THE IMPACT OF OIL AND NON OIL REVENUE ON THE ECONOMY OF NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

For development and growth of any society, the provision of basic infrastructure is quite necessary. This perhaps explains why the government shows great concern for a medium through which funds can be made available to achieve their set goals for the society (Fagbemi and Noah, 2010). Government needsmoney to be able to execute its social obligations to the public and these social obligations include but not limited to the provision of infrastructure and social services.Exportation is required by any economy to enhance revenue and usher in economic growth and development. Itis therefore crucial for economic progress and this has informed the idea of export-led growth. Export is acatalyst necessary for the overall development of an economy (Abou-Strait, 2005). It was also noted that foreigntrade creates an avenue for foreign capital to flow into a country (Ricardo, 1817). This increases the earnings ofthe country thereby creating an avenue for growth by raising the national income of the country. It alsoincreases the level of employment in the economy as a higher demand for exports will require more productionwhich will in turn lead to the employment of more people. Exportation by a country also helps attain afavourable balance of trade and balance of payment position for the exporting country provided its exportsreasonably exceed its imports.

In a country like Nigeria where the level of investment is low, foreign capital is very much needed in orderto accelerate the creeping rate of economic growth. The Nigerian economy is one that depends largely onforeign trade for growth and is also one which depends majorly on one export commodity at a time. Forinstance, at independence, the major export commodity was cocoa and the leading sector in the economy wasthe agricultural sector but today, the major export commodity is crude oil and the leading sector is now thepetroleum sector. This has not allowed for balanced growth in the economy as some sectors have been allowedto 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 tofocus on the petroleum sector while ignoring the other sectors as well as the potential revenue they cangenerate. This research aims to determine if non-oil exports contribute significantly to the Gross DomesticProduct (GDP) of the economy and to what extent they contribute. It also aims to determine the factorsresponsible for the current performance of the non-oil sector.

1.2     STATEMENT OF THE PROBLEM

Owing to both external and internal factors, the growth performance of the Nigeria economy has been less than satisfactorily during the past three decades.Nigeria is yet to attain the ranks of a developed economy due to lack of structural change, among other factors.Also, it was observed that a factor crucial to this lack of economic progress is the lack of economic diversitywhich has caused the economy to rely heavily on crude oil for revenues and as the major export commodity inthe economy (Osuntogun et al, 1997). Prior to the 1970s, Nigeria’s exports were predominantly non-oilcommodities with agricultural commodities accounting for the oil share. However, in the 1970s, when the priceof crude oil in the international market sky rocketed, the share of non-oil exports began falling and hasremained low ever since.

This is majorly due to the money-spinning nature of oil exports which makes it moreprofitable to export oil and less profitable to export non-oil commodities. This has cause a rather heavydependence on the oil sector and the proceeds from the exportation of crude oil. This heavy reliance subjectsthe country to difficulties when the price of crude oil, the major export commodity, is low in the internationalmarket. In light of this, the government adopted various strategies to boost non-oil exports and stabilize theeconomy. In spite of these efforts, the performance and contribution of the non-oil exports sector has remainedvery low. The sector has continued to perform below its full potential. This research is therefore carried out todetermine to what extent the diversification of the economy will help enhance the economic progress of theeconomy, to appraise the past efforts at diversification and to discover how thecurrent performance of thenon-oil sectors can be improved.

1.3     OBJECTIVES OF THE STUDY

1.       To examine the impact of oil and non-oil revenue on economic growth of Nigeria.

2.       To determine whether non-oil exports contribute to Nigeria’s Gross Domestic Product.

3.       To find out whether oil export generate revenue in Nigerian economy.

1.4     RESEARCH QUESTIONS

1.       What is the impactof oil and non-oil revenue in economic growth of Nigeria?

2.       Does non-oil exports contribute to Nigeria’s Gross Domestic Product?

3.       Does oil export generate revenue in Nigerian economy?

1.5     RESEARCH HYPOTHESES

1.       H0:There is no significant relationship between the impact of oil and non-oil revenue and economic growth of Nigeria.

          H1:There is a significant relationship between the impact of oil and non-oil revenue in economic growth of Nigeria.

2.       H0: Non-oil exports do not contribute to Nigeria’s Gross Domestic Product.

          H1: Non-oil exports do contribute to Nigeria’s Gross Domestic Product.

1.6     SIGNIFICANCE OF THE STUDY

Despite the various allocations and policies to the development of the oil and 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 impact of oil and non-oil revenue on the Nigeria. The interest of this study is to examine whether the exchange policy in Nigeria has an impact on non-oil exports.

1.7     SCOPE OF THE STUDY

          The study will cover a period 6 years (1999-2005). This is to achieve a comprehensive analysis of the impact of oil and non-oil revenue on the Nigerian economy. This period witnessed various economic policies by the government such as the economic stabilization act and the Structural Adjustment Programme (SAP) which has so much impact on the performance of this sector.

1.8     LIMITATION OF THE STUDY

As it is expected with written work of this kind, the completion of this project was not possible without limitation or problems encounter in the course of writing this project which includes difficulties in obtaining relevant and up-to-date, data due to poor nature of Nigeria’s data collection and storage facilities. Also, the dwindling state of the economy has made it difficult for people to save and thereby little capital accumulation for investment.

Finally, the Nigerian government, oil sector and non-oil sector will used the recommendations of this research to provide infrastructure, such as public utilities, good road and services etc to Nigerian.

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     DEFINITION OF TERMS

Gross Domestic Product implies the market value of allofficially recognized final goods and services producedwithin a country in a given period. GDP per capita is oftenconsidered as an indicator of a country’s standard ofliving. GDP is related to national account, a subject inmacro -economics. It is customarily reported on anannual basis. It is defined to include all final goods andservices, that is, those that are produced by economicsresources located in that nation regardless of theirownership and are not resold in form.

Inflation is defined as a generalized increase in the levelof price sustained over a long period in an economy(lipsey1995). It is a rise in the general level of prices ofgoods and services in an economy over a period of time. Exchange rate: An exchange rate (also known asforeign exchange rate) between two currencies is the rateat which one currency will be exchanged for another. It isregarded as the value of one country’s currency in termsof another currency. Exchange rates are determined inthe foreign exchange market, which is open to a widerange of different types of buyers and sellers wherecurrency trading is continuous. Non-oil export: These include the exportation of thenon-oil produces among which are agricultural, industrialand manufacturing outputs. Non-oil export index: This is the fraction of the totalexport of goods and services that are produced within theeconomy that are not directly related to the oil sector ofthe economy. The non-oil products exports are unlimitedas they include cash crops, food crops, manufacturing, entertainment, tourism etc. the value of the non-oil export index shall be used for measuring the non-oil export.