REAL EXCHANGE RATE AND NON OIL EXPORT IN NIGERIA (1980-2010)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Since exportation has a special share in the economic growth of many advanced
and developing countries; as far as making those countries as the strongest countries,
the effective factors; in turn, could pave way for progress of countries, particularly the
developing countries. Since increase or decrease in currency exchange rate leads to
the decrease or increase in export.
Nigeria is endowed with various kinds of resources needed to place her amongst
the top emerging economies of the World. Unfortunately, the nation has not
adequately benefited from the economic prosperity expected of a nation so richly
blessed.
Non-oil exports are products, which are produced within the country in the
agricultural, mining, quarrying and industrial sector that are sent outside the country to
generate revenue for the growth of the economy, excluding oil products. These non-oil
exports include products like coal, cotton, timber, groundnut, cocoa, beans, gum
arabic etc. while real exchange rate basically, can be defined as the nominal exchange
rate that takes the inflation differentials among the countries into account. Its
importance stems from the fact that it can be used as an indicator of competitiveness
in the foreign trade of a country. Exchange rate is used to determine an individual
country’s currency value relative to the other major currencies in the index, as adjusted
for the effects of inflation. All currencies within the said index are the major
currencies being traded today: U.S. dollar, Euro pounds, etc. This is also the value that
an individual consumer will pay for an imported good at the consumer level. This
price includes tariffs and transactions costs associated with importing the good.
It is imperative to note that exchange rate, whether fixed or floating, affects
macroeconomic performance such as import, export, national price level, output,
interest rate etc as well as economic units such as individuals’ purchasing power,
firms’ performance etc (Chong and Tan, 2008). Chong and Tan (2008) empirical
analysis revealed that the real exchange rate volatility is responsible for changes in
macroeconomic fundamentals for the developing economies.
Export earnings assume vital importance not only for developing, but also for
developed countries. Developed countries mainly export capital and final goods, while
the main part of export of developing countries consists of mining-industry goods
especially natural resources. According to export-led growth hypothesis increased
export can perform the role of “engine of economic growth” because it can increase
employment, create profit, trigger greater productivity and lead to rise in accumulation
of reserves, allowing a country to balance their finances (Emilio (2001), Goldstein and
Pevehouse (2008), Gibson and Michael (1992), McCombie and Thirlwall (1994)). In
this context there are some challenges for countries with natural resource abundance
such as oil in comparison with other countries. The main point is that in parallel with
windfall of oil revenues these countries have to pay more attention to the development
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of the non-oil sector as well as its export performance (Sorsa, 1999). Because in the
most of the cases oil driven economic development leads to some undesirable
consequences such as Dutch Disease in the oil rich countries. In this regard Dutch
Disease concept provides certain link between the real exchange rate and non-oil
export. According to this concept the appreciation of a country’s real exchange rate
caused by the sharp rise in export of a booming resource sector draws capital and
labour away from a country’s manufacturing and agricultural sectors, which can lead
to a decline in exports of agricultural and manufactured goods and inflate the price of
non-tradable goods Corden (1982) and Corden and Nearly (1984).
The discovery of oil and the realization that foreign exchange could comparatively
be easily derived from relegated attention to the non-oil sector to the background.
There are some motivations for conducting this research. The main motivations is
that some seminal theoretical and empirical studies predict that most natural
resource rich countries suffer from serious socio-economic problems caused by their
resource revenues and in this regard these natural revenues are a curse rather than a
blessing for these countries (Sachs and Warner, 1997; Auty, 2001; Gylfason, 2001;
Gylfason and Zoega, 2002 ). One of these resources causes, the so called Dutch
disease, is mainly related to an appreciation of the real exchange rate, sourced from
inflow of resource revenue into country, which undermines the competitiveness of
the non-resource sector’s (manufacturing and agriculture) export and therefore
deteriorates this sector while it leads to higher demand for imports and services
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(Corden and Nearly, 1982; Corden, 1984). This prediction, in particular the ultimate
role of exchange rates in economic challenges of these countries, is supported by a
number of empirical studies. For example, Wakeman-Linn et al. (2002) and sturm et
- (2009)concluded, that the exchange rate is a key economic policy issue in oil
exporting countries.
Another motivation would be to examine whether or not the predictions of the
international trade theory holds in an economy such as Nigeria. One of the
motivations is that without conducting empirical analysis it is quite difficult or
impossible to make effective policy measures for the international trade of a country.
Government especially thinks that the non-oil export based development can be an
engine of sustainable economic growth for the country particularly in the future
post-boom period; it would be useful to investigate the impact of the real exchange
rate on the non-oil exports of Nigeria.
Appreciating exchange rate is one of the major factors that impede the growth of
non-oil export in Nigeria. Another non-oil export that could be dwelled on is the
industrial sector. It is the fastest growing sector in Nigeria economy. It comprises of
mainly manufacturing and mining. But one can clearly see that since the inception of
oil in Nigeria, the country has been running on a monotonic state (concentrated only
on oil), as its main source of revenue and for its expenditures. These have resulted to
a break down in some sectors of the Nigeria economy. The agricultural sector since
the emergence of oil has been partially abandoned, the farmer’s in the country only
operate on a subsistence level, due to the fact that the policy mapped out by the
government has not been really implemented and it has brought about low
productivity in the economy. Efforts kicked off by the World Bank and other state
and national agencies (Fadama I, II & III policy) were not able to fully revive the
agricultural sector, due to the country mainly depends on oil for its survival.
Looking at the industrial sector you see that you have little or no export to other
countries. Nigeria has many unused resources that if really developed can create
enough marketable goods in the foreign exchange market (non-oil export).
The main objective of this study is to analyze the impact of changes in the real
exchange rate on the export performance of the non-oil sector and to suggest policy
proposals which may be useful for policymakers in non-oil export promotion issues.
1.2 STATEMENT OF PROBLEM
Nigeria remained a net exporter of agricultural products between 1960 and 1970.
Goods exported include: palm oil, palm kernel, cotton, groundnut etc. Agriculture
through export of non-oil products had a rosy record contribution up to 80% of gross
domestic product and providing employment for over 70% of the working
population. But recently there has been a steady decline in agriculture and other non-
oil exports.
But the story of its decline is as pathetic, as its impact on industry that relied heavily
on the sector for raw materials. Thus the declines came with surge of revenue from
oil (oil export).The emergence of oil has made the government, not to really plan
efficiently, how to improve the real sector of the economy which produces the non-
oil exports.
But the discovery of oil alone could not be held responsible completely for the
misfortunes or decline in the non-oil exports. The policy instruments put in place by
successive government were more of lip service than concrete action. The creation
of marketing board contributed also to the decline of non-oil export since the board
has the right to export the commodities. It is also pertinent to say that fixing of
export product prices by marketing board, discouraged further private investment in
the sector. In other sectors of the economy there was no efficient policy instrument
to hold the sector and also check the activities of those sectors. Hence the emphasis
on real exchange rate and non-oil export is to re-engineer the economy.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the impact of real exchange rate on
the Nigerian non-oil export. The specific objectives are:
- Toevaluate Nigeria past and present non-oil export effects relative to the real
exchange rate
- Toevaluate government policies or measures towards boosting non-oil sectors
contribution to the economy.
- Toevaluate the factors responsible for the decline in the contribution of non- oil revenue the economy.
- Tomake recommendations for improving the non-oil sector of the nation.
1.4 STATEMENT OF HYPOTHESIS
To test for the statistical significance or non significance of the data
Ho represents the null hypothesis
H1 represents the alternative hypothesis
Ho =H1 there is no relationship between real exchange rate and non-oil export in
Nigeria.
Ho≠H1 there is relationship between real exchange rate and non-oil export in
Nigeria.
Results;
If Ho>H1, then we accept the null hypothesis, that the real exchange rates has
effect on the non-oil export.
If Ho<H1, then we accept the alternative hypothesis and reject the null hypothesis
that real exchange rate does not affect the non-oil export in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The effects of the recent global economic crisis on Nigeria have reaffirmed the
urgent need for economic diversification in the country. Although, no country is
immune to such global crisis, the over-reliance on oil export revenue by Nigeria
exposes her exchange rate and economy excessively to external shocks. Therefore,
there is the need to conduct a research of this nature to examine Nigeria’s exchange
rate sensitivity.
This study would further provide an econometric assessment of the impact of real
exchange rate fluctuations on the performance of non-oil export in Nigeria. This
would go a long way in helping to design policies and measures to protect these
companies as well as other sectors of economy from exchange rate risk and other
external shocks.
In order to understand exchange rate fluctuations better, this study would go
further to identify the economic factors that are responsible for exchange rate
volatility. Once we are able to identify the factors behind the fluctuations, then it
would be easier for policy makers to influence the exchange rate through the
price system in favour of their countries.
1.6 SCOPE AND LIMITATION OF THE STUDY
This study would also be based largely on secondary data. The reliability of the
findings of this study would also depend on the liability of these data. The analysis
will also be based on the non-oil sector and its effects by the real exchange rate over
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the years (1980-2010).
Also the causes and consequences of the neglect of the non-oil export shall be
discussed as well. The limitation encountered in the course of this research work was
manly time and difficulty in getting secondary data etc.
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