Effect of Non-Oil Sector on the Growth of Nigerian Economy (1990-2021)

Effect of Non-Oil Sector on the Growth of Nigerian Economy (1990-2021)

Ezu, Gideon Kasie & Osakwe, Charity Ifunanya
Department of Banking and Finance, Nnamdi Azikiwe University, Awka

Received: 25 January 2023; Revised: 12 February 2023; Accepted: 15 February 2023; Published: 30 March 2023

ABSTRACT

This research work assessed the effect of non-oil sector on the growth of Nigerian economy. The major reason for this study was to proffer solution to question of what else need to be done in order to diversify the economy and develop the non-oil sector to realize its potentials in Nigeria. The specific objectives are; to evaluate the relationship between manufacturing sector output on Nigerian economy and determine the relationship between agricultural output on Nigerian economy. Ex-post facto research design was deemed appropriate for the study. Data for this study were sourced from secondary means especially CBN statistical bulletin. Manufacturing sector output, agricultural sector output, power sector output and total bank credit were used to proxy non-oil sector, while GDP was used to proxy economic growth. Hypotheses were tested using regression analysis (OLS), which was adopted due to its simplicity and unbiasness. The regression was tested using E-view software version 8.0.The result of the study showed manufacturing sector and agricultural sector have significantly contributed to economic growth in Nigeria, while power sector and bank credit have not contributed significantly to economic growth in the country. The study therefore recommends that budget on power sector should be increased and its usage properly monitored to avoid embezzlement of the fund.

Keywords: economic growth, fluctuation, manufacturing; hybrid, inflation,

INTRODUCTION

The  importance  of  export  to  a  nation’s  economic  growth  and  development  cannot  be  overemphasized.  Export  is  a  catalyst  necessary  for  the  overall  growth and development  of  an  economy  (Abo, 2015). Furthermore, a well develop export sector will provide  employment opportunity for the people with  the  attendant  reduction  in  social  costs  of  unemployment.  Earnings from export  will  reduce  the strains on the balance of payment position and even improve it. A rewarding export drive can turn a hitherto developing  economy  into  a  prosperous  economy.  Export help in increasing the level  of aggregate  economic activities through its  multipliers effects on the level of national income (Usman & Salami, 2008). Income earned through exporting will help in increasing the level of demand within the economy.

An assessment of the trend and patterns of activities in the  non-oil  sector  of  Nigeria  revealed  that  despite  the various  policies,  strategies  and  reform  programmes,the contributions of the sub-sectors of this sector have been dismal,  disheartening  and  below  its  full  potential. Agriculture that serves as mainstay is  still characterized by low productivity. This stems from small farm size with crude and outdated farm implements, lacking access to credit  facilities  and  inputs  by farmers  owing  to  inadequacies  of  their  provision  among others (Iwu, 2013).

Statement of the Problem

Although  various  factors  have  been  adduced  to  Nigeria’s  poor  economic  performance,  the  major problem  has  been  the  economy’s  continued  excessive  reliance  on  the  fortunes  from  the  oil  market without any meaningful economic diversification (Osun, 2007).  However, the production of this export crop in Nigeria has suffered a reduction in recent years owing to a number of factors  (Oluyole& Sanusi, 2009). Villalobos (2009) identified some of these factors  as: low yield, inconsistent production pattern, disease incidence, pest attack and use  of simple farm tools. The dilemma facing the non-oil export sector is not only that it is being  overshadowed by the oil export trade, but the declining non-oil exports and loss of market share in the non-oil trade globally is  a  clear  evidence  of  how  the  non-oil  sector  competitiveness  of  the  Nigerian  economy  has  been consistently eroded over the last three decades.

A  robust  and  strong  export  trade  is  indicative  of  how  competitive  the  commodities  and services are, and how large the scale of the industrial base of an economy is. This is reflected by the comparative advantage possessed by the country. Also, exports of commodities  are possible  when domestic demand for such are satisfied and surpluses exist  in commercial quantities. Thus, the non-oil export  sector serves as the  hub  for exporting  these surpluses produces by the non-oil base of the country’s economy.The  need  to  correct  the  existing  structural  distortions  and  put  the  economy  on  the  path  of sustainable growth  is therefore compelling.

Objectives of the Study

The broad objective of this study is to examine the impact of non-oil sector on the Nigerian economic growth. However, the specific objectives include:

1. To evaluate the relationship between manufacturing sector output and growth of Nigerian economy.
2. To determine the relationship between agricultural output and growth of Nigerian economy.
3. To examine the relationship between total deposit money banks credit and growth of Nigerian economy.

Research Hypotheses

The following research hypotheses are stated in its null form.

H0₁: There is no significant relationship between manufacturing sector output and Nigerian economic growth.

H0₂: There is no significant relationship between agricultural output and Nigerian economic growth.

H0₃: There is no significant relationship between deposit money bank credit and Nigerian economic growth.

REVIEW OF RELATED LITERATURE

Conceptual Review

Prior to the phenomena emergence of the oil sector, agriculture is one of the oldest occupations in Nigeria and has been the main stay of the Nigerian economy contributing 80% of the export earnings and 75% of the Gross Domestic Product (GDP). The  Nigerian economy  has  not  recovered  from  the  resultant  disequilibria  in  both  domestic  and  external  sectors,  this  has therefore brought about the need for adjustment in Nigeria  to diversify and restructure the productive base of the economy in order to reduce its dependence on oil export (Iwu, 2012).

Furthermore,  a  well -developed  sector  will  provide  employment  opportunity  for  the  people  with  the attendant reduction in social costs of unemployment. Earnings from export reduce the strains on the balance of payment position and even improve it. A rewarding export drive can turn hitherto under developed economy into a  prosperous  economy.  Export  help  in  increasing  the  level  of  aggregate  economic  activities  through  its multipliers effects on the level of natural income. Income earned through exporting will help in increasing the level of demand within the economy. This  monoculture  situation  brought  untold  hardship  on  the  people  of  the country. For instance, from 1970 to date oil exporting has constituted on the average of 90% of the total foreign exchange earnings (Ayodele, 2015).

In the attempt to diversity the productive base of the Nigerian economy, various past administrations have  introduced  measures  and  established  special  institutions  such as  the  Nigerian  Export  Promotion  Council (NEPC). Despite the  fact that Nigerians non-oil export produces are now cheaper for foreign buyers and the amount being recorded in this local currency by exporters for unit of export is now higher than before, the problem is that available statistical data shows a  mere marginal increase in non-oil  sector  contribution  to  the  total  export  between  1987  and  1993.  Its  percentage  contribution  increased from 5.8 percent in 1986 to 8.6 percent in 1988 but declined to 1.9 percent in 1992 (CBN, 2014).

Relationship between Agricultural sector and economic growth

Prior to the advent of oil, the Nigeria economic mainstay was Agriculture. It accounts for more than seventy percent of our Gross Domestic Product. There were stiff competitions amongst different regions. There were groundnut pyramids in the North, Cocoa in the West and Palm oil in the East. Employment rate was relatively high due to availability of jobs for framers, fishermen, hunters etc. During that period, Nigeria was at par economically with Brazil, China, south Korea, Singapore etc (Omoluwa, 2016). Nigeria is rated as the largest nation on the African continent, with a vast geographical landmass of 923,768 km2. Nigeria has an estimated population of over 180 million inhabitants (NPC, 2011 ). The country adjoined across the tropics of Guinea Gulf on the western Coast of Africa and also the Republic of Benin, Chad, and Cameroon in the east. Nigeria is endowed with a variety of vegetation, dynamic topography, and viable agro-climatological conditions.

 Nigeria is also one of the few in the continent blessed with good arable farmland for agricultural activities. Among the Nigerian industries, service accounts for 32% of the GDP, manufacturing 11% and agriculture 30%. Therefore, it is obvious that the agricultural sector plays a significant role in the economic growth and development of the Nigerian economy (Kamil, 2017).

Agriculture deals with the cultivation of land for crop production and rearing of animals for the use of man and also for the feed of animals (livestock). Agriculture has several other sub-sectors like forestry, fishery, processing and marketing of the agricultural products. The agricultural sector provides job opportunities and raw materials for many agro-allied industries.

Relationship Between Banking sector and economic Growth

Fadare  (2014)  empirically  identifies  the  effect  of  banking  sector  reforms  on  economic  growth  in  Nigeria  by using the data 1999  –  2013. Variables used for the study are interest rate  margins, parallel market premiums, total banking sector credit to the private sector, inflation rate, size of banking sector capital and cash reserve ratios. Results indicate that the relationship between  economic growth and other exogenous variables of interest rate margins, parallel market premiums, total banking sector credit to the private sector,  inflation  rate  and  cash  reserve  ratio  show that they are positive  and  significant.  Hence  it  is  suggested  that criteria which encourage banking sectors to lend to both manufacturing sectors and Agricultural sectors at a cheaper rate should be encouraged and inflation should be reduced to its bearest minimum. Furthermore,  financial policies should consider reform and  enforce  the  lending  to infant  industries  with  proper  regulatory  policies  and  reduce stringent measures that require excessive  collaterals.

Theoretical Framework

This study is hinged on Endogenous growth theory. The linkage  between  oil,  non-oil  export  and  economic growth  has  occupied  a  central  position  in  the development literature. The focus is on how some of the components of non-oil export  affect  economic  growth  in Nigeria. The application of the endogenous growth theory has  only  emerged  properly  not  too  long  ago  from  the work  of  Moosa  (2012),  Devarajan  (2016)  even though  one  of  the  pioneering  authors  in  its  original contribution  is  the  work  of  Barro  (2010). Barro  made  use  of  the endogenous  growth  model  to  find  a  linkage  between public revenues / spending and economic growth which is to be linked with the relationship that exist between non-oil export and economic growth in Nigeria in this research work. Tsoukis and Miller (2009) also built on the work of Barro. All their studies centered on endogenous growth theory. In  examining  this  on  Nigeria’s  data,  the  study  use  the neoclassical  growth  model,  otherwise  referred  to  as  the growth  accounting  framework,  to  explain  the  source  of growth  in  an  economy.  The  national  accounts  form  the basis of the economies to be analyzed and it is used  in conjunction with the aggregate production function. This approach has got a wide application  in  econometric analysis (for example, Akinlo & Odusola, 2013; Levine &Zervos,  2006;  Obstfeld,  2014).Using  a  production function approach, it states that the growth rate of output (GDP) is principally determined by the following factors: The  rate  of  growth  of  gross  labour  and/or  the  rate  of growth  of  its  quality,  multiplied  by  the  labour  income share; the rate of growth of gross capital input and/or the rate of growth of its quality, multiplied by  the capital income  share;  and  Change  in  technology  or  total factor productivity (TFP).

Empirical Review

Ogbonna and Ebimobowei (2012) examined the impact of non-oil revenue and the Nigerian economy during  the  period  of  1970-2009.  They  used  Pearson  correlation  to  analyze  primary  and  secondary  and descriptive statistics to explain evidence and events. The results of the analysis show that non-oil  revenue positively affected  the  gross  domestic  product  and  per  capita  income  of  Nigeria.  However, the  relationship  between petroleum  revenue  and  inflation  rate  was  negative.  They suggested  proper  utilization  and  management  of  non-oil revenue to achieve long-run growth and development of the country.

Torben  and  Mideksa  (2012) investigated  the  economic  impact  of  non-oil  resource  endowment  using quantitative comparative method and focusing on the Norwegian economy. The study results indicated that on average, about 20% of the growth in GDP per capita since 1974 has been due to the petroleum endowment.

From  an  economic  point  of  view,  Baumeister  and  Peerman  (2009) explained  that  oil  price  shocks results from low price elasticity of demand and supply. The result of this is that large price variation is required to clear the market, that is, to restore the market to equilibrium. Hamilton (2008) agreed that crude oil price elasticity is very low especially in the short run. This is due to technology lock -up; that is,  it  takes  some  time  before  energy-consuming  appliances/capital  stocks  are  replaced  with  more  energy efficient substitutes. However, substitution takes place in the long run and price elasticity is thus much larger.

METHODOLOGY

This study is based on ex-post facto research design in order to examine the impact of non-oil sector on the economic growth in Nigeria over a twenty-six year period from 1990 to 2021. This is to ensure enough data points for the econometric analysis in order to cater for the loss of degree of freedom.

Secondary data were collected for the period of 1990 to 2021 from official reports. All the data were on an annual basis as provided in the various official reports and publications of the Central bank of Nigeria (CBN) and National Bureau of statistics. The data for the study include; manufacturing sector output, agricultural sector output, return on equity (which serve as proxy for bank profitability) and gross domestic product was used to proxy economic growth.

Model Specification and Validity

This research work adapted the model of Abogan, Akinola and Baruwa (2016). The adapted model is expressed as below:

RGDP=  f  (OILR,  NONX,  EXCR, INF)………………………………………………………. (1)

However, given that this research has four different objectives, the researcher therefore slightly modified the model by breaking down the variables to show three different relationships which exist between the dependent and independent variables. The new modified model is shown as below:

These functional relationships were further transformed into econometric models as follows:

Where:

 = Deposit money credit

AGRS = Agricultural sector output

MANQ = Manufacturing sector output

PSQ = Power sector output

 = Error Term

 = Slope of the regression line

Method of Data Presentation and Analysis

The data for this research were presented and analysed based on the research questions and hypotheses earlier established for the study. The method of analysis used in this study was the Ordinary Least Square (OLS) method. It was chosen because the alternative econometric techniques such as Two Stage Least Squares (2SLS) give limited information. The computer software application E-Views 8.0 was used for the analysis.

Test of Hypotheses

Hypothesis I

H0₁: There is no significant relationship between manufacturing sector output and Nigerian economic growth.

HI₁: There is a significant relationship between manufacturing sector output and Nigerian economic growth.

The result from Appendix II showed a standard error co-efficient which is within acceptable limit. The R-squared showed that the regression line is not well fitted. The Adjusted R-squared showed that only 38% variation in the dependent variable is caused by the independent variable. the Durbin-Watson coefficient is above the stipulated benchmark, which therefore depict no autocorrelation problem.

Decision

The F-statistics value of 0.000360 is less than the significance value of 0.05, hence we reject the null hypothesis and conclude that there is a significant relationship between manufacturing sector output and Nigerian economic growth

Hypothesis II

H0₂: There is no significant relationship between agricultural output and Nigerian economic growth.

HI₂: There is a significant relationship between agricultural output and Nigerian economic growth.

The result from Appendix II showed a standard error co-efficient which is within acceptable limit. The R-squared showed that the regression line is not well fitted. The Adjusted R-squared showed that only 12% variation in the dependent variable is caused by the independent variable. The Durbin-Watson coefficient is above the stipulated benchmark, which therefore depict no autocorrelation problem.

Decision

The F-statistics value of 0.038709is less than the significance value of 0.05, hence we reject the null hypothesis and conclude that there is a significant relationship between agricultural output and Nigerian economic growth

Hypothesis III

H0₃: There is no significant relationship between deposit money bank credit and Nigerian economic growth.

HI₃: There is a significant relationship between deposit money bank credit and Nigerian economic growth.

Source: E-view result

The result from Appendix II showed a standard error co-efficient which is within acceptable limit. The R-squared showed that the regression line is not well fitted. The Adjusted R-squared showed that only 2% variation in the dependent variable is caused by the independent variable. The Durbin-Watson coefficient is above the stipulated benchmark, which therefore depict no autocorrelation problem.

Decision

The F-statistics value of 0.221931is greater than the significance value of 0.05, hence we accept the null hypothesis and conclude that there is no significant relationship between deposit money bank credit and Nigerian economic growth

DISCUSSION OF FINDINGS

The result showed that manufacturing sector has been contributing significantly to increase in GDP which was used to proxy economic growth although the magnitude of contribution to general economic growth is still very minimal considering the potentials of the sector in the Nigerian economy. This result conforms with the pre expectation of this study, which stipulated a positive significant relationship between the variables.

The result showed that banking sector which is being targeted by the policy makers as a means of ensuring economic growth in the country have not actually served its purpose, as it has not significantly contributed to the growth of the economy. This is because the banks prefer giving credits to the oil sector, rather than other activity sectors. This finding conforms with the findings of Aragu (2012) and Iwu (2009).

CONCLUSION

The  Nigerian  economy  is  one  of  the  least competitive globally and even in Africa because of inappropriate policies and an unfavourable business environment.  On  ease of  doing  business indicators,  Nigeria  performs  poorly  when compared  with  most  other  economies  including low-income  economies  in  Africa. Only a  small  proportion  of producers  have  been  able  to develop  into  sizeable businesses  are  able  to  compete  internationally,  as shown by the long-term decline in non-oil exports. In  agriculture,  yields  have  been  falling and, in manufacturing, there is considerable unused capacity. It is instructive that, over  the  decades,  countries  such  as  Indonesia  had both  increases  in  capital  per  worker  as  well  as increases  in  total factor productivity (TFP),  while  Nigeria  had  declines  in TFP and negligible increases in capital per worker. This study thereby conclude that non-oil sector of the Nigerian economy has great potential of making the country one of the strongest economies in the world, due to her abundance of Natural resources, but due to over-dependency in the oil sector as the major source of revenue, the no-oil sector have not significantly been contributing to the growth of the economy.

RECOMMENDATIONS

Based on the various findings of this study, the researchers came up with the following recommendations;

1. Basic infrastructures such as good road, power and water should be provided for manufacturing firms, as this will help to lower their cost of production and make them stronger to be able to expand and utilize their capacity.
2. More mechanized farming equipment should be provided and effectively supervised to ensure that they get to the commercial farmers, to ensure that these equipment are not high jacked or given to the wrong people. This will help place Nigeria as one of the most exporting countries in the world, given the abundance of natural resources at her disposal.
3. Incentives should be given banks that extend huge amount of credits to the activity sectors of the economy, as a way of encouraging increase in bank credit to the vital sectors of the economy and breaking the chain of monopoly of the oil sector as the most attractive sector for investment in Nigeria.

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APPENDIX I

Table 4.1: Data for determining the effect of non-oil revenue on the growth of Nigerian economy (1990-2021).

Source: Central bank of Nigerian annual reports and Central bank Bullion for various years

APPENDIX II

Hypothesis I (E-View testing)

Hypothesis II (E-view testing)

Hypothesis III (E-view testing)