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CHAPTERONE

INTRODUCTION

1.1 BACKGROUNDOFTHESTUDY

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 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

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

(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

(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

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

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