CHAPTER ONE

1.0                                                                 INTRODUCTION

1.1    BACKGROUND INFORMATION

Nigeria according to Okoh (2004) embraced globalization as one of the founding members of the world trade organization (WTO), the body that is currently charged with the responsibility to remove all barriers to trade between the nations of the world such that the whole world becomes “one big” global market. This in Mackinnon (1994) view underscores the importance of foreign trade in the development process, and has been of interest to development economists. International trade economists believe that import is a key part of international trade and the import of capital goods in particular is vital to economic growth. This is so given that imported capital goods directly affect investment, which in turn constitute the motor of economic expansion. This in Egwaikhide, (1999) view may have prompted several authors to be preoccupied with the determinants of import in developing countries, with the result that a number of functional specifications have been explored.

As a developing economy, Nigeria have her own share of high nominal value of aggregate import over the years. This has been the order since independence in 1960, and has been made worse with the oil boom of the 1970s that gave rise to increase in average income, and subsequently increase in the demand for import. Evidence show a concentration of these import volume on the side of non-oil sector, such that non-oil import have over time been on a steady growth path. The nominal value of non-oil import rose from an average of N36.55 billion; representing 96.8% of total import into Nigeria within the period 1970-1979, to N118.36 billion; representing 93.4% of total import in period 1980-1989, N3.48 trillion in the period 1990-1999; representing 79.9% of total import and N19.33 trillion; representing 82.0% of total imports over the period 2000-2008/2. These represent an average growth rate of 1174.3% - a staggering growth figure one may say.

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Available statistics reveal that before 1970, the import of consumer goods dominated aggregate imports up to 1965, when the import of capital goods which was next to consumer goods fluctuated between 24% and 40%, while the share of raw materials generally increased from 10% to 23%. This distributional pattern of imports however changed dramatically from 1970, with the import of capital goods leading, and followed by raw materials after 1980. The contribution from consumer goods fell from 40% to 27% between 1980 and 1990, - a distributional pattern that has remained till date. A key factor in the 1960s outcome is the import substitution industrialization pursued with vigour since the late 1950s; this relied mainly on imported inputs particularly raw materials (Egwaikhide, 1999).

On the degree of openness, Shehu and Aliyu (2007), quotes Aliyu (2001) as haven discovered that the measure of openness was 40% in 1989, 64.8% in 1992, 86.9% in 1995, then fell to 73.6% in 1997. A study that further shows that for ten years, - that is from 1989-1998, except for 1993, 1995 and 1998, the Balance of Payment (BOP) balance was consistently in deficit. This shows the extent of erosion of the gains of our oil surpluses by the growth of non-oil import.

This growth in the value of imports has in the literature been attributed to a number of factors which include expansion in crude oil export that considerably raised foreign exchange earnings, the over-valuation of the naira during the period of controls, and liberal trade policies, borne out of the desire to provide capital goods and raw materials for import substituting industries; both of which made access to imports easy. Again the expansion of domestic absorption which reveals supply inadequacies in the system, such that aggregate demand outweighs supply. To make up for the supply shortfalls and cut down on the surging inflationary consequences, Nigeria relied on imports, to the extent that imports as a

component of total trade, particularly non-oil imports has persistently been on a steady rise, (See Moro, 1995;Egwaikhide,1999; Oyinlola et al 2010).

Several measures aimed at addressing this lingering problem had in the past been adopted; the last of these is the exchange rate reform under Nigeria’s

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economic reform agenda. This was aimed at realigning the economy in the direct of non-oil trade. As a matter of fact, non of these measures has so far proven to be a potent tool to solving the problem, even when past studies had come up with answers to what actually determines Nigeria’s aggregate imports in the economy as a whole. This underscores the need to carry out the study in the context of the non-oil sector of the Nigerian economy.

1.2          STATEMENT OF THE PROBLEM

A critical examination of the deficits problem of Nigeria’s external trade leaves no one in doubt that those deficits emanated from the non-oil sector. The sector has been growing in deficits since 1960, except in 1969 when it made a contribution of N2.4 million naira surplus to Nigeria’s overall trade balance of payment. The rate of growth of these deficits on aggregate term in the sector has also produced a staggering figure. From the period 1970-1979 to 1980-1989, the growth rate was 223.8%, from 1980-1989 to 1990-1999, the growth rate stood at 2840.8%, while the growth rate within the period 1990-1999 to 2000-2008 produced 458.3%. This shows the extent of abuse of our oil surpluses in the overall trade balance.

The adoption and implementation of various import control measures during the era of controls, by the authorities could not solve the problem, then Nigeria opted for exchange rate deregulation in 1986 as a way out of it. Import control measures during the period of controls include the import substitution strategy of industrialization, high tariff rates with outright ban for some categories of commodities, coupled with the use of administratively determined exchange rate. It is of note that the objective of import control has over the period been in conflicts with the objective of maintaining a steady price level. When ever this was the case, the government has often time opted for measures that will ensure steady price level as against measures for the control of imports. (se Egwaikhide,

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1999). The consequences of this is the fact that non-oil imports remained on a steady rise, with no solution yet in sight.

Interestingly, past studies like those by Ajayi (1975), Egwaikhide (1999), Aliyu (2001), and Shehu and Aliyu (2007) revealed that some variables like real income, real exchange rate, foreign exchange are the main determinants of Nigeria’s import. None of these studies exclusively focused on the non-oil sector of the Nigerian economy. Therefore the view here is that, these studies on the determinants of Nigeria’s import, the estimates of which were carried out on a wider aggregate, might have been plagued by the expected influence of the oil sector in the Nigerian economy. The outcome of these studies most likely, may not perfectly explain events in the non-oil sector, therefore the need to carryout a similar study to explain events in the non-oil sector.

In the light of this, the study seeks to assess the effects of the major components of Nigeria’s non-oil import demand function, with a view to ascertaining the determinants of non-oil import in Nigeria. To be able to accomplish this task, the study will address the following research questions:

1.      What are the determinants of Nigeria’s non-oil import demand?

2.      What are the magnitudes of the elasticities of non-oil import demand function in Nigeria?

1.3            OBJECTIVES OF THE STUDY

The broad objective of the study will be to investigate the determinants of Nigeria’s non-oil import demand.

Specifically the study seeks to:

1.      Ascertain the variables that determine Nigeria’s non-oil import demand.

2.      Estimate the size of elasticities of non-oil import demand function.