THE PROBLEM OF FINANCING INTERNATIONAL TRADE IN NIGERIA

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THE PROBLEM OF FINANCING INTERNATIONAL TRADE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The Nigeria economy has since the early 1990s 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 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 spending spilled into the rest of the economic sector and generated an unsustainable growth in the economic activities. In particular, the patter of investment shifted mainly to construction and services sectors to the detriment of productive sector that is industrial and Agricultural sector which had been the sole earner and should provide the basis of economic growth. The stump in oil market from the early to mid “goes”. This phenomenon, exacerbated the problem already existing from the tuba lance experience in the proceeding 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 wightly $12 per barrel. Consequently oil export revenue which had accounted for about 96% of Nigeria’s exchange earning dropped sharply. Moreover, the glut also forced production down by 0.4 million barrel per day, as at the middle of 1991, and dropped further to o.6 million barrel per day, during the first quarter of 1992 the oil glut and the attendant low unit price of oil signed the beginning of economic recession from Nigeria. As a result of these economic recession, the country ability to meet its trade.

Obligations become 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 export value which declined from the peak ofN14.2 billion in 1990 t0 N8.6 billion in 1992 but the total import expenditure rose from N 9.1 billion in 1990 and N12.6 billion in 1992. With a deficit of approximately N 4 billion. The ripples of the oil glut was also fect on the domestic front as was observed on the sharp decline in both state and federal government’s allocation 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 advance. Consequently, Nigeria’s external debt rose to nearly billion in 1993. Thirdly, the light of mounting foreign debt and with the reluctance of 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 Babangida’s administration under the structural adjustment programmer (SAP) and re-aliging aggregate domestic expenditure and production pattern in order to minimize dependence on imports. The objectives of the programmer are this.

1. To restructure and diversity 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, substantial improvement were recorded with these adjustments instance, Nigeria’s balance of payment showed on overall surplus of N1, 946.3 million in 1993. This continued to decline even to a deficit.

Despite the measure introduced by (SAP), aggregate in flow of foreign exchange continued to decline by 7.1 percent from $ 12,353.9 million in 1992 to & 3,567.1 million in1993. Total foreign exchange out flow also decline by about 20.8 percent.More so, as foreign exchange cash flow problem intensified, Nigeria importers found it increasing difficult to secure confirmed lines of creasing difficult to confirmed lines of credit overseas. Although the foreign countries portray (SAP) in a negative light, economic expects 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 recessional has affected considerably the issue of international cash flow. It becomes more difficult for the less developed countries who are non-cultural and have little or nothing to export to gain foreign exchange. It was even worse when the strictly import oriented. In such cases, the little reserve would be very much in sufficient 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 measure ranging from trade restriction to out right ban of most commodities. Most foreign-based institutions had over the years refused to honor most of Nigeria letter of credit L.D.C.S. suffers from this problems.

This project is going to analyze 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 with this period in Nigeria.

1.2 PURPOSE / OBJECTIVE OF THE STUDY

The purpose of this study include the following:

a. To examine international cash flow in trade.

b. To analyze the risk factors in international cash flow.

c. To trace the major problems of financing international trade.

d. To have a look at trade restrictions and government polities and its effects on trade.

e. To overview SAP in non-oil financing sector.

f. To find the major important of international trade.

1.3 STATEMENT OF THE PROBLEM

In this section, there are many problems militating against the international cash flow in trade. It can be stated as follows:

1. Foreign exchange market.

2. Exchange rate.

3. Issues of embargo

4. Comparative advantage and cost

5. Advanced deposits on imports and the multiple currency issue.

6. Trade restriction and government policies

7. Cash flow problems in trade

8. Subsidies.

9. Slow pace of implantation

10. Lack of coherence

11. Fraud

12 Mismanagement of frauds as a result of lack of formal co-ordination among federal state and local government.

1.4 SIGNIFICANCE OF THE STUDY

The study is cent red on international cash flow and problem of international trade. But due to the short corning mentioned in the limitation, the study is centered on international cash flow 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.

1.5 DEFINITION OF TERMS

EXCHANGE RATE: This is the rate at which various currencies exchange with one another and supply also controlled by the government. The problem with this is its incessant fluctuation. Exchange rate is hardly constant and importers and exporter into this are quite irreconcilable. Most international trade transaction have be turned by venture of exchange rate fluctuations.

TARIFF: This standard instrument for commercial policy is essentially a tax levied by a government on goods coming into a country. Also export tax, levied on goods leaving a country and transit duty levied on goods passing through enrout to another country.

IMPORT LICENSE: Here, some specific commodities are placed on license so that the number of people that will be importing the commodity will be reduced. As in this case, only those that have license should deal on it.

FOREIGN EXCHANGE CONTROL: This could be used by the government to curtail expenditure on importers. It is done by disturbing foreign currency for only those goods, which are necessary.

EXCHANGE RATIONING: This involves the allocations of foreign exchange to some government authorized. These authorities in turn rotating 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.

EMBARGO: This is an out right prohibition in the importation of some items.

The purpose of embargo is the encourage local industries and cut down on the use of foreign exchange as well as cutting down on harmful commodities like cocaine, cigarette, wheat etc. Any one caught importing these commodities will be punishable by law.

DEVALUATION: This is an expenditure switching policy of the government to discourage devalues the currency from its initial rate to other countries, the prices of imported commodities increases, this will discourage import.

Finally, international trade: From a broad prospective, international trade means transactions between a country and other countries of the world. It also means a trade relationship between a nation and other nations of countries.

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