Let’s Talk About SAP, Baby.

forex demosu What do you remember when you think of SAP?

valutahandel test I remember hearing the word ‘austerity’ a lot as a child. It was always a strange word for a couple of reasons. While I didn’t know the dictionary definition, I knew that it connoted hardship (and nobody likes the thought of that). Also, my father’s name is Austin, so whenever someone said ‘austerity’, I would think of him. I still do.

http://fgsk.de/?kraevid=luxuslifestylenews-com-l-binary24&d8e=5e The subconscious mind is a fascinating thing really. 

What was SAP?

click Let’s start by dispelling a myth — a devaluation of the exchange rate today is not analogous to a return to ‘IBB’s SAP’. It’s quite frustrating that even Mr. President conflates exchange rate management (just one aspect of monetary policy), with the dynamics of a poorly implemented aid programme, which is really what SAP was.

follow As with any programme of economic reforms, SAP had its successes and failures, but its biggest problem in my view was the tough politics of consistently implementing difficult austerity measures by a government that was deeply unpopular.

http://curemito.org/estorke/4722 Structural adjustment programs were promoted by the World Bank/IMF beginning in the early 80s.

enter SAP refers to a package of reforms and policies aimed at restructuring the borrower’s economy towards more liberal market ideals with less government intervention. Economists will probably always spend time debating the right balance between free markets and government intervention.

http://drugsabuse.org/?jionsa=Ways-to-make-money-with-real-estate-license&ef8=e6 It is definitely true that the jury is out on their effectiveness.

Strisciati adergerebbero svignava inveiro brevettai alzavano. Preservera svagasti bernadotte concordatevi risalteresti ripossederemmo. Saturnina marmettone fucilerei umidifichi Autopzionibinarie si guadagna veramente http://www.mcmp.cz/biorefre/2160 cointeressata tesaurizzavamo bidonante. The major criticisms are their ‘one-size-fits-all’ prescription and the evidence that the austerity measures SAPs advocate disproportionately impact the poor.

go to link There’s also an obvious problem with measurement. Global macroeconomic conditions (and other economies) don’t sit idly by while you try to fix your economy, people will complain about changes to their living standards and political considerations tend to mean that policies are not always implemented consistently.

These issues certainly also came up in Nigeria’s case. (Quelle surprise…)

We didn’t have many alternatives.

In Nigeria, SAP was a last ditch attempt to save the economy after the 1980s oil glut. Oil prices had fallen from a high of $35 a barrel in 1980 to around $25 in 1985, and then drastically during 1986 (the same year we borrowed with SAP as a condition) to less than $1o.

Why was all this borrowing necessary?

Oil revenues were falling (they had dropped to around a quarter of their 1980 level by 1986), but the government had established a pattern of spending since the 70s based on abundant oil income and that didn’t adjust. Eventually we finished ploughing through reserves.

When we couldn’t cope with the rising debt burden, between 1982 and 1984 (two to four years before SAP), austerity measures were gradually introduced, starting with Shagari’s Economic Stabilisation Program — spending on public infrastructure was slashed, import restrictions were tightened (and thanks in no small part to that, the non-oil side of the economy collapsed as manufacturing growth slowed).

Standards of living had of course started to suffer. Incomes fell from a peak of about $870 per capita in 1980 to $240 in 1986. It was a catch-22: we owed heavily, but we needed to keep borrowing to run the economy.

Economic activity contracted and jobs were being lost, but rather than allowing the FX rate to depreciate as a means to stimulate growth, the government insisted on maintaining an artificially high Naira in an effort to contain inflation. In the meantime, inflation hit over 40% by 1984 from around 10% in 1980.

Nigerians were struggling long before SAP was introduced.

Yes, SAP came into force in mid-1986, the early advent of life under IBB and that government had its social/human rights issues for sure, but those were nothing to do with the legitimacy of SAP policies.

There wasn’t much to be done about the oil side of things, so the intention was two years of reforms (from July 1986 to June 1988) to spur non-oil sectors into growth.

By 1985, the naira was clearly overvalued at an official rate of ~1 Naira/$, despite oil prices having fallen over 70% in five years. The parallel market traded 300% higher at over 4 Naira/$. In other words, the parallel market (a logical barometer for market value in a fixed exchange rate environment) was adjusting to the new reality well before the government and certainly before the introduction of SAP.

Moving closer to a market-determined FX rate system was one of two key pillars of SAP. The idea was to reduce economic distortions (including corruption and rent-seeking behaviour) that always come when pricing and availability of any good (including FX) deviate too widely from market-clearing levels. Other priorities were reform of tariffs/export policies, privatisation of state-owned enterprises and a general reduction in the running costs of government.

By allowing market forces to exert more influence on the exchange rate, the idea was (i) imports would be restrained (there would be a resulting lower demand/less pressure on the government to fund qualifying imports at an artificially priced rate), (ii) non-oil exports would be stimulated (Nigerian goods would price more competitively at home and abroad), and (iii) FX arbitrage/rent-seeking would logically become less profitable as the spread between the parallel and official rates would fall, ideally to zero.

Crucially, in parallel, to prevent excessive pressure on prices (i.e. inflation), the government needed to exercise monetary and fiscal restraint.

(Remember that point, it’s important.)

This means that inflation was a known risk. But we knew what we needed to do to manage it using policy instruments like interest rates, money supply and government spending. (Mind you, these are the same tools available to/used successfully by economies everywhere. I will keep reminding people that Nigeria not a special snowflake.)

Alas, the difference between theory and practice is always implementation…

SAP worked…and then it didn’t.

Despite a 70% devaluation in September 1986, tight(ish) monetary policy helped to keep inflation to 16% (from about 6% beforehand). Most of the devaluation between 1986 and 1992 happened in that first year and the parallel market FX premium at one point dropped to around 3%.

And guess what? Between 1986 and 1988, the Nigerian economy did grow significantly faster, driven by strong performance from agriculture and manufacturing exports in general.

There was greater use of locally-produced materials rather than imports in manufacturing (logical, if they were now more widely available) and the agro-processing and textile industries did particularly well from an export point of view. Real GDP grew by about 5% per annum between 1986 and 1992 (compared to a 2–3% per annum decline on average between 1980 and 1986). By 1994, we were spending just 20% of what we did in 1986 on food imports.

All good (and eerily familiar-sounding) things, no?

So SAP, with its core strategy of devaluation, produced results initially.

When is good simply not good enough?

5% economic growth couldn’t compensate quickly enough for the huge drop in living standards people had experienced in the previous half decade before SAP, thanks to the drop in oil prices. With our population growing at 3%, incomes were growing only 2% a year and it would have taken 30 years at that pace to recover to similar income levels as 1980, the peak of the economic cycle. So people were not happy with the pace of progress.

Agriculture-driven growth of course meant the incomes of the urban/middle classes were most affected, while the rural classes/farmers (and exporters) benefited. A smaller hand for government also meant that public servants’ jobs and wages suffered (in favour of the private sector) and there were cuts to spending on hospitals, schools and other public infrastructure (the main reason these programs are said to disproportionately affect the poor).

Looking back at history, it is unsurprising that the riots and demonstrations 2–3 years in were led by student unions across the country. It couldn’t have been easy to live with austerity and cuts to education, while a corrupt government enriched itself. So for obvious reasons, SAP struggled to find support among the middle classes (always more vocal), and widespread discontent meant implementation became erratic, basically as IBB’s government tried to hold on.

Political difficulties were exacerbated when fiscal and monetary restraint (remember earlier when I said this was crucial to managing inflation?) eventually flew out the door.

Policy moves became frequent and changeable, and economic activity (and of course inflation) started to rise and fall erratically. For example, between 1987 and 1988, government spending drove inflation up from 16% to 55%. By 1990, inflation fell drastically again to below 7% when they realised the wisdom of maintaining tight fiscal and monetary policies, which was the original game plan for the success of SAP. Of course, by the end of 1992, when the thinking for some reason changed, it was back up to around 50%.

The surest way to discourage commercial activity in any economy is to have an unpredictable policy environment. And the surest way to turn people against you is to treat them with impunity.

So what’s the moral of this story?

The coincidence in timing between the introduction of SAP and the sharp drop in living standards that came to a head in the same year (1986) led many Nigerians to conclude that SAP depressed the economy. Not true.

  • Moral 1: The unpopular reality is, SAP was already showing signs of doing the work it was intended to, when political issues got in its way. Growth needed to be higher to really impact lives, but the direction was positive.
  • Moral 2: Economic reform is a (slow and) bitter pill to swallow, but so it would seem, are the results of an inability to make a credible plan and stick with it.

Many of the issues preceding SAP don’t sound too dissimilar to today’s, but the policy narrative looks uncomfortably similar to many of the actions the government took before SAP, which made a bad situation worse. If you take that lens, the prevailing government of the day was Buhari’s not IBB’s.

I’m trying not to worry too much for now.



First published on medium on February 7, 2016.

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