Monetary Policy and Export Diversification in Nigeria

Abstract

This study examined the extent to which monetary policy has influenced export diversification in Nigeria for the period 1962 to 2014. The study employed descriptive and ordinary least squares techniques. The descriptive analysis revealed that the diversification exercise in Nigeria can only be expressed as average. The regression estimate showed that monetary policy was insignificant in influencing export diversification in Nigeria. The study concluded that monetary policy has not played a fundamental role in enhancing export diversification in Nigeria. The study recommended that monetary policy should be purpose driven towards the achievement of export diversification. This can be achieved by employing selective-sectoral monetary policy measures in accelerating investment in various non-oil sectors of the economy such as the mining, manufacturing and tourism sectors.

Headnote

Abstract

This study examined the extent to which monetary policy has influenced export diversification in Nigeria for the period 1962 to 2014. The study employed descriptive and ordinary least squares techniques. The descriptive analysis revealed that the diversification exercise in Nigeria can only be expressed as average.

The regression estimate showed that monetary policy was insignificant in influencing export diversification in Nigeria. The study concluded that monetary policy has not played a fundamental role in enhancing export diversification in Nigeria. The study recommended that monetary policy should be purpose driven towards the achievement of export diversification.

This can be achieved by employing selective-sectoral monetary policy measures in accelerating investment in various non-oil sectors of the economy such as the mining, manufacturing and tourism sectors.

Keywords: monetary policy, export diversification, economic growth, Nigeria

JEL Classification: E52, F31

(ProQuest: ... denotes formulae omitted.)

1.Introduction

Export diversification is not a new economic strategy in Nigeria neither is it a fresh topical political agenda in Nigeria. The desire to diversify the Nigerian economy can be traced back to the early 1970's when the Nigerian government adopted a direct monetary policy measures as the platform of stimulating the domestic economy. Such direct instruments included the use of administered interest rate by the government, fixed exchange rate regime, credit ceiling on deposit money banks among others. With these instruments the government intends to channel the flow of loanable funds to the real sector with a view of not only enhancing domestic output growth but also as an attempt at diversifying the economy from the its dependence on agricultural export. However, this period coincided with rising oil price at the international oil market leading to a reduction in the drive for export diversification of the Nigerian economy. The issue on diversification resurfaced in Nigerian political agenda with the collapse of oil price at the international market from $39 per barrel in 1980 to $11.575 per barrel in 1986 culminating into a decline in foreign exchange revenue from N12,353.3m in 1980 to N8,107.3m in 1986 with adverse consequence on foreign reserves positioning and increase in budget deficit among others. However, the drive for export diversification was quenched or perhaps relegated with the rebound of the oil price at the international oil market.

Recently, the issue of export diversification has once again being the pinnacle of political agenda of the Nigerian government owing largely to the collapse of oil price at the international oil market from $125.45 in March 2012 to $110.72 in December 2013 and further to $30.7 in Jan 2016. The multiple adverse consequences on the Nigerian economy include: the nosedive of the impressive economic growth rate experienced in the country over the period 2000 to 2010 averaging 6.3% to 4.2% in 2012; decline in foreign exchange earnings; decline in foreign reserves; increase deficit financing; increase in exchange rate volatility, devaluation and depreciation of the domestic currency (Naira) among others.

Apart from the above, the lack of export diversification was also chiefly responsible for the rising rate of unemployment in Nigeria. This is because oil productivity and oil revenue crowds out other economic activities as was the case in the early 1970's when the growth in oil revenue led to the decline in economic activities of the non-oil sector such at agricultural and manufacturing sectors - a term known as Dutch Disease (Hvidt, 2013; Sannassee, Seetanah and Lamport, 2013; Al-Kawaz, 2008). The crowding out of other economic activities by the growth of oil revenue has resulted in the inability of the Nigerian government in generating stable and sufficient foreign earnings and in creating job opportunities for the swiftly growing labour force of young and well educated indigenes of the country (Hvidt, 2013). Also, the over reliance of the Nigerian economy on oil sector, has made the country not only at the mercy of the international community but have made the country completely susceptible to the economic woes (such as economic recession) of her global oil-trading partners.

It is also worthy of emphasis that the absence of export diversification, reduced the potentials contribution of other sectors (non-oil sector) of the economy to the foreign exchange earnings of the Nigerian government. From figure 1, it is observed that with exception to the period 1960 to 1969, the revenue contribution of non-oil sector lagged behind the revenue contribution of the oil sector.

Owing to the dismal performance of the Nigerian economy and the poor performance of the non-oil sectors, attempts at diversifying the economy has resulted in the initiation of various monetary policies. The extent to which monetary policy have influenced export diversification in Nigeria has not been explored by previous indigenous studies (see Onadugo, Amijiri and Nwuba, 2015; Esu and Udonwa, 2015; Chimobi and Uche, 2010).

The need for this study arises because studies have showed that export diversification affects economic growth positively (Lederman and Malony, 2003; Hesse, 2008; Agosin, 2009). Thus, a positive relationship between monetary policy and export diversification would have important implication for economic growth in Nigeria. Also, Lederman and Malony (2003) noted that the negative effect of natural resource abundance on growth disappears once the country controls for export diversification. In this regard, export diversification in Nigerian country is capable of bringing about a reduction in the negative effect of oil abundance in Nigeria which includes the various agitation or communal crisis in different regions of the country (such as the Niger Delta Militants, Niger Delta Avengers, MASSOB and Boko Haram Islamist group). Therefore, this study seeks to examine the relationship between monetary policy and export diversification given the importance of the implication of this study on economic growth.

In addition to the introductory section, this study has five sections. Section two discusses the literature review while the research method is discussed in section three. Results and findings are discussed in section four while section five discusses the conclusion and policy recommendations arising from the findings of the study.

2.Literature Review

One of oldest concept in the theory of economic development is export diversification. Earlier theorists on international trade (Smith, 1776; Ricardo, 1817; Samuelson, 1971; Jones; 1971; Heckscher-Ohlin, 1991) argued that countries should specialize in production and exportation of commodities which they possess comparative advantage over other countries of the World. The comparative advantage theory was challenged by Prebisch (1950) and Singer (1950) after the World War II. Prebisch (1950) and Singer (1950) argued that specialization on primary commodities make developing countries export dependant on raw materials and agriculture products; and import dependant consumer and manufacturing products from the developed countries, hence the need for export diversification.

On empirical literature, plethora of studies have analysed the role of economic diversification on economic growth. Liu and Zhang (2015) examined the relationship between export diversification and exchange-rate regimes for a group of seventy-two countries. Employing panel ordinary least square technique, the study observed that diversification of export products has a positive but insignificant effect on the choice of fixed exchange-rate regimes. When export diversification is decomposed into the extensive and intensive margins, evidences of the paper show that higher level of product diversification at the extensive margin has a statistically positive effect on exchange-rate regime choices while the intensive margin has a negative but insignificant impact on the choice. Onodugo, Amujiri and Nwuba (2015) examined how diversification of the economy will enhance stable and viable economic growth in Nigeria. Using descriptive analysis, the study observed that the neglect of agriculture has, in addition, led to the constant depreciation in GDP of the country. The study also noted that for the economy to be diversified there has to be a very serious paradigm shift in economic policies and political will to implement such changes in policies.

Suberu, Ajala, Akande Olure-Bank (2015) examine the diversification of the Nigeria towards a sustainable growth and economic development. The study employed descriptive method of analysis and observed that considering Nigeria's peculiar circumstances and the successes recorded before the advent of oil, for Nigeria to break loose from the problems inherent in a mono-economy, especially one largely dominated by oil, which is subject to depletion, international price shocks and unfavorable quota arrangement, there is need for diversification. Agricultural sector is suggested as possible options for diversifying the Nigerian economy. Shabana and Zafar (2014) examined the role played by the country-specific factors in the determination of exports diversification for a panel date-set of selected ASEAN and SAARC member countries for the time period 1986 to 2012. The study employed the fully modified ordinary least squares co-integration technique and observed that foreign direct investment, domestic investment, competitiveness, financial sector development and institutional strength are significantly and positively determinants of export diversification in both ASEAN and SAARC member countries. These findings have important policy implications for ASEAN and SAARC regions. The study emphasized the need for the two selected regions to diversify their exports especially in their area of specialization which is vital for their economic development. The study also encourages the regional countries to improve their international competitive strength while upgrading environment to attract both domestic and foreign investment.

Iiham and Almas (2014) took an in-depth look into economic diversification in the UAE economy. The findings of the study support the fact that the UAE is facing an oil curse characterised declining levels of total factor productivity, GDP volatility, negative returns on investment, and a labor force that is too reliant on government's supply of jobs. The study noted that the UAE economy has made good progress in recent years to diversify its economy. However, the drivers of economic growth in the UAE are vulnerable to external shocks outside of the Emirate's control; it is critical that the UAE take steps to mitigate economic disruptions that might result from these shocks. The study recommended that greater efforts are needed to stimulate the diversification of the production base by encouraging increased domestic, especially private, investment. Also, well-targeted policies should be adopted to accelerate reform and facilitate the involvement of the private sector in the economy.

Agosin, Alvarez and Bravo-Ortega (2011) examined the determinants of export diversification around the World for a group of 79 countries covering the period 1962 to 2000. The study employed generalised methods of moments (GMM) technique. The results suggest the existence of robust evidence across specifications and indicators that trade openness induces higher specialisation. In contrast, financial development was insignificant to diversifying exports. The result also showed a positive effect of real exchange rate volatility on concentration while exchange rate overvaluation had insignificant effect on concentration. The study also showed evidence that human capital accumulation contributes positively to diversify exports and that increasing remoteness tends to reduce export diversification. Further, the findings of the study also revealed that improvements in the terms of trade tend to concentrate exports. This effect is lessened for countries with higher levels of human capital; suggesting that countries with higher education could take advantage of positive terms of trade shocks to increase export diversification.

Awe and Ajayi (2009) examined the relationship between sectoral non-oil revenue and economic growth in Nigeria. Employing the Ordinary Least square technique, the study observed that revenues from agricultural and solid minerals had significant impact on economic growth while revenue from manufacturing was insignificant in influencing economic growth. Thus, the study recommends the need to promote expanded production in both the agriculture and industrial sector to diversify the export market for Nigerian goods rather than relying majorly on the European and North American markets while at the same time giving greater attention to the packaging and the design of export product to command better prices and patronage at the international market. The study also recommended the necessity of upgrading basic infrastructures so as to create conducive environment for expanded output in the non-oil sub-sector of the Nigerian economy.

Osakwe (2007) examine the relationship among foreign aid, geography, resource endowments and diversification of exports in Africa. The study employed a System-GMM dynamic panel data technique. The findings of the study showed that foreign aid, the quality of infrastructure, and resource endowments are robust determinants of diversification in Africa. The study also suggested that there is no systematic relationship between geography and diversification. Furthermore, there is some evidence that institutional factors are important export diversification in Africa although it is not robust. Lane (2000) examined the relationship between international diversification and the Irish economy. The study observed that the Irish economy displayed some properties associated with international risk-sharing which include: high gross stocks of foreign assets and liabilities; high international consumption correlations relative to output correlations; and pro-cyclical behaviour of the yield on net external liabilities.

From the above review, it is reaffirmed that there exist a paucity of knowledge on the relationship between monetary policy and export diversification in Nigeria, despite the importance of the implication of this study on economic growth. This therefore further suggests the need for this study.

3.Research Methodology

3.1.Theoretical Framework

This study relied on the Prebisch (1950) and Singer (1950) hypothesis of export diversification. The hypothesis stressed that developing countries should increase in the variety of their exporting products because the income elasticity of demand for the primary products is low and through economic diversification, developing countries can reduce the risk of commodity shocks, term of trade and price instabilities. Scholars such as Cooper and Brainard (1968), Carrere, Strauss-Kahn and Cadot (2007) and Hesse (2008) have also laid credence to the Prebisch-Singer hypothesis, stressing that economic diversification from primary products is desirable for developing countries; and that currently diversification is a significant target for economic policy (Shabana and Zafar, 2014).

3.2. Model Specification

To examine the relationship between monetary exchange rate policy and diversification in Nigeria, the study utilized a modified model by Shabana and Zafar (2014) and Bebczuk and Berrettoni (2006) on the determinants of export diversification. The model is stated as:

... (1)

DIV is export diversification; EG is economic growth; FDI is foreign direct investment; XPT is non-oil export; CPS is credit to the private sector; EXT is exchange rate policy and MON monetary policy. The econometric form of equation (1) is stated as:

... (2)

Export diversification is measured by export diversification index. Monetary policy is measured by monetary policy rate (mon) and exchange rate (ext). Export diversification index from 1962 to 2010 is sourced from International Monetary Fund (IMF) database while data from 2011 to 2014 was obtained using moving average method. Data on other variables: economic growth (eg); foreign direct investment (fdi), non-oil export (expt); credit to the private sector (cps); exchange rate (ext) and monetary policy (mon) are sourced from the Central Bank of Nigeria (CBN) Statistical bulletin.

4.Data Analysis and Interpretation

4.1. Trend Analysis of Export Diversification index in Nigeria 1962 - 2014

Figure 2 below present the export diversification index for Nigeria for the period 1962 to 2014. It is observed that the export diversification rose from 3.74 in 1962 to 4.05 1967 before declining to 3.78 in 1968. Afterwards, the export diversification index rose to 4.17 and further to 6.15 in 1969 and 1980 respectively. In 1990, the export diversification index stood at 6.0 but decline marginally to 5.72 in 1995 and rose again to 6.03 in 2000. The index for export diversification declined to 5.78 in 2010 before rising marginally to 5.82 in 2014. From the above discussion above-cum-the diagram in figure 2 below, it is observed that the export diversification exercise in Nigeria can only be expressed as average. Index value one indicates a full degree of export diversification but the average value of the export diversification index for study period is 5.58.

4.2.Unit Root and Co-integration Estimates

The unit root was conducted using the Augmented Dickey Fuller (ADF) test and the result presented in table 1 below. From the table, it was observed that all the series were not stationary at levels but became stationary after first differencing, indicating that series were integrated of order one, that is, the variables were I(1) series. Consequently, the study proceeds to estimate the co-integration estimate among the variables in equation (2).

The Johansen co-integration estimate presented in table 2 showed the absence of co-integration among the variable in the estimation model of equation 2. This null hypothesis of no co-integration for None, At most 1, At most 2 and At most 2 were not rejected by trace and maximum Eigen test statistic. Sequel to the absence of co-integration among the variables, this study proceeds to carried out the regression estimate using the ordinary least technique.

4.3.Estimates on Monetary Policy and Export Diversification in Nigeria

The regression estimate on influence of monetary and an exchange rate policy on export diversification in Nigeria over the period 1962 to 2014 is presented in table 3 below. The coefficient of determination (R2) of the model is 80.6% indicating that independent variables explained about 81% of total variation in export diversification in Nigeria. The F-statistic (31.92; p<0.05) showed that the model is well specified. The regression estimate showed that economic growth (leg) and foreign direct investment (lfdi) had insignificant effect on export diversification in Nigeria. However, non-oil export and credit to the private sector had positive and significant impact on export diversification in Nigeria. A one percent increase in non-oil export (lexpt) and credit to the private sector (lcps) with enhance export diversification in Nigeria by 48.4% and 50.2% respectively. Lastly, the result of the regression estimate showed that monetary (mon) and exchange rate (ext) had insignificant effect on export diversification in Nigeria. With respect to the focus of this study on the impact of monetary policy on export diversification in Nigeria, it was observed that monetary policy was insignificant in influencing export diversification in Nigeria. This implies that the various monetary policies initiated and implemented over the years, have not contributed to achieving export diversification in Nigeria.

To evaluate the robustness of the regression estimate stability test (cumulative sum (CUSUM) and cumulative sum of squares (CUSUMsq) was conducted on the residuals of the regression estimate.

The stability tests showed that the model is adequately specified and that the parameters of the models did not suffer from any structural instability over the period of study. This is because the plots of both the CUSUM and CUSUMsq are within the bounded line of five percent significant level as seen on figures 3 and 4.

5.Conclusion and Policy Recommendations

The current macroeconomic issues facing the Nigerian economy which is occasioned mainly by the decline in international oil price has called on the need to diversify the economy. Therefore, this study examined the relative effect of monetary policy on export diversification in Nigeria for the period 1962 to 2014.

The study employed descriptive and ordinary least squares techniques. The descriptive analysis revealed that the export diversification exercise in Nigeria can only be expressed as average. Index value one indicates a full degree of export diversification but the average value of the export diversification index for study period is 5.58.

The regression estimate showed that monetary policy was insignificant in influencing export diversification in Nigeria. From the regression estimate, the study concluded that monetary policy has not played a direct fundamental role in the enhancing export diversification in Nigeria.

From findings the study recommends that:

- One, monetary policy should be purpose driven towards the achievement of export diversification. This can be achieved by employing selective-sectoral monetary policy measures in accelerating investment in various non-oil sectors of the economy such as the mining, manufacturing and tourism sectors.

- Two, the regression estimate showed that non-oil export had significant impact on export diversification in Nigeria, therefore there is the need for the Nigerian government to provide the necessary facilities (such as productive-enhancinginfrastructure facilities, financial and tax incentives) to promote productive activity in the sector.

- Third, the positive and significant influence of credit to the private sector on export diversification suggests the need for monetary authority in formulating policies that can spur export diversification through the expansion of long-term credits by banking institutions to private investors particularly in the non-oil sectors of the economy.

References

References

Agosin, M.R., Alvarez, R., Bravo-Ortega, C. (2011) "Determinants of export diversification around the World: 1962-2000," The World Economy, p. 1-21; Doi: 10.1111/j.1467-9701.2011.01395.x

Agu, C., Caliari, A. (2014) "Economic diversification and macroeconomic policies: is Africa's growth enough?" Paper for Consideration in the CSAE Conference 2014

Al-Kawaz, A. (2008) "Economic diversification: The case of Kuwait with reference to Oil producing countries," Journal of Economic Cooperation, vol. 29, no. 3: p. 23-48

Awe, A.A., Ajayi, S.O. (2009) "Diversification of Nigerian revenue for economic development: The contribution of the non-oil sector," Pakistan Journal of Social Sciences, vol. 6, no. 3: p. 138-143, Doi=pjssci.2009.138.143

Cadot, O. & Carrere, Céline & Strauss-Kahn, V. (2010) "Export Diversification: What's behind the Hump?," CEPREMAP Working Papers (Docweb) 1011, CEPREMAP.

Chimobi .O.P., Uche, U.C. (2010) "Money, price and output. A causality test for Nigeria," American Journal of Scientific Research, vol. 8: p. 78-87

Cooper, R., Brainard, W. (1968) "Uncertainty and diversification in international trade." Working Paper of Institute Studies in Agriculture Economic, Trade and Development, vol. 8, no. 56: p. 257-285

Esu, G.E., Udonwa, U. (2015) "Economic diversification and economic growth: Evidence from Nigeria," Journal of Economic and Sustainable Development, vol. 6, no. 16: p. 56-63

Heckscher, E.F., Ohlin, B. (1991) Heckscher-Ohlin Trade Theory, Translated, Edited and Introduce by Harry Flam andM. June Flanders, Cambridge, Mass., MIT Press

Hesse, H. (2008) "Export Diversification and Economic Growth," Working Paper No. 21, Commission of Growth and Development, Washington, D.C: The World Bank

Hvidt, M. (2013) "Economic diversification in GCC countries: Past record and future trends," Research Paper, Kuwait Programme on Development, Governance and Globalization in the Gulf States.

Iiham, H., Almas, H. (2014) "Can the UAE avoid the Oil curse by economic diversification?" Discussion Paper no. 8003

Lederman D., Maloney, W. (2003) "Trade structure and growth," Policy Research Working Paper, World Bank no. 3025

Lane, P.R. (2000) "International diversification and the Irish economy," The Economics of Social Review, vol. 31, no. 1: p. 37-53

Liu, X., Zhang, J. (2015) "Export diversification and exchange-rate regimes: Evidences from 72 developing countries," Munich Personal RePEc Archive (MPRA), Paper no. 66448

Onodugo, I.C., Amujiri, B.A., Nwuba, B.N. (2015) "Diversification of the economy: A panacea for Nigeria economic development," International Journal of Multidisciplinary Research and Development, vol. 2, no. 5: p. 477-483

Osakwe, P. N. (2007) "Foreign aid, resources and export diversification in Africa: A new test of existing theories," African Trade Policy Centre, no. 61

Petersson, L. (2005) "Export diversification and intra-industry trade in South Africa," South African Journal of Economics, vol. 73, no. 4: p.785-802

Prebisch, R. (1950) "The economic development of Latin America and its principal problems," Journal of Development Economics, vol. 72, no. 16: p. 603-633

Sannassee, R.V., Seetanah, B., Lamport, M.J. (2014) "Export diversification and economic growth: The case of Mauritius," World Trade Organization (W.T.O)

Shabana, N., Zafar, M. (2014) "Explaining trends and factors affecting export diversification in ASEAN and SAARC regions: An empirical analysis," NUST School of Social Sciences and Humanities (S3H) National University of Sciences and Technology, Working Paper Series, no. 04

Singer, H.W. (1950) "The distribution of trade between investing and borrowing countries," American Economic Review, vol. 40, no. 7: p. 531-548

Suberu O. J., Ajala O. A., Akande M. O., Olure-Bank Adeyinka. Diversification of the Nigerian Economy towards a Sustainable Growth and Economic Development. International Journal of Economics, Finance and Management Sciences, Vol. 3, No. 2, 2015, pp. 107-114, Doi: 10.11648/j.ijefm.20150302.15