THE PROBLEMS OF FINANCING INTERNATIONAL TRADE IN NIGERIA
BACKGROUND TO 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:-
1) To restructure and diversify the production base of the economy in order to reduce dependence on the oil sector and import of finished goods.
2) To achieve a viable fiscal balance of payment over the medium term.
3) 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.
1.2 STATEMENT OF THE PROBLEM
As we have seen, the transfer of capital from one country to another is a common process of international trade, Nations in a poor country may wish to borrow the savings of Nations in a richer country. Mature industrial countries supply grants in aid to developing countries. Defeated countries have after war, been obliged to make, reparation payments to victors. Corporation in one country may wish to acquire capital assets or set up subsidiaries in another. All these are example of transactions between countries all requiring the movement in and out of fund (cash flow).
At times, these funds are not in currency und but, in the correct value of capital flow, proper conversion rate and the fluctuating issues of foreign currencies. Secondly, there was also the issue of less developed countries who were adamantly dependent on the developed countries for almost everything. This raised considerably, the process of transferring the real sector which was inherent in borrowing or lending, created transfer problems.
Apart form the transferring of money, capital in one currency being transferred through the exchange market to another, all involve the transfer of real resources as money. In whatever way, a country in this transaction must experience changes in its balance of payments which are directly connected with borrowing or lending. Therefore there are the problems of manipulating of these balance of payments changes and the casual relationship with the capital movement. In Nigeria, problems arise in the international transaction because of the inefficiency in our financial system which introduced “Lagos” between the time payments are made for goods and the time funds were actually remitted. The remittance lay introduced exchanged rate risk into the transaction. All these elements of cost were borne by the importers and in some cases puts pressure on the country’s balance of payment.
1.3 OBJECTIVE OF THE STUDY
The purpose of this study include the following:
a. To examine international cash flows in trade
b. To analyse the risk factors in international cash flow
c. To trace the major problems of financing international trade.
d. To have look at trade restrictions and government policies and its effect on trade.
e. To overview SAP in non – oil financing sector
1.4 RESEARCH QUESTION
The research questions include the following:
A) Does the international cash flow play any role in trade?
B) Are there risk factors in international cash flow?
C) What are the problems of financing international trade?
D) Are there any trade restrictions and government policies on international trade?
1.5 RESEARCH HYPOTHESIS
A) Ho: The international cash flow does not play any in trade
Hi: The international cash flow play role in trade.
B) Ho: There are no risk factors in international cash flow.
Hi: There are risk factors in international cash flow.
C) Ho: There are no problem of financing international trade
Hi: There are problems of financing trade.
D) Ho: There are no trade restriction policies on international trade.
Hi: There are trade restriction and policies on international trade.
1.6 SIGNIFICANCE OF THE STUDY
This study is of enormous importance to various people of divergent walks of life. Firstly, it will prefer suggestion on alternative mode of transaction with the problems necessitated by structural adjustment programme (SAP).
Secondly, it is of great significance to the government as it will enable some to adjust government policies, implementation on trade transactions. This could in actual fact help in reducing the base log of deficit.
1.7 DELIMITATION, SCOPE AND LIMITATION OF THE STUDY.
The study is centred on international cash flows and the problems of international trade. But due the short coming mentioned in the limitation, the study is centred on international cash flows and problem of international trade with reference to the Nigeria foreign transaction during the SAP period.
As already stated, this study is aimed at looking into the issues of cash flow and problems of financing international trade. The research has therefore been limited by the following factors:- Time is of essence in a study of this nature. The time average within which this study was carried out, its submission is quite insufficient considering the volume of and the quality of work. The writer is therefore restrained by lack of fund, which affected his movement and procurement of other relevant materials.
UNCO – OPERATIVE ATTITUDE OF INTERVIEWERS
Most organizations especially financial institutions could not readily release important information’s at the time appointment for interviewers were scheduled or met. In some situation time was quite short and most officers could not spare the writer enough time.
1.8 DEFINITION OF TERMS
This is the rate at which various currencies exchange with one another. It is generally assumed that exchange rates are determined by supply and demand or some how controlled by the government. The problem with exchange rate is that of its incessant fluctuation. Exchange rate is hardly constant, and importers and exporters find this aspect in trade quite irreconcilable. Most international trade transaction have been ruined by venture of exchange rates flunctuations.
TARIFF The tariff is a standard instrument for commercial policy. It is essentially a relieved by a government on goods entering a country. We have also the export tax which is levied on goods leaving a country and transit duty which is levied on goods passing through enroot to another country.
IMPORT LICENS Here some specific commodities are placed on license so that the number of people that will be importing the commodity will be reduced. As a result, certain commodities can only be imported by those who have the license.
FOREIGN EXCHANGE CONTROL
Is used by the government to curtail expenditure on importers. This is done by disturbing foreign currency for only those goods which are necessary.
This involves the allocations of foreign exchange to some government authorities. These authorities in turn rotate the foreign exchange among the competing demands. Such rationing will give preference to the importation of goods and services which are essential to a country’s, to some individuals not on the basis of the individuals or groups who yield the greater political influence give the biggest tribes to the official concerned.
This is an outright prohibitation in the importation of some items. The purpose of embargo is to encourage local industries and cut down on the use of foreign exchange as well as cutting down on harmful commodities like cocaine, cigaratte, wheat etc. Anyone caught importing this commodity will be punishable by law.
This is an expenditure switching policy of the government to discourage import as well as export. When the government devalues the currency from its initial rate to other countries, the prices of imported commodities increases, this will discourages import.
From a broad perspective, international trade means transactions between country and other countries of the world.