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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
Certification ii
Dedication iii
Acknowledgement iv
Table of Contents v
Abstract vi
CHAPTER
ONE
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
analysis 38
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
References
Appendix
ABSTRACT
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.
CHAPTER ONE
1.1 INTRODUCTION
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.
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