Since independence, in 1960, Nigeria’s balance of payments has been under severe pressure. This is because its balance of payments have been subject to constant fluctuations. For instance, between 1960 and early 1970s, Nigeria had deficit in both the visible and invisible trade accounts. This led to balance of payment deficits. As a result of these deficits, Nigeria used up her accumulated foreign reserves, plus some international borrowing to finance the deficit. So many factors caused the balance of payment deficit within the period 1960 to 1970. These factors include:
1. The world prices of most Nigeria primary products fell because of the manipulations of foreign importers in the world market.
2. Nigeria pursued industrial and economic development vigorously. Thus, much capital equipment had to be imported and this led to a large deficit in the visible trade account.
3. The huge expenditure involved in the prosecution of the civil war which started in 1967, was another major factor for the huge deficit that occurred within the period.
Between 1971 and 1980, there were significant improvements in the balance of payment, except in 1977 and 1979 that deficits reappeared. During this period (1971-1980), a general surplus balance of payment occurred. This could be attributed to the huge amount of foreign exchange derived from our oil sales.
By late 1981, there was a decreased world demand for oil. This led to a glut in the world oil market. During this period, Nigeria’s importation of capital goods increased steadily. By September 1981, external reserves had fallen from ₦5.6 billion in 1980 to ₦4.5billion. The result was a build up of large payment arrears which doubled from ₦2.2 billion in 1982, to over ₦4.4 billion in 1983. The heavy foreign indebtedness had resulted in a sharp rise in the service ratio from 9 percent in 1982 to 17.4 percent in 1983, and to over 40 percent in 2003.
It should be noted that, since the beginning of the oil glut in the world market, Nigeria has been having balance of payments difficulties. In a further attempt to ease the external payment problem, Nigeria had adopted many measures to correct balance of payment deficits.
For instance, for the first time, Nigeria approached the International Monetary Fund (IMF) for a balance of payment support loan of ₦2.5 billion. Besides, other bilateral loan negotiations were being made with friendly countries. Although IMF loan was not given, the Nigerian government adopted the Structural Adjustment Programme (SAP) and the Second-tier Foreign Exchange Market (SFEM). These two measures also did not create any significant impact in solving our balance of payment problems. Today, there has been a heavy reliance on external loans, especially from the World Bank, to finance our balance of payments deficits.
Therefore, the current causes of balance of payment deficit in Nigeria include:
1. Low level of technological development that makes the country a greater importer of advanced technology.
2. Low level of agricultural production. This makes Nigeria dependent on food imports and imported inputs for our agro-allied industries.
3. Wrong set of industries in our import substitution strategy. Industries that make us import dependent in the demand for machines, and in the demand for the raw materials are the ones scattered across the country, e.g. steel rolling mills.
4. Inadequacies in export promotion strategies.
5. Poor social and economic infrastructure that contribute greatly to low capacity utilisation in the industrial sector: bad roads, irregular supply of electricity, water, poor telecommunication, etc.
6. Policy instability and political instability.
7. Excessive government expenditure e.g. white elephant projects.
8. Servicing of huge external debts.