The study investigates the impact of exchange rate changes on non-oil export in Nigeria between 1970 and 2014, using Nigeria time series data; The study examines the significant role of exchange rate and inflation on non-oil export of the economy which other studies might have ignore; In achieving the objectives of this study, Ordinary Least Square methods involving Augmented Dickey-Fuller (ADF), unit roots test of stationarity, were applied; The result shows that exchange rate and inflation have no significant impact on non-oil export whereas trade openness have a positive relationship with non-oil export, which shows that trade openness increases non-oil export in Nigeria; This study amongst others encourages the government to strengthen the legislative and supervisory framework of non-oil sectors in Nigeria and diversify the economy to ensure maximum contributions from all faces of the sectors to economic growth of Nigeria, as well as enhancing the productivity and output of non-oil commodities coupled with providing markets for the commodities.
Exportation is required by any economy to enhance revenue and usher in economic growth and development. It is therefore crucial for economic progress and this has informed the idea of export-led growth. Export is a catalyst necessary for the overall development of an economy (Abou-Strait, 2005). It was also noted that foreign trade creates an avenue for foreign capital to flow into a country (Ricardo, 1817), this increases the earnings of the country thereby creating an avenue for growth by raising the national income of the country. It also increases the level of employment in the economy as a higher demand for exports will require more production which will in turn lead to the employment of more people. Exportation by a country also helps attain a favorable balance of trade and balance of payment position for the exporting country provided its exports reasonably exceed its imports. In a country like Nigeria where the level of investment is low, foreign capital is very much needed in order to accelerate the creeping rate of economic growth. The Nigerian economy is one that depends largely on foreign trade for growth and is also one which depends majorly on one export commodity at a time. For instance, at independence, the major export commodity was cocoa and the leading sector in the economy was the agricultural sector but today, the major export commodity is crude oil and the leading sector is now the petroleum sector. This has not allowed for balanced growth in the economy as some sectors have been allowed to grow while growth has been impeded in others and this has made the country remain a developing country. In Nigeria, crude oil is the major export because of the large revenue it generates. This has led the economy to focus on the petroleum sector while ignoring the other sectors as well as the potential revenue they can generate.
1.1 Background to the Study
Research related to exchange rate management still remains of interest to economists, especially in developing countries, despite a relatively enormous body of literature in the area. This is largely because the exchange rate in whatever conceptualization, is not only an important relative price, which connects domestic and world markets for goods and assets, but it also signals the competitiveness of a country’s exchange power vis-à-vis the rest of the world in a pure market. Besides, it also serves as an anchor which supports sustainable internal and external macroeconomic balances over the medium-to-long term. There is, however, no simple answer to what determine the equilibrium exchange rate, and estimating equilibrium exchange rates and the degree of exchange rate misalignment remains one of the most challenging empirical problems in an open economy like Nigeria (Williamson, 1994).
Nigeria overall economic performance since independence in 1960 has been decidedly unimpressive. Despite the availability and expenditure colossal amount of foreign exchange derive mainly from its oil and gas resources, economic growth has been weak and the incidences of poverty has increased. The objective of every independent nation like Nigeria is to improve the standard of living of its citizenry and promote economic growth and development of the country but due to vicious circle of poverty, scarcity of resources and the law of comparative advantage, countries depend on each other to foster economic growth and achieve sustainable economic development. Hasanov and Samadova (2012) noted that expanding non-oil export to get rid of one-product economy has been known as a solution for economic development in oil producing countries which Nigeria is one of them and is the sixth largest oil producing and exporting countries in the world. 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. Hasanov and Samadova (2012) also revealed that 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. 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. The Dutch Disease concept provides the relationship between the 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), Corden and Nearly (1984), and Hassanov and Samadova, (2012), postulated that if we divide overall export of oil rich countries into oil and non-oil exports appreciation of real exchange rate which is specific for these countries negatively affects non-oil exports while export revenues of oil sector mainly depends on oil price in the world markets. Experimental studies of the growth rates of countries endowed with natural resources have showed paradox finding that countries which are amply endowed with resources tend to grow slower than others. One economic explanation for this paradoxical phenomenon is that the resource exporter’s real exchange rate co-moves with highly volatile commodity prices. In price upturns, the real exchange rate appreciates and undercuts the competitiveness of the domestic industry. Lost industry is then difficult to reconstruct when the commodity price falls and over several price cycles, the country loses its non-resource industrial base (Sachs and Warner, 2005; Auty, (2001)Torvik, (2001), Collier and Goderis(2007). Omojimite and Akpokodje (2010) asserted that the dependence of Nigeria on crude oil exports had important implications for the Nigerian economy since the oil market is a highly volatile one. For example, being dependent on the export of crude oil, the Nigerian economy became subject to the vicissitudes and vagaries of the international oil market such that international oil price shocks were immediately felt in the domestic economy. Coupled with this, Nigeria implemented a fixed exchange rate system that engendered overvaluation of the domestic currency, serving as a disincentive for increased exports through non-competitiveness of the country’s non-oil exports. On the other hand, the overvalued exchange rate enhanced imports thereby exacerbating the already precarious balance of payment position. The Nigerian government has over the years engaged in international trade and has been designing trade and exchange rate policies to promote trade (Adewuyi, 2005). Although a number of exchange rate reforms or depreciation has been carried out by successive governments, the extent to which these policies have been effective in promoting export has remained unascertained. This is because despite’ government efforts, the growth performance of Nigeria non-oil export has been very slow. It grew at an average of 2.3% during the 1960 -1990 period, while its share of total export declined from about 60% in 1960 to 3.0% in 1990 Ogun (2006). Looking at the sectorial contribution to non-oil export in the period before the introduction of the Structural Adjustment Programme (SAP) (1975-1985), it can be seen that agricultural sector contributed about 4.0% and Windfalls that result from volatile oil price surges/shocks overwhelmingly flow through the economy; expand the oil sector and penalize the non-oil sector (Mieiro and Ramos, 2010). On this premise, this study will investigate the effect of exchange rate on non-oil export in the Nigerian economy. The need to correct the existing structural distortions and put the economy on the path of sustainable growth is therefore competing. On this premise, this study will investigate the effect of exchange rate on non-oil export in the Nigerian economy.
1.2 Statement of the Problem
There is growing agreement in literature that prolonged and substantial exchange rate misalignment can create serve macroeconomic disequilibria and the correction of external balance will require both exchange rate devaluation and foreign exchange demand management policies (Alalade et. al., 2014).The Nigeria government has over the years engaged in international trade and has been designing trade and exchange rate policies to promote trade (Adewuyi, 2005). Although a number of exchange rate reforms or depreciation has been carried out by successive governments, the extent to which these policies have been effective in promoting export has remained unascertained. This is because despite government efforts, the growth performance of Nigeria non-oil exports has been very slow. It grew at an average of 2.3% during the 1960-1990 period, while its share of total export declined from about 60% in 1960 to 3.0% in 1990 (Ogun, 2006). Looking at the sectorial contribution to non-oil export in the period before the introduction of the structural adjustment programme (SAP)(1975-1985) it can be seen that agricultural sector contributed about 4,0% and windfalls that result from volatile oil price surges/shocks overwhelmingly flow through the economy expand the sector and penalize the non-oil sector (Mieiro and Ramos, 2010).Since September 1986, when the market determined exchange rate system was introduced via the second tier foreign exchange market, the naira exchange rate has exhibited the features of continuous depreciation and instability. This instability and continued depreciation of the naira in the foreign exchange market has resulted in declines in the standard of living of the populace, increased cost of tended to undermines exports and made planning and projections difficult at both micro and macro levels of the economy. A good number of small and medium scale enterprise have been strangled out as a result of low dollar/naira exchange rate and so many other problems resulting from fluctuations in exchange rates can be also be identified. This movement of the exchange rate along the path of depreciation since 1986 has raised a lot of questions on the impact of exchange rate policies on the Nigerian economy. Hence the need for this study so as to investigate the impact of exchange rate changes on Nigeria non-oil export thereby filling the gap created by previous researchers on this topic.
1.3 Research Question
The question is to what extent has the redirection in policy affected the performance of non-oil export in Nigeria? But more simply, this research work is set to answer the following questions
- Do changes in exchange rate of naira have significant effect on Nigeria’s non-oil exports?
- Do changes in domestic price level (inflation) have any significant effect on the overall contribution of non-oil exports?
1.4 Objectives of the Study
This research has a particular focus that aim at examining the impact of exchange rate change to the non-oil sector. The major objectives are broadly defined as follows;
- To empirically evaluate how changes in exchange rate has affected the non-oil export.
- To empirically find out the impact of inflation on the overall contribution of non-oil exports
1.5 Research Hypotheses
To carry out this research, the following hypotheses are formulated:-
- H01: Exchange rate has no significant impact on non-oil export in Nigeria.
- H02: Inflation rate has no significant impact on non-oil export of the Nigerian economy.
1.6 Significance of the Study
The effects of 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 exports 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 exchange rate sensitivity. study of the changes in exchange rate of naira on non-oil export to the growth of Nigerian economy is significant and important, for this knowledge, it will enable the policy makers to formulate appropriate policies that will aim at improving on the quota of the total revenue brought about by the non-oil sectors of the economy. This study is also important and significant in that it will examine the various ways of improving non-oil sector towards raising the living standard of Nigerians, and would further provide an econometric assessment on how changes in exchange rate of naira have been to the performance of Nigeria’s non-oil export, also intends to evaluate the contribution of non-oil exports to Nigeria economic growth and development.
1.7 Scope and Limitation
This study would be based largely on secondary data. The reliability of the findings of the 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 (1970-2014). 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 finance, time and difficulty in getting secondary data etc.
1.8 Organization of the Work
The study is organized in five chapters; chapter one covers the introduction of the research, background of the study, statement of problem, research question, objective of the study, research hypotheses, significance of the study, scope and limitations of the study and organization of the work. Chapter two covers the review of related literature, theoretical literature and theoretical framework and empirical literature. Chapter three covers introduction, model specification, estimation techniques and procedure, evaluation of the estimates, and nature and source of data. Chapter four covers the data analysis, presentation and interpretation of results. Chapter five covers summary, conclusion and recommendations.
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