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Project Topic:

IMPACT OF EXCHANGE RATE POLICY ON NON-OIL EXPORTS IN THE NIGERIAN ECONOMY

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 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 57 ::   Attributes: Secondary data, Data Analysis,Abstract  ::   724 people found this useful

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ECONOMICS UNDERGRADUATE PROJECT TOPICS, RESEARCH WORKS AND MATERIALS

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CHAPTER ONE

INTRODUCTION

1.1.  BACKGROUND OF STUDY

1.1.1.     Exchange Rate Policy in Nigeria: 1999-2004

The Nigerian exchange rate policy was largely a passive one before the inception of the Structural Adjustment Programme (SAP), dating back to 1959 with the introduction of pounds that year. Nigerian authorities’ failure to devalue its Nigerian pound in response to devaluation of dollar in December 1971 resulted in the appreciation of the Nigerian pound dollar exchange rate from $2.80- $3.80 to the naira pound. Nigeria failed to devalue because of the optimism about the sustainability of the rate owing to the nation’s increase in external reserve resulting from crude oil earnings.

The naira replaced the pounds in 1973 when Nigeria devalued at the same rate with US. Hence the exchange rate against the dollar became US $1.52 to the naira. Within a month of this, the US dollar was devalued by 10% and Nigeria followed suit with a 10% matching devaluation, thereby maintaining the existing naira/dollar rate. Nigeria devalued at the same rate with US. This was done to curtail the country’s import bill and ensure the maintenance of the local value of export and to protect emerging local industries as well as to discourage the outflow of capital.

During the most of 1973 the anchor currencies, the dollar and sterling weakened considerably. The sustained weakness brought into sharp focus the dilemma involved in the method of determining the exchange rate of the Nigerian currency. This showed that a fixed relationship between the Naira and any other currency could not be sustained if Nigeria wanted to be able to respond independently to economic changes in the light of her own objective and circumstances. The rigid relationship between the US dollar and the naira was terminated in April 1974 and so Nigerian authorities decided to pursue an independent exchange rate policy, ‘policy of progressive appreciation of Naira against the dollar and the sterling’. This period coincided with the first oil boom which brought healthy balance of payment position, thus bringing overvaluation of naira. In conclusion, we can say that the objective of the exchange rate policy in the pre-SAP period exhibited two features.

1.   It was geared towards equilibrating the balance of payment in the short run thereby   influencing the relative price structure in the domestic currency terms. This affected resource allocation in the economy with further effect on the international trade.

2.    It was myopic as it was geared towards having a highly valued exchange rate with the positive effect on imports and negative effect especially on non-oil exports, rather than being geared towards long term consideration as long run balance of payment viability.

The period beginning from September 1986 marked the second phase of the exchange rate policy in Nigeria. This period is characterized with the inception of the Structural Adjustment Programme (SAP) that was put in place to redress the structural imbalances to attain structural transformation of the economy. The exchange rate policy within this period was more dynamic than it was before 1986 as the floating exchange rate was embraced and was largely in line with the objectives of the Structural Adjustment Programme (SAP). These objectives included the need to obtain a realistic exchange rate of the naira via gradual depreciation of the currency, decrease imports and boost exports especially of the non-oil variety with salutary impact on the long run balance of payment position. Accelerate the growth rate of the economy via encouraging capital inflow and discouraging outflow of same.

Thus in 1986, the Naira was floated and Nigeria was categorized as an independent floater by the International Monetary Fund (IMF). The problems created by the system made it to be suspended and the Naira exchange rate was then determined in the Autonomous Foreign Exchange Market (AFEM),guided by the intervention from the Central Bank of Nigeria. In 1988, the ’autonomous market’ was introduced (also called the ‘Inter Bank Market’), whose objective was to encourage the inflow of foreign exchange from 000non-oil export into the banking system, thereby relieving the Central Bank of some pressure. By 1994, the federal government fixed the exchange rate at N22 to a US dollar which implies a shift from the flexible regime of 1986 to 1993. The foreign exchange market was liberalized in1995 with the introduction of autonomous foreign exchange market (AFEM) for sale of foreign exchange dedicated to this market by government as well as purchase of foreign exchange by the Central Bank of Nigeria (CBN) from oil companies. The policy was retained in 1996 and further liberalized in 1997.

  1.  Non –oil Exports Before Structural Adjustment  Programme (SAP)

            The objective of export promotion efforts before SAP was largely to boost foreign exchange earnings; hence promotion activities were concentrated mainly on primary commodities including agricultural and mineral products. Import-substitution policy was pursued without any well- defined objective of exportation of industrial products. To worsen matters, as soon as the government began to realize the need for non-oil export expansion and diversification, crude oil production and export assumed prominence in the economy. Consequently, the policy of non-oil export promotion was never taken seriously. These factors encouraged the sustenance of anti-export bias policies such as overvalued exchange rates. As was officially acknowledged in the second national development plan (FRN 1970), the government was committed to expanding the export market base but it has not hitherto done very much directly to encourage this process. Rather, government continued to make statements of intentions regarding non-oil export promotion. In the fourth national development plan (FRN 1981) for example, there is a statement that:

“Conscious efforts will be made to diversify the economy away from overdependence on the petroleum sector. This implies a deliberate policy to widen the basis of our public revenue and export earnings. The export potentials of existing industries such as tyres, coal, pulp, and paper, etc, and those of traditional exports like cocoa, groundnut, palm produce, rubber, etc, will be actively exploited during the plan period”.

However, before the fourth plan was launched, export promotion of major cash crops was done through various forms including budget provisions, bank credit allocation, storage, produce, financing, shipment and marketing facilities and setting up of the Nigerian Export Promotion (NEPC) in 1976 (Uduebo 1993).

Although there were all along clear statements of intentions to diversify the export structure, a commitment process was clearly lacking.

 

  1. Non- oil Exports Under Structural Adjustment Programme (SAP)

Conscious of the strong need to diversify the sources of foreign exchange earnings and reduce the excessive dependence of the economy on the export of crude oil, government in 1986, stepped up the promotion of non-oil exports by instituting a package of incentives spelt out in 1986 federal budget to aid production for export. The structural adjustment Programme document stressed, among other things, the need to diversify and shift emphasis from heavy dependence on the oil sector, and ensure sustained favorable balance of payments. According to the document:

In order to reduce dependence on the oil sector as the principal earner of foreign exchange, the administration is deeply committed to promoting non-oil exports. Although it is realized that the initial base of the non-oil exports has shrunk considerably during the past decade, the government believes that the correction of cost- price distortions through a realistic exchange rate, combined with other positive export incentives and institutional reforms, should make it possible for Nigeria to earn at least $1 billion from non-oil exports by the end of the present decade (1990).

To accomplish the non-oil export objectives of foreign exchange expansion, as well as product and market diversification, the government moved in the direction of pursuing a more consistent and comprehensive export promotion Programme. To this end, it put in place a number of policy reforms and incentives. Two of these stand out clearly, namely, the consequent deregulation of commodity prices, and the establishment of the second tier foreign exchange market (SFEM).  The market determination of exchange rates in the SFEM was expected to produce a depreciation of the nominal exchange rate as well as the real exchange rate facing exporters with over 90% devaluation of the nominal exchange rate between 1986- 1992, and nearly similar percentage for the real exchange rate. The depreciation has been an incentive to cash crop producers as very high prices of agricultural products followed the spate of depreciations. The euphoria of high Naira prices of agricultural products, coupled with the liberalization of export trade and other export trade incentives, led to the emergence of all sorts of exports with different motives scrambling to partake in the foreign exchange earnings from export. The apparent romance with export trade by individuals and firms became obvious three years later (1989) when export business slumped.

1.2.   PROBLEM STATEMENT

Nigeria’s exports can be broadly classified into oil and non-oil exports. In recent years, the oil component has become the major source of the country’s exchange earnings, a position it took over from the agriculture sector beginning from the 1970s. Over the years, it is evident that non-oil exports have continued to decline due to the advent of petroleum. The share of oil in Nigeria’s export was between 57.6% and 99.7%, while non-oil export was between 1.8% and 42.4% (CBN Statistical Issues 2004 see table 4.2). The major contribution to Nigerian’s gross domestic product (GDP), national income has fallen short of the potentials it has. These could be said to be due to frequent changes of government policies as well as poor economic policy implementation that resulted in slow output growth, low standard of living, income inequality and increased poverty. The fall in non-oil export has made the Nigerian economy to depend on oil exports as a major source of income.

A central goal of Nigeria’s reform Structural Adjustment Programme (SAP) was to restructure and diversify the productive base of the economy in order to reduce dependence in the oil sector and in imports through the promotion of non-oil exports via the exchange rate policy. Thus, this project will basically be a research work on the impact of the exchange rate policy on the non-oil exports in the Nigerian economy.

The exchange rate is the rate at which two national currencies exchange for each other. The non-oil exports are products that are not identified as oil exports; they include natural resources, agriculturally produced products, and manufactured products. Examples are limestone, cocoa, coal, rubber; palm oil etc. 

The exchange rate as a policy plays an important role in international economic transaction for a developing country that is highly dependent on trade. The price of a foreign exchange plays a major role in the ability of the economy to attain optimal productive capacity. Thus the attainment of a realistic exchange rate is an important macroeconomic policy objective. The exchange rate as a price incentive could be used to boost the export of non-oil products.

When the exchange rate policy was adopted, it was to serve as a price incentive to increase the volume of non-oil exports. When the rate of the domestic currency to the foreign currency depreciates, this lowers the price of the non-oil exports making it cheaper, which may increase the volume of the products being export.

The main problem of interest in this study is to check the impact of the exchange rate policy on non-oil exports and determine the extent to which the non-oil exports have increased.

1.3.   SCOPE OF THE STUDY

            The study will cover a period 5 years (1999-2004). This is to achieve a comprehensive analysis of the impact of the exchange rate policy on non-oil exports. This period witnessed various economic policies by the government such as the economic stabilization act and the structural adjustment Programme which has so much impact on the performance of this sector. It also covers the period when the naira was over valued to the present period where it has been devalued. Regression analysis will be needed to enable us to determine the various factors included in the model.

1.4. OBJECTIVES OF THE STUDY

The main objective of the study is to examine the extent to which the exchange rate policy can boost non-oil experts especially exports of agriculture, manufactured and mining products.

This project aims at investigating or surveying the trends as well as the composition of Nigeria’s non-oil exports over the period. Having identified the fall in exports of agricultural and manufactured products as the underlying cause of the decline in non-oil exports, the project proceeds to present an explanation of the growing ability of the agricultural sector to feed the country as well as produce a surplus for the export market.

The discussion of all these sections provides the background against which the impact of the exchange rate policy on the non-oil exports is assessed. The last part will be the summary and conclusions.

These objectives are further stated as follows;

  1. to  examine the trend of non-oil exports between 1999-2004
  2. To examine the effect of the exchange rate policy on the non-oil sector of the Nigeria economy.
  3. To make policy recommendation on how on non-oil exports can be increased in economy.                

1.5.     JUSTIFICATION OF THE STUDY

Despite the various allocations and policies to the development of the non-oil exports sector, it is yet to perform up to expectation. The volume of foreign exchange being generated is either not enough or has fallen. This is due to the monoculture nature of the Nigerian economy. Since the first Nigerian national plan, the allocation to the non-oil exports like manufacturing sector has been increasing with little impact being felt in the economic recovery.    

There is over dependence on one sector of the economy which needs diversifying. The desire to find a realistic exchange rate for the domestic currency is an important macro economic policy objective for a developing country highly dependent on trade.

Also the non-oil exports of the economy have featured in the developmental strategies and plans of many countries and this has been successful e.g. Newly Industrialized Countries (NIC) or the Asian tigers and this has been very successful, this necessitates for a study to be done in this area.

Since exchange rate policy was adopted during the structural adjustment Programme (SAP) to boost the non-oil exports, there is need to examine the effect of this policy on non-oil sector. The interest of this study is to examine whether the exchange policy in Nigeria has an impact on non-oil exports.

1.6.    RESEARCH QUESTIONS

The following are the research questions which this project will answer.

  1. What are non-oil exports?
  2. What are the types of exchange rate?
  3. What are the other factors that affect non-oil exports?
  4.   How does exchange rate affect non-oil exports in Nigerian economy?

 1.7. RESEARCH HYPOTHESES

a. Ho: Exchange rate policy has no impact on non-oil exports

    H1:  Exchange rate policy has impacts on non-oil exports

b. Ho: Real Gross Domestic Product, foreign capital inflow, interest rate and inflation have no impact on non-oil exports.

   H1: Real Gross Domestic Product, foreign capital inflow, interest rate and inflation have impact on non-oil exports.

1.8.   RESEARCH METHODOLOGY

The methodology that will be applied will be descriptive, analytic and investigatory and will include the use of data.

The econometric method of ordinary least square estimation was selected because of the advantage over others. Ordinary Least Square (OLS) estimates are used for the study based on time series analysis because of its BLUE property. In essence, the estimates of parameter arising from this technique will best linear unbiased relative to other estimation techniques.

1.9.    SOURCES OF DATA

The sources of data will be from the Central Bank of Nigeria annual report and statistical bulletin, Federal Office of Statistics annual report, relevant journals and text. Secondary data will be used ranging from 1999-2004.

1.10. OUTLINE OF CHAPTERS

Chapter1: Introduction

Chapter 2: Literature Review

 Chapter 3: Theoretical Framework and Model Specification

  Chapter 4: Empirical Analysis

Chapter 5: Findings, Recommendations and Conclusion

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