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

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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

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

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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.

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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

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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

H

o

represents the null hypothesis

H

1

represents the alternative hypothesis

H

o

=H

1

there is no relationship between real exchange rate and non-oil export in

Nigeria.

H

o

≠H

1

there is relationship between real exchange rate and non-oil export in

Nigeria.

Results;

If H

o

>H

1

then we accept the null hypothesis that the real exchange rates has

effect on the non-oil export.

If H

o

1

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

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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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