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Real
Exchange Rate And Non Oil Export In Nigeria
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 firms’ performance etc).Chong
and(ChongTan(2008) empiricaland Tan, 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 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
2
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 appr caused by the sharp rise in export of a booming
resource sector draws capital and labour away from a country’s manufactu 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’sandagriculture)(manufacturingexportandtherefore deteriorates this
sector while it leads to higher demand for imports and services
3
(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
4
the
emergence of oil has been partially abandoned, the farmer’sin 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.
5
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
6
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.
H ≠H there is relationship between real exchange
rate and non-oil export in
o 1
Nigeria.
Results;
If Ho>H1,
then we accept the null hypothesis, that the real exchange rates has effect on
the non-oil export.
If Ho1, then
we accept the alternative hypothesis and reject the null hypothesis that real
exchange rate does not affect the non-oil export in Nigeria.
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