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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
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 (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 al. (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:
a. To evaluate Nigeria past and present non-oil export effects relative to the real exchange rate
b. To evaluate government policies or measures towards boosting non-oil sectors contribution to the economy.
c. To evaluate the factors responsible for the decline in the contribution of non-oil revenue the economy.
d. To make 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 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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