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OIL REVENUE AND THE PERFORMANCE OF THE REAL SECTOR OF THE NIGERIAN ECONOMY (1975-2007).
TABLE OF CONTENTS
Title page i
Table of Contents v
1.1 Introduction 1
1.2 statement of problem 2
1.3 objectives of study 6
1.4 research hypotheses 7
1.5 method of study 8
1.6 scope of the study 8
1.7 significance of study 9
1.8 organization of study 10
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.1 Introduction 12
2.2 Analysis of the oil sector of the Nigerian economy:
Performance and contribution 12
2.3 an overview of the real sector of the Nigerian economy 16
2.3.1 the Nigerian agricultural sector structure, contribution
and performance 20
2.3.2 problems of the agricultural sector 20
2.3.3 the way forward 24
2.4 industrial manufacturing sector of Nigeria economy 25
2.4.1 performance of the industrial sector of Nigerian economy 31
2.4.2 problems of the industrial sector 34
2.4.3 the way forward 37
2.5 the impact of crude oil revenue on the performance of
the real sector of the Nigeria economy manufacturing sector
2.5.1 The positive impact of crude oil revenue 38
2.5.2 the negative impact of oil revenue 43
CHAPTER THREE; RESEARCH METHODOLOGY
3.1 Introduction 46
3.2 nature and sources of data 46
3.3 model specification 46
3.3.1 variables in the model 47
3.4 method of data analysis 48
3.5 decision rule 50
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 data presentation 52
4.2 data analysis 52
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1 Summary 56
5.2 Recommendations for policy 56
5.3 For further studies 57
5.4 Conclusion 57
The purpose of this project was to examine the relationship between oil revenue and the performance of the real sector of the Nigerian economy. The manufacturing sub sector and agricultural sector were isolated as the real sector. Two multiple regression analysis were adopted to examine the aforementioned objectives. Data were sourced from CBN statistical bulletin of various years for the variables used in the model for the periods 1975-2007. Foreign direct investment, electricity consumption, loans and advances on agriculture and government expenditure on agriculture were added as check variables. The regression result showed that a positive relationship exists between oil revenue and the real sector although this is not significant in the short run. The t-test was statistically significant at 5% level of significant while the F-statistics were not statistically at 5% of significance. The R2 showed that the model is highly reliable. The findings revealed that although oil revenue has contributed positively to the performance of the real sector of the Nigerian economy, this contribution is not significant in the short run. This work concludes to curb the negative effects of crude oil revenue on the economy and further strengthen the positive effects.
The following discourse is an attempt to critically examine the performance of the real sector since the discovery of crude oil.
The real sector here is described as the driving force of an economy; it is the engine for growth and development. According to Gbosi (2008) “the real sector of Nigerian economy consists of all economic units that are involved in the production of goods and services. These economic units may include households, business firms, ministries and government parastatals. Many of these economic units produce tangible goods and services that are exchange and linked to the financial sector of the economy” some of the real sectors include industrial, construction, as well as manufacturing and agricultural sectors.
Nigeria with a population of about 140 million is African’s most population, resource rich country and the continent’s largest economy. Oil dominates the economy, accounting for about 80 percent of federal government revenue and 95 percent of foreign exchange earnings. Throughout the 1950s ad 1960’s and the early parts of 1970’s, agriculture was the core of economic activities in Nigeria. During this period the manufacturing and mining activities were at very low levels of development and the country’s participation in external trade was only possible because of the level of economic activities in agriculture.
In October 1960 when Nigerian became politically independent, agriculture was the dominant sector of the economy, contributing about 70% of the Gross Domestic Product (GDP), employing about the same percentage of the working population, and accounting for about 90% of foreign earnings and federal government revenue. The early period of post-independence up until-1970s saw a rapid growth of industrial capacity and output, as the contribution of the manufacturing sector to GDP rose from 4.8% to about 11%%. This pattern changed when oil suddenly became of strategic importance to the world economy.
The main exploration and exploitation of oil began in 1956 when oil was stuck in commercial quantity at oloibiri presently Bayelsa in Rivers State by Shell Petroleum Development Company (then Shell D’Aray). In February 1958, the first shipment of about 4900 barrels of crude oil by shell Petroleum Development Company was made, this success spurred other companies such as Mobil, Texaco, Agip, Elf, etc to engage in the exploration of oil in Nigeria. Following the successful beginning of February 1958 coupled with the high increase in world demand for crude oil, the oil sector grew to become the backbone of the Nigerian economy accounting for nearly 30 percent of GDP, oil exports totaled US $ 25billion (96 percent of total export) and per capita income exceeded US $ 1100 hence crude oil discovery was taken by the entire populace as a means to achieve rapid economic growth, but this was not the case as the economy began to experience many symptoms of the “Dutch Disease” (an economic concept that originated from Netherlands in the 1960’s which explains the seeming relationship between the exploitation of natural resource and a decline in the manufacturing sector).
Although the agricultural sector was still an important sector of the Nigerian economy until the mid-1960’s, the oil boom of the 1970’s transformed Nigerian economy drastically as agriculture which share in GDP was previously estimated to be 70%, reduced to about 26% while manufacturing share which was previously about 11% fell to 6%.
As a result of the increased prominence of the oil sector, attention was shifted from other real sectors of the Nigerian economy, and was focused on the oil sector and the flows of huge foreign exchange resource as well as oil revenue earnings to quicken the pace of economic development on one hand and achieve reasonable degree of economic independence on the other hand, but this was not the case as the economy began to experience economic growth without development. In the 1970’s, the price of crude oil further rose from us $2.4 per barrel to a high of us $21.3 per barrel the effect of this was an increased contribution of crude oil foreign exchange earnings to GDP (gross domestic product).
The oil sector by this time had become the highest contributor to the attainment of economic growth and this could be seen from the infrastructural constructions embarked upon by the government, these included construction of bridges, roads, universities, national theatres, stadiums, etc. another effect of the increased revenue derived from oil is evident in the transformation of the Nigerian economy and social structure from a hitherto agrarian and subsistence economy to a more advanced and monetized economy. The advancement and monetization of the Nigeria economy can be seen in the establishment of banking institutions, these institutions are responsible for the growth of the real sectors as the real sectors relies on the banking sector for working capital with which to purchase inputs locally and abroad.
However there was a glut in the international market in the periods 1980-1986 and this adversely affected the performance of the Nigerian economy, this fall in the price of oil was very detrimental to the functioning of the economy in general and has also affected the economy growth of Nigeria. As a result of the recent uncertainty in the international oil market, the economy has been experiencing mixed economic results. In 2002, the weakening international oil price and a subsequent revenue shortfall culminated in relatively low real GDP growth; fall in federal revenue by about 22.4 percent, deterioration in the fiscal account and pressure on external payments, resulting in a debt crisis.
Generous supply by monetary authorities to the government led to excess liquidity in the economy that contributed to rising inflation and demand pressure in the foreign exchange market during this period the performance of all other sectors of the economy except the industrial sector’s production improved. The decline in the industrial sectors production was attributed to the 7.8 percent decline the crude oil production. The upturn in the oil market in 2003 brought about the anticipated upswing in real GDP growth, which rose 5 percent. Also, a better fiscal position and lower external pressure, with Nigeria resuming regular payments of its external debt, were observed in 2003. In 2004, the economy’s performance reverted to lower levels, with GDP growth at 3.7 percent in 2004 and at 3.8 percent in 2005, as a result of low exports and insufficient investment.
The beneficiaries from the vast wealth coming from petroleum development did not care about using these proceeds to develop other sectors. Much of the wealth ended up in individual private accounts or conspicuous spending in the domestic economy. Nigeria is a nation endowed with a variety of resources ranging from natural to human and capital resources which if well harnessed, have a very great potential of elevating Nigeria from a struggling economy to one of the fastest developing countries in the world such as China, Indonesia etc. from above, it can then be seen then be seen that the oil sector has a mixed relationship with the performance of the real sector as an increase in the share of crude oil revenue could bring about an increase in investments and economic growth and development but at the same time it could lead to a the neglect of the other sectors of the economy. The discovery of crude oil in Nigeria could therefore be seen as a positive achievement on one hand, but on the other hand, its discovery has caused the Nigerian economy to be one of such economies where economic growth is experienced without sufficient substantial development to back it up.
This study is therefore important as it is expected to provide useful insight to the contribution of crude oil to the Nigerian economy since it began to be the dominant export item of the country. A regression analysis shall be carried out from the period 1990-2007.
1.2 STATEMENT OF PROBLEM
In the early 1960s through the mid 60’s agriculture was the mainstay of the Nigerian economy.
Since the oil boom of the 70s, Nigeria has depended solely on crude oil exploitation for revenue generation, crude oil became the main stay of Nigerian economy relegating other sectors of the economy to almost noting, agriculture and manufacturing total earning in 1960 fell from a high 74.6 percent to an insignificant 2.5 percent within the same periods. According to (CBN Brief 1989:20) “crude oil contribution to Nigeria’s GDP has been on the rise accounting for about US $40 per barrels as at January 1981 and growing further in subsequent years until recently when the global economic meltdown sent the economy into peril as its major revenue earner (crude oil) was not enough to generate sufficient revenue. Given the monocultural nature of the country’s economy, other sectors of the economy has also been affected. Hence the problem to be discussed here includes the actual benefit of the economy from the exportation of crude oil, the effect of this exportation on the GDP growth and its impact on growth in the real sector of the economy.
1.3 OBJECTIVES OF STUDY
The objectives of this study include:
1. Determining the contribution of crude oil revenue to the growth of the Nigerian economy.
2. Assessing the potential, contribution and performance of the real sector of the Nigerian economy to economic growth.
3. Determining the impact of crude oil revenue on the performance of the real sector of the Nigerian economy between 1975 and 2007, and
4. To discover and offer adequate recommendation on how to solve the problems stated above and suggest ways to enhance the performance of the real sector.
1.4 RESEARCH HYPOTHESES
In carrying out this research, the following null hypotheses were tested.
H01: There is no statistically significant relationship between oil revenue and the performance of the manufacturing sub-sector of the Nigerian economy.
H01: There is no statistically significant relationship between oil revenue and the performance of the agricultural sector of Nigerian economy.
1.5 METHOD OF STUDY
This study was based on research with the application of descriptive, analytical and statistical methods. Secondary data which includes the extraction of relevant information from relevant textbooks, journals, magazines, newspaper, seminar work and former projects were used. Materials gotten from the internet was also a major component in this study. The various data were collected from annual CBN reports and statement of account. Regression of crude oil revenue on the manufacturing production and regression of crude oil revenue on agricultural production were carried out to determine the goodness of fit. Student t-test was then applied to test the significance of the estimate in order to test the stated hypotheses.
1.6 SCOPE OF THE STUDY
The scope of this study focuses on the growth and performance of the real sectors of the Nigerian economy since the discovery of crude oil and this study covers the period of 1975-2007. This period is adopted so as to cover the various periods of fluctuations of oil revenue in the economy, the period also enables us to examine the real sector before and after the oil boom and help we review how the policies implemented within this period affected the performance of the economy in general. The greatest limitation of this study is time constraint other factors that limited this study includes poor financing, and difficulty in data collection.
1.7 SIGNIFICANCE OF STUDY
This study will contribute greatly towards the rejuvenation of the real sector which has been neglected for a very long time (about 3 decades).
Furthermore, government could use this study for developmental purposes by embarking on some suggested policies.
It will also enable policy makers formulate and implement well-articulated polices that will help revive the real sector of the economy and help bring Nigeria back to her original state.
This study will in no little way add to the stock of knowledge already available and other researchers interested in carrying out similar research could use this study as a form of secondary research material.
Finally, this study will help to brig Nigeria back to its former diverse state before the emergence of crude oil.
1.8 ORGANIZATION OF STUDY
This work comprises of five chapters;
Chapter one presents a brief introduction comprising of background of study, statement of problems, objective of study, research hypothesis, method of study, limitation and scope of study and finally organization of the study.
Chapter two incorporates the theoretical framework also related literature is also reviewed.
Chapter three involves the research methodology which contains data source, the model specification as well as data analysis technique where the tool of analysis to be used was disclosed.
Chapter four deals with the presentation an analysis of data, there the hypotheses were tested and the result interpreted. The level of relationship between oil revenue and performance in the real sector was also calculated and interpreted.
Finally chapter five gives the summary, recommendation and conclusion of the research work.