After an initial lag in 1973 and 1974, when large surpluses were saved and invested abroad, consolidated public expenditure accelerated rapidly: by 1976 it absorbed the entire oil windfall (Figure 2). By 1977 combined federation and states capital expenditure increased six fold over their 1970 level. Public capital expenditure accelerated so strongly that it alone accounted for the spending of more than half of the entire oil windfall.
However, Nigeria’s continued failure to improve its ranking in measures of educational success or infrastructure quality suggest that much of this expenditure was conceived too hastily and ended up largely leading to waste and corruption. Weak institutions and poor governance have contributed substantially to Nigeria’s public debt problems, as the majority of projects financed by public borrowing during the late 1970s and 1980s failed to generate an adequate rate of return needed to improve the repayment capacity of the country.
Thus during the 1970s, public expenditure was primarily financed from oil revenues, made possible by the high oil prices in the 1970s, some domestic borrowing, and relatively modest external borrowing. At the time of the second oil shock in 1980, when oil prices jumped to almost $40/bbl, the Since the oil prices collapse in the early 1980s, Nigeria experienced rapid external debt built-up and dwindling foreign exchange reserves: public and publicly guaranteed external debt increased from $4. 3 billion to $11. 2 billion, while foreign exchange reserves were almost exhausted, from $10 billion to $1. 23 billion, all between 1981 and 1983.