ABSTRACT
This paper analyses oil prics
stability and industrial sector output in Nigeria. Results show that the impact
of oil price on industrial sector
output is asymmetric in nature; with the impact of oil price decrease
significantly greater than oil price increase. Also, from the variance
decompositions, oil price changes
play a significant role in determining the variance decompositions of output
and prices. The implication is that any policy that is aimed at moving the
economy forward must focus on price stability in which changes in oil price
play a significant role.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The
need to promote a virile industrial sector has continued to be a major concern
of most development economies. The reason for this awakened interest in
industrialization can be traced to the fact that a significant work to be the
level of industrialization offers the place in a growing economy.
Also, a significant increase industrial
output offers prospect of growing availability of manufactured products, increase
employment, greater efficiency, improved balance of payments and higher
technological innovation “CBN 2002”
However, despite efforts by past
administrations in Nigeria at promoting trade and industrial development, and
its effects of macroeconomic variables on the industrial sector shows that
efforts by policy makers have not effectively satisfied the desired industrial
development which should increase national income per capital income, prove
foreign exchange earnings, secure full employment and expand the market for
local law materials. Industrial sector performance in Nigeria has been rather
poor since independent. Prior to 1970, there was a real total reliance on
agricultural production while the past 1970 era shower a total shift to
exclusive reliance on petroleum.
In addition to the monoculture structure
of the production bases, there was the problem of oil price instability, which
to a large extent has advancely affected industrial sector productivity in
Nigeria since 1973,substantial fluctuations in the international price of crude
oil have had for reasing implication for the country’s macroeconomic policies
“Olapoenia, 1986” Okigbo, 1973, Iwayemi, 1995.
The price of crude petroleum rose from
the first time in Nigeria in 1973 from $3 to $11.6 per barriers in response to
the uncertainties created by the Grab – Israel war, which erupted in October
1973. The resultant rise in the price of crude petroleum generated a total of
N9.2 billion in revenue for Nigeria in 1994 as the country exported 108 million
tons of crude oil that year “mandal, 1977. The upsurge in crude oil and price
and the resultant increase in the revenue for the country created opportunity
for industrial development and modernization of the Nigeria economy.
Although the oil price increase in 1943
was short lived, between 1979 and 1980, the price of oil rose in the
international market between 135 and A$40 a barrel from et $14 level recorded
in the early part of 1978. the rise in crude oil price again was only mainly to
the Iraninan revolution. In responses Nigeria produced 84.2.5 million barrel in
1979 and realized N9305.6 million in the prices “The Africa Guardian, 1986,
First Bank Business Report,1990” with the increased revenue derivable from oil
sector the Nigeria economy became mono-cultural as emphasis shifted from the
agriculture sector to the oil sector. Thus is 1980 the nation experienced a
severe economic crisis which is receasble to the over dependence a severer
economic crises which is traceable to the overdependence on the oil sector “Otashere, 1988” The oil glut era of the
1980s created a serious problem for the industrial sector, as there was a
decline in industrial output and the level of industrial employment.
Consequent upon the freezing, the
country passed through a period of structural adjustment programmed in 198.
This was accompanied by austerity measure of enormous proportion. By 1990 a
sign of relief was not welcome with the price of oil in the international
market seoard as a result of the guif war between Iraq and Kawat. as a result
of the war, Nigeria earning from crude oil export reached N106.62 million as
against the targeted N38.62 million.
These translate into windfall of N68
billion since the exchange rate was stabilized atN9 to 11 between September and
December 1990. The revenue gained from the glut crises was however not
translated to productive investment and increased manufacture productivity.
In the late 1990’s and early 2000 crude
oil maintained at position as the highest contributor to the federation
account. This was shown in the year 2003 annual budget. Out of estimated proved
revenue of N1,819.0214 billion, a total of N120. 1789 billion representing
61.58% is expected to be generated from oil. The projection is predicted on a
crude oil price at $21 per barrel: the answer to this question rest on the
pattern of crude oil price volatility
1.2 STATEMENT
OF THE PROBLEM
Nigeria
like many other developing nations has seen several decades of political
instability and dictatorship the country in addition to continuous oil price
instability is still faced with a lot of political tension, there is tension
between the tension between different ethnic groups especially current ethnic
crises in the Nigeria Delta which is threatening the down stream oil sector. As
the 7th largest producer,
Nigeria external liquidity position has been strengthened by the high oil
price.
The country produced 2 million barrel of
oil pending and high oil price has seen to it that it’s current account changed
from a deficit of 9% GDP in 1998 to a surplus currently.
Export growth has seen spectacular, but
Nigeria remains too dependent on oil, her position can weaken quite significant
and quite rapidly if the oil price drops too far below $20 per barrel.
The highest oil price in the early 1970
led to massive industrialization of the Nigeria economy. However, hopes that
Nigeria will regain the strong growth momentum that characterized its
performance in 1970’s are unlikely to be realized in the near terms growth in
the 70’s was driven by rapid expanding oil production that quadingpling of the
declare price of oil and the massive public sector investment in the
infrastructure and scare owned heavy industry. The favourable condition that
favoured industrial sector performance and growth in the No’s as unlikely it
apply in the event 6 to 8 years because of the existence of the following
constraints.
1. Export
and balance of payment imbalance with the continuous decline in oil price and
the heavy reliance oil revenue the Nigeria economy is likely to be faced with
constrained growth in the industrial
sector by limiting import capacity. Thus in turn will result in
investment falling below the level necessary for the high rates of growth
targeted in the vision of 2010 pham drawn up in 1997
2. Infrastructure:
In the 1998 African competitiveness report Nigeria was ranked within out of 20
countries evaluated on electricity and water supply, telecommunication, railway
infrastructure and internet access. Nigeria has the smallest number of
telephone in use per capital out of 23 African countries and if it is in bottom
three on our transport, port facilities and transport cost. This to a large
extent has hampered industrial sector growth in the last two decades.
3. Institutional Capacity: Lack of institutional
capacity has also constrained growth of the Nigeria economy compared to some of
the world’s poorest economies adult literacy is still relatively low in Nigeria
school enrollment ratios which stagnated since 1980 were above average for
developing countries as a whole but are now below it.
In
year 2000, the expenditure on education represents. 1.4% of GDP and accounted
for 7.1% of total expenditure. This performance falls below the average for
developing countries.
4. Regional
Disparities: Concentrations of Industries are located in major cities with very
few industries in most states and few region of the federation. Regional
disparities in Nigeria are amongst in the world. When the countries were ranked
by united nations development programme in its 1994 human development report at
found that the state senders was top with an index nearly five times as great
as that of Borno state.
5. High
Incidence of Uncertainty: According to Pindgick “1991” uncertainty play a key
role in investment decisions because such decision are by and large invariable.
Uncertainty in the Nigeria economy has manifested in the form of internally generated
and externally generated uncertainties. Since 1970 include high unpredictable
inflation and price variability, uncertain demand, increase volatility of
demand, interest rate volatility and frequent policy reversal. Forms of
uncertainties arising from external sector include external shocks emanating
from falling crude oil price uncertainty arising from a high and rising
external debt shock and debt service payment. Both internally and externally
generated shocks have had an adverse effect on the performance of industrial
sector for the past two decades
6. Political
Instability: During the past two decades the manufacturing sector in Nigeria
has seen constrained by such factor as macroeconomic policy inadequacies and by
social and political instabilities. In addition to the problem of political
instabilities is the problem of governance and corruption which as eastern deep
into the fabric of the Nigeria society.
Given
this limiting factor, the researcher is constrained to asking the following
questions.
I.
To what extent has oil price
instabilities constrained the industrial sector performance in Nigeria
II. To
analyze the pre SAP the post SAP industrial
sector policies in Nigeria
III.To appraise
the major characteristics of the manufacturing sub- sector in Nigeria
4. HYPOTHESIS OF THE STUDY
To
realize the objective of this study, we formulate the following hypothesis
(i) That there is a strong positive correlation
between high and rising oil price and industrial sector growth in Nigeria.
(ii) That there is a negative correlation between
uncertainty “Political Instability and macro-economic instability” and
industrial sector performance in Nigeria
(iii) That exchange rate volatility have had an
adverse effect on manufacturing sector performance in Nigeria and
(iv) That financial repression “low interest rate”
have had an adverse effect on the manufacturing sector programme in Nigeria.
1.5 THE SCOPE OF THE STUDY
The
study will basically cover the period “1979 – 2006” the choice of the long span
is deliberate as it cover the “oil boom” era the early 70’s and “oil gulf” era
of the early 1980’s and the post structural adjustment programme era of the
1990’s
1.6 METHODOLOGY
In
an attempt to empirically analyze the impact of oil price instability on the
industrial sector a functional model will be formulated and specified for the
period 1970 to 2006 a period a thirty one year. The methodology here involves
specifying and industrial sector model and estimating the model with the use of
ordinary least squares “OLS” regression techniques. The study shall employ the
use of secondary data. Ultimately the following source of data will be
utilized.
·
Use of Journals
·
Use of CBN publication
·
Federal Office of Statistics (FOD)
publications
·
Literature and seminar papers on the
oil sector and industrial sector out put in Nigeria
1. LIMITATION OF THE STUDY
This
study is constrained by other several factors among which are the problem of
inadequate data, which is the same of most research work in the country.
Obtaining information in Nigeria is not only difficult but generally
unreliable. This is because the management and storage is still not well
developed
Not withstanding the unreliability of
available information attempt will be made to optimize the available data on
subject by carefully reviewing the relevant data.
In addition to the poor sectoral data is
the problem of lost of the research work; research work of this nature
generally cost money and this study is not an exception.
1.8 STRUCTURE OF THE STUDY
This
study is organized into five chapters, chapter one is generally introduce
comprising the objectives, statement of problem the hypothesis and the
structure of the study. Chapter two contains a review of relevant literature on
the subject matter. Chapter three describes the theoretical framework and model
specification while chapter four shows the analysis and interpretation of the
regression results.