single currency or currencies which
are perfect substitutes circulate freely Chipeta and Makandiwire (1994) identified the
features of monetary union to include the following:

Several independent nations voluntarily come together in an economic
integration process that incorporates monetary integration as an integral
part of their coming together;

Establishment of a single currency for use throughout the union while the
individual country currencies are abolished;
6

The adoption of a common monetary policy throughout the countries
within the union under the control of a single central bank;

Immutable fixed exchange rates where individual currencies are retained
by member countries.
To the extent to which the above features exist in the monetary union, five types
of monetary integration are identified in the literature and these include limited currency
union and total economic and monetary union.
Under the “limited currency
convertibility”, all exchange restrictions involving the use of the sub-regional currencies
are removed. The ‘parallel currency union’ situation allows for the circulation of a
common currency alongside national currencies under a defined and fixed rate with the
common currency. The Europea Unikon (EU) adopted the paralled currency union
under the Europea Monetary System (EMS). In the case of ‘partial monetary union’ the
participating countries agreed to implement the same exchange rate regime (fixed or
floating) and establish a fixed exchange rate between their currencies and the regional
rate. In the ‘single currency’ model the monetary zone operates a single currency, a
common stock of external reserve as well as management of monetary, fiscal and other
financial policies. However, in this arrangement each member country retains its central
bank. This is the present model in the EU. In respect of the ‘full economic and monetary
union’ a single central bank is established to provide central banking services to all
member countries. A single region-wide currency operates in the union.
Sani sani(2004) outlines the structure and survey of economies of WAMZ,
pointing out major economic features such as the population of WAMZ, the Gross
Domestic Product (GDP), GDP Growth Rates, Per Capital GDP, Inflation Rates, External
Trade, Foreign resources, External Debt Stock, and Human and Income Poverty Levels.
The study indicates that, balance of payments difficulties prevail in the WAMZ Countries
due to periodic adverse shifts in terms of trade, huge public debt burden, capital flights or
low levels of inward investment owing to unconducive environment. Findings from the
study using the Human Development Index indicates that there is high level of poverty,
low level of literacy and lack of sufficient good drinking water among others in the
WAMZ countries. Analysis of socio-macroeconomic performances of the zone also
indicates that, member countries should improve on their current socio-economic policy
reforms and intensify their political commitments in meeting-up the requirements of
convergence criteria, in order to facilitate the overall integration programme.
Cobham and Robson (1997) examine strategies for monetary unification in
Africa. They focus on the issue of if full monetary union in the version portrayed by the
existing African unions is preferred, in what ways should countries belonging to a
coherent sub-region aim it. This issue is addressed taking into consideration the case of
countries committee to monetary union and the case where governments are induced to
integration but are unwilling to commit themselves. They argue that in case where
countries are certain about the goal, monetary unification involves two stages. The first
stage is a preparatory period in the course of which inflation rates would converge;
exchange rates stabilised and there will be convertibility. The second stage is a
transitional period during which the existing currencies would be scrapped while the new
one would be introduced. In the initial preparatory period, the new union-level Central
Bank will be set up, while the existing national Central Banks will be transformed
7
into subordinate agencies. Further, these subordinate agencies will however continue to
play crucial policy roles particularly in the management of national clearing systems, in
the prudent supervision of banks, and in the operation of the country-specific elements
of union-level monetary and credit policy. On the other hand, the level of their autonomy
would be reduced compared to what it had been prior to unification. The capacity of
monetary integration in Africa to provide a framework of macroeconomic stability
depends on whether a specific mandate is given to the new union-level central bank to
pursue price or exchange rate stability. There is need for a managerial structure that
would make it stand out of political pressure. For the fact that preparatory stage requires
important processes and decisions, a period of 5 year (or less for economics not
confronting adjustment problems) is proposed as an appropriate time scale. The
subsequent transition period to a new currency requires extensive prior publicity and
information which can be easily carried out within 6 months.
Given the foregoing, an economy having a high initial inflation rate might prefer
to adopt the new currency directly taking it as a currency reform instead of passing
through a painful preparatory deflation period. The choice of approach depends on cost
of currency reform (the problem of curbing aggregate monetary growth and the costs of
fixing prices in both currencies, etc). The two major alternative approaches examined in
the context of the European Union are the currency competition strategy and the parallel
currency strategy. The first strategy entails permitting the free circulation of national
currency in each member country until one becomes dominant, while the second
involves the creation of a new currency which competes with and eventually dominates
each of the national currencies. These strategies have been found inappropriate in the
African context where competition is limited by low level of trade and financial flows
among countries and where public goods characteristics and externalities are associated
with money.
In the case of where countries are not committed to the achievement of monetary
integration, but are interested in moving toward it, two policies are proposed. The first
one is that countries should peg their currencies to the same external anchor and that they
should ensure convertibility of their current and capital account transactions. These
policies can lead to a reasonable level of convergence in the areas of macroeconomic
policies and inflation rates and position that countries involved could decide to embark
on full monetary unification.
Frankel and Rose (1998) states the criteria for optimum currency area (OCA) to
include the extent of trade, the similarity of the shocks and cycles, the degree of labour
mobility and the system of risk-sharing via fiscal transfer. They opine that the greater
these four linkages between countries, the more they are suitable for a common currency.
Thus, openness is considered as a criterion for membership in an optimum currency area
because greater trade result in higher savings in the transaction costs and risks associated
with various currencies. Similarly, the more suitable the adoption of a common currency.
This is because countries with correlated business cycles are considered as those with
propagation mechanisms which converted country-specific shocks into internationally
coordinated business cycles.
Certain conditions have to be met if there is to be a net benefit from monetary
unification. The theory of optimal currency areas (OCAs) suggests that economies or
regions with a great diversity in output and employment growth need substantial labour
8
market flexibility if they are interested in monetary union and would like to avoid serious
adjustment problems (Jekins and Thomas, 1996). Economics having a low degree of
labour flexibility given the level of real divergence do not constitute an OCA and could
better maintain some degree of flexibility in exchange rate, even if this action is
associated with economic costs. However, credibility gains can accrue to a small country
if it pegs its currency to the currency of a large trading partner with a credible antiinflationary policy such as the case of the Common (Rand) Monetary Area. Economic
literature indicates that monetary union is optimal if one or combinations of a number of
conditions are met. These conditions include wage flexibility, mobility labour between
countries, possibility of politically ease transfers and similarity in countries response to
shocks. It is argued that a degree of real economic convergence is required for exchange
rate coordination.
Several criteria were proposed by those who came up with the Maastricht Treaty
as a precondition for monetary union in Europe (Jekins and Thomas, 1996). These
include; (a) inflation rates must converge close to the mean rates attained by the three
countries having lowest inflation; (b) long-term nominal interest rates on government
debt have to converge to a level close to the mean of those achieved by the three
countries with lowest inflation; (c) exchange rates must be stable for two years prior to
the unification without any measures to halt the free flow of foreign exchange; (d) the
deficit-to-GDP ratio must not exceed 60.0 per cent. In practice, any group of countries
proposing a policy union will require convergence in macroeconomic stability indicators
as a pre-condition for admission in order to safeguard other members from negative
policy spill over effects (Jekins and Thomas, 1996).
Examining the question of whether Southern Africa is prepared for regional
integration, Jekins and Thomas (1996) find no evidence of convergence of per capita
income in SADC members for the period 1960. In fact they report that two measures
show that probably a slight divergence had occurred. They also report that there exist a
marked pattern of convergence among the SACU countries, with Botswana and Lesotho
“catching up@ with Namibia, South Africa and Swaziland. Further, they find that there
exists a significant divergence of Key policy and stability indicators across SADC as an
entity, but a degree of convergence in the subset constituting the CMA countries,
Botswana and Mauritius. They conclude that the observed lack of convergence of the
Southern African economies over time coupled with the current substantial divergence of
policy and stability indicators suggests non-preparedness of Southern Africa for regional
monetary integration.
IV.
OBJECTIVES AND RATIONALE FOR THE STUDY
The overall objective of the study is to ascertain the extent and degree of
compliance of Nigeria with both the primary and convergence criteria laid down for
WAMZ member countries. The specific objectives are:
1.
To examine the trend in macroeconomic aggregates of Nigeria,
particularly during the period 2000 – 2004, with a view to ascertaining the
level of compliance with WAMZ conditions.
9
2.
To examine the factors which have influenced the level of observance of
the convergence criteria.
3.
To critically examine the prospects of achieving the objectives of WAMZ
on the part of Nigeria.
4.
To propose strategic policy options to aid the implementation of the
convergence criteria.
The issue of monetary union in the West African sub-region has remained a sore
development challenge since the formation of ECOWAS in 1975. It is widely believed
that the benefits of economic integration would be better realized if the community fully
achieves monetary integration. The political will of member countries which was largely
suspect in the past seems to be yielding space to economic and political liberalism. The
burgeoning poverty and years of social and economic decay further emphasise the need
for the political leaders in the sub-region to accelerate the process of integration so as to
annex the benefits associated with integration such as expanded market for labour and
employment and economic opportunities for income generation and improved supplies of
goods and services. While monetary union forms the climax of regional economic
integration, the ECOWAS member countries have left this issue to drag on for so long a
time. The “fast track” approach envisage through the establishment of WAMZ seems to
be heading towards the slow lane again since the deadlines for meeting the convergence
criteria have not been met and it is also obvious that the realization of the monetary
union is uncertain. It is, therefore, important for an empirical investigation of the status
of achievement of each of the convergences criteria. Since these criteria are empirical
and measurable, the level of performance in each case could, therefore, be perceived as
indicator of the move towards monetary union. This study becomes important in isolating
obstacles to monetary union on the part of the individual countries and in offering
suggestions to effective pursuance of the implementation of the convergence criteria.
V.
5.1
SCOPE AND METHODOLOGY
Scope
The study is limited to Nigeria only on account of the limited funds available.
The ideal approach would have been to have the study cover two or three WAMZ
countries for comparative analysis. The study is limited to Nigeria with the aim to assess
the level and degree of compliance with both the primary and convergence criteria laid
down for WAMZ member countries. In terms of coverage, the study covers the period
between 2000 and 2004.
5.2
Methodology
5.2.1 Data Sources and Data Collection Methods
Both primary and secondary data are required for pursuing the objectives of the
study. Secondary data are mainly time-series data on macroeconomic variables such as
the GDP, inflation rate, debt stock, tax revenue and other convergence criteria targeted
under WAMZ. The secondary data which were already collected, came from several
institutions and agencies including the Central Bank of Nigeria (CBN), the National
10
Bureau of Statistics (NBS), the Ministry of Finance (MOF), the Debt Management Office
(DMO), the National Planning Commission (NPC), the Nigerian Institute of Social and
Economic Research (NISER) and other relevant government departments and parastatals.
International publications such as the IMF Finance Statistics were consulted to harmonize
the data base as obtained from various sources indicated above.
The primary data collection which is still outstanding will be collected from
Lagos and Abuja, the Federal Capital Territory (FCT). The choice of Lagos and Federal
Capital Territory (FCT) is premised on the fact that Lagos is the Nigeria’s Commercial
centre where the views of the organized private sector operators could be sought, while
FCT Abuja is the country’s political seat where the views of the policy makers and other
opinion leaders could also be obtained.
Essentially, the survey would cover the officials of monetary authorities in
Nigeria, notably the CBN and MOF. The purpose of this is to collate, examine and
analyse the various factors which influence macroeconomic variables in the Nigerian
economy. This will include the analysis of the monetary and fiscal policies over some
period and the impact of these measures on macroeconomic variables. The instruments
for primary data collection will include a structured questionnaire and in-depth interview
guide. Opportunity for focus group discussions among selected monetary officials will
also be explored.
The in-depth interviews and the questionnaires will be designed to capture some
major issues that relates to the theme of the study. Some of the research issues to be
captured by the in-depth interviews are:
The problems confronting Nigeria in the process of meeting the
convergence criteria
What could be done to remove all obstacles still confronting the country
and thereby ensure its preparedness to be a member of the monetary
union?
How consistent has Nigeria been able to achieve the limit set for each of
the criteria from year to year?
Have there been policy slippages and incoherence since the
commencement of the implementation schedule?
If Nigeria has held back would this be as a result of domestic realities,
particularly macroeconomic performance and the challenge and desire to
meet the yearnings and aspirations of her citizens?
What external factors within and outside ECOWAS and in the other
WAMZ countries in particular tend to influence Nigeria’s reaction to and
implementation of the convergence criteria?
5.2.2 Data analysis
Data analysis involved calculation of series of indicators and the rate of change in these
indicators to reflect trend in primary and secondary convergence criteria. The descriptive
technique of summarizing and presenting the indicators was used.
11
VI.
FIRST RESEARCH OUTCOMES
6.1
Introduction
The analysis of how Nigeria has been able to comply with the convergence
criteria as well as the assessment of the level of preparedness to be a member of the union
will be incomplete without a review of macroeconomic policies and performance. It is in
the light of this that a general review of the macroeconomic policy and performance of
the economy in the last decade is presented. Specific emphasis is accorded the period
2000-2004, during which time Nigeria and other members of WAMZ were expected to
have implemented the convergence criteria laid down.
6.2
Macroeconomic Performance in Nigeria
This section examines macroeconomic performance in Nigeria over 1990-2003.
Thus, it examines output growth performance of the economy, analyses savings and
investment ratios, trade performance indicators and indicators of the level of indebtedness
of the economy. Further, it reviews the trends of fiscal positions and movement of the
general price level. The indicators of the financial health of the economy such as balance
of payments position and external reserves as well as policy variables particularly lending
and exchange rates.
Output growth performance of the Nigerian economy can be analysed from Table
6.1. It can be seen from the table that in 1990 output of the economy grew by 13.0 per
cent and declined by about 1.0 per cent in 1991. Thereafter, the rate of growth of output
of the economy ranged between 0.2 and 3.5 per cent in the rest of the 1990s. This
unimpressive performance of the economy in terms of output growth can be attributed to
macroeconomic instability particularly the higher rate of inflation which might be
occasioned by persistent fiscal deficits which was recorded during the 1990s. Thus,
inflation rate rose from 7.5 per cent in 1990 to a peak of about 73.0 per cent in 1995,
before it fell to 6.6 per cent in 1999. Similarly, the ratio of budget deficit to gross
domestic output (GDP) moved from 2.9 per cent n 1990 to a peak of 17.4 per cent in
1993, the last year of the implementation of Structural Adjustment Programme (SAP).
Subsequently, this ratio hovered between 0.2 and 9.0 per cent up till 1999. This implies
that budget deficit –GDP ratio was more than the acceptable limit of 3.0 per cent in most
years in the 1990s. Exchange rate depreciated continuously from a level of N 7.90: $1 in
1990 to N92.30: $1 in 1999. It should be mentioned that at the inception of SAP in 1986,
naira was said to have been over-valued against major currencies, particularly, the US
dollar. It was therefore argued that in order to promote domestic output and export, naira
should be devalued and exchange rate should be allowed to be determined by market
mechanism. Given the poor output growth performance of the economy in the 1990s, the
expected positive effect of devaluation and depreciation of naira seems not to be realized
in Nigeria during this period.
An examination of trade performance of the economy reveals that the ratio of
export to GDP which was 42.6 per cent in 1990 fell to 22.6 per cent in 1994. Thereafter,
it rose to over 40.0 per cent between 1995 and 1997 and fell to 27.2 and 37.2 per cent in
1998 and 1999 respectively. It should be stated that oil export dominated total export in
Nigeria. The ratio of import to GDP rose from 17.7 per cent in 1990 to a peak of 38.5 per
cent in 1995. Subsequently, it ranged between 20.0 and 31.0 per cent. This analysis
12
suggests that since the ratio of export to GDP was higher than that of import, therefore
current account balance will be favourable. However, it can be seen from the Table 6.1
that the overall balance of payments position was deficit throughout the 1990s except in
1997. This implies that the financial health of the economy was poor during this period.
Looking at domestic savings and investment rates during the 1990s, it can be
observed from the table that savings rate (savings-GDP ratio) was above 10.0 per cent
throughout the period except in 1992 when it was 4.3 per cent. However, investment rate
(investment-GDP ratio) was between 5.0 and 6.5 per cent during the 1990s. This implies
that investment rate lagged behind the savings rate throughout the period except in 1992.
Thus, savings-investment gap was positive and ranged between 5.0 and 10.0 per cent,
which is undesirable for growth. This is a reflection of poor or inadequate
macroeconomic environment in Nigeria. Therefore, the trends of interest and exchange
rates need to be examined since they are major determinants of investment. The table
shows that lending and exchange rates were high during the 1990s. Lending rate was
between 20.0 and 39.0 per cent in 1990s, while exchange rate depreciated continuously.
This trend of macroeconomic fundamentals hindered investment. Given the direct impact
of savings and investment on growth, it is therefore not surprising to see that output
growth performance of the economy during 1990s was unimpressive. The undesirable
trends of interest and exchange rates were induced by the implementation of deregulation
policy since the inception of SAP in 1986.
The level of indebtedness of the economy should be analysed since it has impact
on macroeconomic performance particularly investment and growth. The level of
indebtedness of the economy was high in the 1990s such that debt stock swallowed total
export receipts and accounted for a significant proportion of GDP. The ratio of debt stock
to export rose from 241.6 per cent in 1990 to a peak of 308.5 per cent in 1995.
Subsequently, it dropped and moved between 148.0 and 250.0 per cent. The ratio of debt
stock to GDP was 106.5 per cent in 1990 but declined to over 70.0 per cent in the late
1990s. It should be noticed that the debt service-export ratio (debt service capacity of the
economy) was low and declining. The ratio of debt service payment to export, which was
over 23.0 per cent between 1990 and 1993 fell to 9.8 per cent in 1997.
The 2000s period was characterized by a slightly improved growth performance
of the economy. Thus, output growth rate which was 2.8 per cent in 1999 rose to about
5.0 per cent in 2000/2001 and eventually reached 10.2 per cent in 2003. This improved
performance could be attributed to relative macroeconomic stability particularly the
substantial reduction in level of budget deficit and consequently, low rate of inflation.
The reduction in the rate of inflation which started in the late 1990s continued in the early
2000s, even though it has been unstable. Similarly, the ratio of budget deficit to GDP has
been around 2.0 and 5.5 per cent in the 2000s. This improved trend of inflation and fiscal
position can be associated with economic reforms embarked upon by the current
democratic government in Nigeria.
With respect to trends of trade performance indicators during the 2000s, it can be
seen that export-GDP ratio which was 32.2 per cent in 1999 rose to 40.2 per cent in 2000.
It fell to about 39.0 and 35.0 per cent in 2001 and 2002 respectively, before it went up to
about 40.0 per cent in 2003. Similarly, import-GDP which was 27.0 per cent in 1999
declined to about 20.0 per cent in 2000 and thereafter rose to between 26.0 and 29.0 per
cent in the subsequent years. Since the export-GDP ratio exceeded the import-GDP ratio,
13
therefore, it implies that current account position was favourable during the 2000s. In the
same vein, the overall balance of payments position was also favourable in 2000 and
2001, before it became unfavourable in the subsequent years. Further, external reserves
can finance over 6 months of import during the period 2000-2003. This is a reflection of
good financial health status of the economy.
An analysis of domestic savings and investment rates in the period 2000 to 2003
reveals that savings rate improved significantly to 22.0 per cent in 2000 and subsequently
fell to between 12.0 and over 15.0 per cent. Investment rate improved throughout the
period. It rose from 5.6 per cent in 2000 to 16.2 per cent in 2003. Consequently, savingsinvestment gap which was very high in 2000 (16.4%) fell to 1.5 per cent in 2002, and
became negative in 2003. This implies that, as at 2003, the rate of domestic investment
exceeded that of savings by about 1.0 per cent. Thus, improved investment performance
can be linked with relative stability of exchange rate and the declining trend of lending
rate during the period. This might have also resulted into the improved growth
performance of the economy during this period, particularly in 2003.
Compared with the late 1990s, the level of indebtedness of Nigeria has reduced.
This is because, the ratio of debt stock to export which was about 217.0 per cent in 1999
came down to 159.0 per cent in 2000, and thereafter hovered between 152.0 and 209.0
per cent. Similarly, the ratio of debt stock to GDP has reduced from 77.2 per cent in 1999
to 64.9, 57.3 and 61.3 per cent in 2000, 2001 and 2003 respectively. However, the debt
service capacity of the economy (as measured by debt service-export ratio) has remained
very low, between 7.5 and 12.0 per cent throughout the period 2000-2003. It should be
mentioned that with the recent debt relief granted to Nigeria, its level of indebtedness of
the country will reduced drastically.
Nigeria’s Fiscal and Monetary Policies and WAMZ convergence criteria
The Central Bank of Nigeria, with effect from the 2000 fiscal year, adopted a
medium-term monetary policy framework. Unlike earlier programmes, which were
designed for one year, the new programme is for a two-year period, from January 2002 to
December 2003(CBN, 2003). The shift is in recognition of the fact that monetary policy
actions affect the ultimate objectives of policy with a substantial lag. Thus, the current
shift will free monetary policy implementation from the problem of time inconsistency
and minimise overreaction to temporary shocks.
The primary objective of monetary policy in 2000-2003 was the achievement of
price and exchange rate stability. Specifically, monetary policy sought to subdue inflation
to a single digit figure over the two-year period. Consequently, the central focus included
6.3
Table 6.1: Macroeconomic Indicators in Nigeria – 1990 to 2004
Indicators
BudgetDeficit/
GDP
Ext.Res.(No. of
Months of Import
cover)
Debt
Stock/
Export
Debt Stock /GDP
Debt
Service/
1990
-2.9
1991
-6.5
1992
-8.4
1993
-17.4
1994
-8.8
1995
0.3
1996
-1.6
1997
-0.2
1998
-4.7
1999
-8.9
2000
-2.3
2001
-4.3
20
-5
na
na
na
Na
Na
3.0
7.6
9.6
9.2
7.6
13.6
11.3
7.
241.6
271.6
241.4
284.2
312.1
308.5
240.0
148.0
250.0
216.8
159.2
157.7
20
106.5
23.6
100.9
26.6
101.1
29.4
114.3
16.0
82.1
19.8
87.3
13.4
98.2
16.0
71.4
9.8
73.3
11.2
77.2
13.4
64.9
9.7
57.3
11.9
72
7.
14
Export
Savings–GDP
Investment-GDP
Savings-Invest.
GDP
Overall
BOP/GDP
Export GDP
Import GDP
GDP Growth
Inflation Rate
AverageOfficial
Exch.Rate
Lending Rate
Sources:
1
2
16.2
6.3
9.9
13.1
5.8
7.3
4.3
5.7
(1.4)
11.7
6.2
5.5
12.6
5.8
6.8
12.1
5.0
7.1
13.2
5.2
8.0
14.6
5.4
9.2
12.8
5.3
7.5
10.5
5.4
5.1
22.0
5.6
16.4
12.1
7.7
4.4
15
8.
6.
-2.1
-5.0
-18.9
-6.1
-4.7
-9.9
-1.9
0.04
-7.7
-10.2
6.9
0.5
-1
42.6
17.7
13.0
7.5
7.9
37.9
27.2
-0.8
13.0
9.9
38.1
26.8
2.3
44.5
17.3
31.6
24.0
1.3
57.2
22.1
22.6
17.9
0.2
57.0
22.0
48.5
38.5
2.2
72.8
82.3
47.8
20.5
3.4
29.3
81.5
43.8
29.8
3.2
8.5
82.0
27.2
30.3
2.4
10.0
84.4
37.2
27.0
2.8
6.6
92.3
40.2
19.9
5.4
6.9
101.7
38.6
26.0
4.6
18.9
111.9
34
29
3.
12
12
20.6
21.0
31.2
39.1
20.2
20.8
20.8
20.9
21.8
33.1
26.4
31.2
25
CBN Annual Reports and Statements of Accounts(Various years)
CBN Statistical Bulletin, 2003.
effective control of anticipated liquidity injections that might arise from excessive
government spending during the pre-election years of 2000-2003 in order to minimise
their negative effects on domestic prices and the exchange rate (CBN, 2003).
The stance of the Bank’s monetary policy was non-accommodating, while a more
competitive financial environment was fostered to enhance greater access to credit for the
real sector. Furthermore, continued effort was made to improve the payment system to
strengthen further the effectiveness of monetary policy. The broad measure of
money supply (M2) continued to be the intermediate target of monetary policy with an
average growth rate of 15.2% during the two-year period of 2002 and 2003. This
translated to 15.3% in 2002 and 15.0% in 2003.
To achieve the objectives of its monetary policy, the Central Bank of Nigeria has
continued to rely on market-based techniques in the management of the Bank’s balance
sheet. The primary instrument of policy has been the open market operations, supported
by reserve requirements and discount window operations for enhanced effectiveness.
Other policy instruments include the cash reserve requirement, the liquidity ratio, the
discount window and the use of the Bank’s certificates to mop up excess liquidity in the
system (CBN, 2002 and 2003). Other policy issues of interest to Nigeria include the
interest rate, remittance of value added tax and duty collections. In addition to these,
other factors are the determination of banks’ cost of funds and supporting poverty
reduction initiatives of the government by ensuring adequate credit to the productive
sectors, encouraging financial savings and private sector investment growth and
improving the financial market environment.
To satisfy the convergence criteria of the WAMZ, macroeconomic policy is
formulated to increase the rate of growth of real GDP, reduce unemployment, maintain
price and exchange rate stability, promote a healthy balance of payments, reduce the
lending rate and mobilise more savings. Specifically, in order to reduce inflation to a
single digit figure (as low as 5%), the central focus is on effective control of anticipated
liquidity injections that may arise from excessive government spending. Periodically, the
central bank determines target growth rates of money supply, which are compatible with
overall policy goals. It relies mainly on open market operations and other policy
instruments for liquidity management, primarily to control banks’ reserves.
15
Moreover, in order to keep the budget deficit (excluding grants) below 4% of
GDP, some efforts have been geared towards boosting output and steps have equally been
taken to rehabilitate the social and economic infrastructure. Also, interest rates have been
fully deregulated, with the banks given the freedom to determine the structure of interest
rates in consultation with their customers. The Central Bank of Nigeria, however, has
retained its discretionary power to intervene in the money market to ensure orderly
developments in interest rates that could enhance investment.
With regard to central bank financing of budget deficits, which are pegged at 10%
of the previous year’s tax revenue, the Bank has continued to insist that government
borrowing from it should not exceed the statutory limit of 12.5% of the estimated current
budget revenue and that should this occur, the market rate of interest should be applied.
The policy of the Bank is against the inflationary financing of government deficits
through the ways and means advances and, with the instrument autonomy granted to it,
the Bank will continue to apply the traditional instruments to fine-tune the system to
ensure compliance with this convergence criterion.
On the need to ensure that gross external reserves cover at least six months of
imports, the Bank’s policy has been based on quantitative rationing and risk management.
These include: portfolio diversification; exchange rate policy; foreign exchange
budgeting and balance of payments policies (CBN, various years).
The progress towards the meeting of necessary convergence criteria, outstanding
problems in that regard, reasons for the observed phenomenon and other issues requiring
resolution before movement into the final phase of monetary integration in the WAMZ,
are discussed in the next section.
6.4
Status of Macroeconomic Convergence: 2000 to 2004
The status of the primary criteria is first analysed in this section. This is followed
by the status of the secondary criteria. This allows an assessment of how far Nigeria has
been able to meet those criteria as it prepares for the second WAMZ.
6.4.1 Primary Criteria
A general picture of the status of compliance with the primary convergence
criteria from 2000 to 2004 is presented in Table 6.2. The figures for year 2004 are not yet
available. The results are mixed. In some of the years progress were made with respect to
some indicators, while slippages occurred in subsequent years. The year 2000 marked the
beginning of the observance of the convergence targets in the WAMZ. Assessment of
macroeconomic performances under the primary criteria indicates that out of the four
criteria, the price stability target appeared not to have been met so far. In 2000, Nigeria
recorded a single digit inflation rate. In the subsequent years, the inflation rate increased
tremendously and exceeded the single digit criterion. Thus, the level of inflation rate has
remained at double digits above 10.0 per cent.
Other criteria appeared to have been satisfied but with little improvement in terms
of the trends. The limit on central bank financing of fiscal deficits stood at 0.0 per cent all
through, which is an indication that a ceiling on central bank financing of budget deficit
of equal to or less than 10 percent of previous year’s tax revenue is met. The limit on
budget deficit/GDP ratio was also within the expected bound except for the year 2002
16
when the budget deficit/GDP ratio was 5.5 per cent. More over, the floor on the import
cover of foreign exchange reserves were met (Table 6.2).
Table 6.2: Macroeconomic Convergence Indicators for Nigeria (Primary Criteria,
2000 – 2004)
Criteria/Target
2000 2001 2002 2003 2004
1. Inflation ( Single Digit)
6.9
18.9 12.9 14.0 Na
2. Budget Deficit / GDP ( 5% or Less)
2.3
4.3
5.5
2.8
Na
3. Central Bank Financing ( 10% or Less, Previous 0.0
0.0
0.0
0.0
Na
Year Tax Revenue)
4. Foreign Reserves/Imports ( 3 months or more)
13.6 11.3 7.8
6.5
Na
Sources: (a) CBN Annual Reports and Statements of Accounts (Various Years) .
(b) CBN Statistical Bulletin ( 2003 ).
Generally, all the four primary criteria have not been met although a considerable
progress has been made. A summary of performance in respect of each of the criteria is
as follows:
(a) Inflation (Single Digit) – Generally, this criterion has not been met. The inflation rate
that was 6.6 per cent in 2000 swung up to a two digit rate of about18.9 per cent in 2001.
By the year 2003, it was still at two digits of 14.0 per cent.
(b) Fiscal Deficit/GDP ratio (5% or less) - Nigeria satisfied this criterion with exception
of year 2002. Thus, in other years budget deficit/GDP ratio was kept at less than 5 per
cent.
(c) Central Bank Financing (10% or less) - The same as observed under budget
deficit/GDP ratio. In all the years, Central Bank financing of budget deficit remained zero
per cent
(d) Foreign Reserves/Imports (3 months or more) - Nigeria met the criterion on foreign
exchange reserves of 3 months of imports in 2000, 2001, 2002 and 2003.
6.4.2 Secondary Criteria
With respect to the status of achievement of Secondary Criteria, the data in Table
6.3 show that Nigeria has not been able to raise the level of tax revenues as a percentage
of GDP to 20 per cent over the years. In fact, the tax revenues as a percentage of GDP is
less than 10.0 per in all the years under review. This further weakens the possibility of
Nigeria meeting the convergence criteria. Furthermore, the wage bill/tax revenue ratio
has not been adhered to. The ratio of the wage bill to total tax revenue is far above the
maximum 35.0 per cent expected. There is no doubt that the trends of the secondary
convergence criteria has shown that Nigeria still has a lot to put in place in terms of
policy fine tuning that will assist in achieving these criteria. Public investment/tax
revenue was kept above 20 per cent in all the years. Real interest rates have generally
been negative during the years under review. Indeed the data on primary convergence
17
criteria (Table 6.2) and secondary criteria (Table 6.3) could be considered as illustrative
of the prevailing situations as efforts are on-going to harmonize statistical data in Nigeria.
Several factors might have been responsible for inability of the Nigerian economy
to meet all the stipulated convergence criteria. Among these are tight fiscal policies
which have tended to increase relatively tight monetary policies adopted, rising
commodity prices and other external terms of trade shocks, poor state of infrastructure
that is not conducive to investments and economic growth (CBN, 2000). These are
serious constraints which need urgent solution if significant progress is to be made
towards the realisation of monetary integration in the WAMZ.
It should be noted that despite concerted efforts to achieve sustained
macroeconomic stability, economic performance in Nigeria by the end of 2003 was not
encouraging. On the basis of current economic conditions, the probability of Nigeria
meeting all the convergence criteria during the stipulated take-off date of the single
monetary zone is slim. The issue goes beyond meeting all the convergence criteria at a
point in time, but requires a track record of meeting the criteria for a considerable period
of time.
Table 6.3: Macroeconomic Convergence Indicators for Nigeria (Secondary Criteria,
2000 – 2004)
Criteria/Target
2000 2001 2002 2003 2004
Tax Revenue GDP ratio
6.5
9.5
7.8
8.0
Na
Wage Bill Tax Revenue Ratio
88.6 54.4 73.7 60.7 Na
Public investment Total tax revenue Ratio
76.1 83.7 64.2 48.3 Na
Exchange Rate Stability Index
0.02 0.03 0.04 0.03 Na
Real Interest Rate
-2.4 -2.1 -4.0 -4.7 Na
Sources: (a) CBN Annual Reports and Statements of Accounts (Various Years).
(b) CBN Statistical Bulletin (2003).
(c) Federal Office of Statistics (FOS) National Accounts (Various Years).
VII. SUMMARY AND CONCLUSION
The study assessed the extent to which Nigeria is set to meet the convergence
criteria between the 2000 and 2004 period. The framework as well as the possible reasons
for the Nigerian government not meeting both primary and secondary criteria was
examined. Analysis of macroeconomic performance indicated that Nigeria needed to
sustain her current economic policy reforms to enhance her overall economic
performance and to facilitate the process of economic convergence. There is no doubt
that the trends of both secondary convergence criteria indicators have shown that Nigeria
still has a lot to put in place in terms of policy fine tuning that will assist in achieving
these criteria. The performance of Nigerian economy under the convergence criteria
during 2000 - 2004 is crucial for determining the degree of readiness for the single
monetary zone.
18
VIII. NEXT STEPS
The remaining activity schedule is as follows:
1. In-depth interview of officials of monetary institutions in Nigeria, that is, officials
of CBN, Ministry of Finance, the Debt Management Office and other
departments. This will be largely qualitative data to provide possible explanation
for the progress (or lack of it) which Nigeria has made in respect of the
convergence indicators obtained through secondary data already analysed.
2. Content analysis of in-depth data will be conducted as well as the analysis of
secondary data for 2004, if this is now available at the CBN.
3. A complete preparation of the entire report based on additional information
obtained at the primary data-collection stage.
We expect to quickly undertake the remaining steps as soon as we receive the second
installment of the funds for the study. We envisage the end of September, 2005 for
the study to be completed.
19
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21