FISCAL POLICY AND ECONOMIC INSTABILITY IN AN OIL-DEPENDENT ECONOMY: The Nigerian Experience During the Oil Boom of t he Seventies*

Despite the unprecedented inflow of foreign exchange into the Nigerian economy during the period of the oil boom in the seventies, the economy has been experiencing a balance of payments crisis and a recession since early 1982. While the glu t in the world oil market is often blamed for these problems their genesis is perhaps best sought within the context of the fiscal indiscipline and the exchange rate policy which characterized policy makers’ response to the oil boom. This paper examines the effects of these policy responses on certain macro-economic variables during the period 1972- 1984. It is observed that the evolution of these variables indicates that the Dutch Disease syndrome emerged during this period . Real output hardly grew ; real agricultural output declined ; non-oil exports, especially agricultural exports, lost competitiveness as a result of real exchange rate appreciation . The non-oil sector became more and more dependent on imports and a balance of payments crisis was imminent even before the 1982 oil market bust. It is argued that these developments could be directly traced back to the budgetary operations of the government through which the oil boom affected the rest of the economy. The policy of nominal exchange rate appreciation also contributed to the events which eventually led to an external debt crisis in the eighties. All of these happened because of the failure to make appropriate policy choices.