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Potentials for diversifying Nigeria's non-oil exports to non-traditional markets

  • C.C. Edordu
  • B. O. Oramah
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    Prior to the 1970s, agricultural exports were Nigeria’s main sources of foreign exchange. During this period, Nigeria was a major exporter of cocoa, cotton, palm oil, palm kernel, groundnuts and rubber, and in the 1950s and 1960s, 3% – 4% annual output growth rates for agricultural and food crops were achieved. Government revenues also depended heavily on taxes on those exports. Thus, during the period, the current account and fiscal balances depended on the agricultural sector. However, between 1970 and 1974, agricultural exports as a percentage of total exports declined from about 43% to slightly over 7%. From the mid 1970s, the average annual growth rate of agricultural exports declined by 17%. The major cause of this development was the oil price shocks of 1973 – 1974 and 1979, which resulted in large receipts of foreign exchange by Nigeria and the neglect of agriculture. The oil boom afflicted the Nigerian economy with the so-called ‘’Dutch disease’’. The Dutch disease phenomenon used to analyse the effects of commodity booms are traditionally evaluated in terms of “spending” and “resource movement” effects (Harberger, 1983). Following Pinto (1987), we examine the Nigerian case by abstracting from the resource movement effect since the oil sector can be considered to be a separate enclave with its own capital, labour and technology; that is, it does not compete with the non-oil sector for resources. According to Pinto (1987), the “spending effect” operates as follows: in the non-oil economy, both tradeables and non-tradeables are produced (tradeables are used here to refer to tradeables other than oil). Let r denote the relative price of tradeables to nontradeables (the real exchange rate). Assuming tradeables and non-tradeables are normal goods, the demand for both increases following a rise in real income associated with the oil boom. Equilibrium can be described solely in terms of market clearing for non-traded goods, for which domestic demand must equal domestic supply. The excess demand for non-traded goods that arises following the boom can be eliminated by a rise in their relative price, that is, a fall in r (real exchange rate appreciation). This draws resources out of the tradeables sector into the non-tradeables sector, so that non-tradeables output rises and tradeables output falls. The consequent decline in the tradeables sector is what is called Dutch disease. It is accompanied by real appreciation, that is, a fall in r. As pointed out by Pinto (1987), there is, strictly speaking, no “disease” since the boom enables the economy to attain a higher level of consumption and welfare. Real appreciation is necessary for an efficient adjustment to the boom, since traded goods can be imported. The consequence of the phenomenon described above was that owing to the reduced competitiveness of agriculture, Nigeria began to import some of those agricultural products it formerly exported and other food crops it had been self-sufficient in. For example, between 1970 and 1982, Nigeria lost over 96.6% of her agricultural exports in nominal terms (Oyejide, 1986). Domestic food production also declined substantially, causing the food import bill to attain a high of about US$4 billion in 1982. The ballooning imports were financed with oil revenues, which ensured current account positive balances in 1979 and 1980.However, beginning in 1982, the oil market plunged, reducing significantly Nigeria’s ability to fiance such imports, and persistent current account deficits began to emerge. Unpaid trade bills also began to accumulate and at a point, foreign suppliers began to dishonour letters of credit originating from Nigeria. By 1986, the situation had become a crisis, dramatizing the ineffectiveness of the prevailing external sector policy of import-substitution industrialization. This strategy, which was essentially inward looking, conferred substantial protection on importcompeting manufacturing activities by imposing relatively high import duties on finished products and very low or no import duties on industrial raw materials and intermediate capital inputs. The policy also invariably taxed the exportable (agricultural) sector of the economy so that by the time the oil market crashed, many manufacturing concerns could no longer operate due to lack of foreign exchange to import raw materials. One consequence of the failure of this policy regime to cope with the negative oil price shock was its substitution with an outward looking external policy stance under structural adjustment programme (SAP) introduced in 1986. Under SAP, emphasis was on diversifying Nigeria’s export base away from oil and increasing non-oil foreign exchange earnings. To achieve the objectives of the programme, the government sequentially put in place a number of policy reforms and incentives to encourage the production and export of non-oil tradeable as well as broadening Nigeria’s export market. Nominal naira exchange rate devaluation, strict fiscal discipline, controlled monetary expansion and a more liberal trade policy were initially introduced to ensure a depreciation of the real exchange rate facing exporters. These were followed by the introduction of export incentives comprising a duty draw-back scheme explicit export bonuses, currency retention scheme and other direct fiscal incentives (such as the exemption of export transactions from stamp duties). Having ensured that appropriate macroeconomic and sectoral incentives had been instituted, the government established the Nigerian Export- Import Bank (NEXIM) in 1991 to provide necessary financial and risk management support to the export sector.

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    Paper provided by African Economic Research Consortium in its series Research Papers with number RP_068.

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    Length: 52 pages
    Date of creation: Nov 1997
    Date of revision:
    Handle: RePEc:aer:rpaper:rp_068
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