AN ANALYSIS OF IMPACT OF OIL REVENUE ON THE ECONOMIC GROWTH IN NIGERIA

ABSTRACT

          Oil revenue is indeed an important component of economic growth of the recipient nations. Therefore, most of the oil-rich nations invest the revenue from the oil sector into the non-oil sectors for strategic reasons. However, over the past five decades there has been a blur in the practicality to fulfilling this purpose in the context of Nigerian economy. So far, there is high inconsistency on the utilization of such oil revenue in Nigeria. Over dependence on oil revenue tends to distort and discourage sourcing of funds from other source by the government, for example, as a result of huge oil revenue flows; countries tend to de-emphasize income taxes as a source of government revenue. Besides, low tax ratios and high consumption expenditures (typically on imported goods) reinforce inflationary tendencies with regard to expenditure; government pay less or no attention to infrastructural development, encouragement of Private sector investment, mechanizing the agricultural and manufacturing sector of the economy because of reliance on petroleum revenue. However, it is noted that large proceeds obtain form the domestic sales and exports of petroleum products, acts like a multipliers to other sector of the economy through government expenditure, thus this seek to examine the impact of oil revenue and Nigeria economic growth. The study reveals that the discovery oil in large quantity has increase the flow of FDI in the country, either through purchase or the establishment of new production facilities (green field, investment), the flow of FDI contribute to capital formation and to export earnings, contribution to technological change and growth of the economy. It further confirms all the variables exhibited their expected sign in the short run but exhibited negative relationship with economic growth in the long run except for government expenditure, which has positive relationship with economic growth both in the long run and short run. The study concluded that Government should use the revenue generated from petroleum to invest in other domestic sectors such as Agriculture and manufacturing sector in order to expand the revenue source of the economy and further increase the revenue base of the economy.

 

Keywords: Oil revenue, Oil price volatility, Gross domestic products, Economic growth, Gross national products, Per Capita income

 

  

CHAPTER 1

INTRODUCTION

1.1 Background to the study

Oil is a major source of energy in Nigeria. Oil, being the mainstay of the Nigerian economy, plays a vital role in shaping the economy and political destiny of the country. Although, Nigeria oil industry was founded at the beginning of the century, it was not until the end of the Nigerian civil war (1967—1970) that oil industry began to play a prominent role in the economic life of the country (Odularu, 2008). The history of petroleum industry in Nigeria reveals that oil was discovered in Nigeria in 1958 at Olobiri in the Niger Delta. The discovery was made by ShellBP. Nigeria joined the ranks of oil producers in 1958 when its first oil field came on stream producing 5,100 barrels per day. After 1960, exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies (Onwe, 2012). From 1956 when the first oil was drilled in Oloibiri to mid-2013 when the price of the commodity crashed beyond imagination of common sense till this day, oil remained the mainstay of Nigeria‘s economy. In Nigeria, policy formulation always appears to respond to the oil situation or attempt to take advantage of it. This usually takes the form of ―expand expenditure when oil earnings increase, maintain the position when there is a dip in earnings and seek a desperate way out when there is crisis‖ (Biodun 2004).

The need to appraise the impact of oil revenue in the Nigerian Economy has become imperative.

Alley, Asekomeh, Mobolaji and Adeniran (2014), states that Nigeria gained US$390 billion in oil-related fiscal revenue over the period 1971-2005. Nigeria has a population of about 173.6 million in 2014 is by far the most populous nation in Africa. Nigeria also has the largest economy in Africa with a Gross Domestic Product of $522.6 billion as at 2013

(www.populationaction.org). Moreover, Nigeria is Africa‘s largest producer of oil. However, Nigeria‘s Oil Wealth has proved in many ways to be a blessing and curse at the same time. The petroleum industry in Nigeria has brought unprecedented changes to the Nigerian economy, particularly in the past five decades when it replaced agriculture as the cornerstone of the Nigeria economy (Aigbedion &Iyayi, 2007).

The oil industry has risen to the commanding heights of the Nigerian economy, contributing the lion share to gross domestic product and accounting for the bulk of federal government revenue and foreign exchange earnings since early 1970. The oil and gas industry is strategic to national development and growth in Nigeria. Oil and gas constitute about 90% of Nigeria‘s foreign exchange earnings and 83% of its GDP (Ogbeifun, 2008).

Despite Nigeria‘s huge oil wealth, Nigeria has remained one of the poorest in the world. In addition, the insurgency in the North, Niger-Delta Avengers in the South, kidnappings for ransomed and the rampaging Fulani herdsmen have all compounded Nigeria‘s problem in no small measure. The problems with Nigerian economy have been traced to failure of successive governments to use oil revenue and excess crude oil income effectively in the development of other sectors of the economy (Yakub, 2008). The economy has been bedeviled by sustained underdevelopment evidenced by poor human developmental and economic indices including poor income distribution, militancy and oil violence in the Niger Delta, endemic corruption, unemployment, relative poverty (Nwezeaku, 2010).  The oil industry in Nigeria plays a crucial role to the sustenance of the nation and fuels not only Nigeria‘s economic and development activities but also socio-political life. The industry has been widely described as the nation‘s live wire and this account for the literature that abounds on its role and significance in Nigeria.

However, Nigerians have had very little share of the Country‘s oil wealth and there was an urgent need to reverse this trend. Nigeria‘s extreme reliance on the crude oil market has triggered structural difficulties for the economy, as earnings from crude oil fluctuate along with market trends (Aigbedion and Iyayi, 2007).  Crude oil became the dominant resource in the mid-1970s. On – shore oil exploration accounts for about 65% of total production and it is found mainly in the swampy areas of the Niger Delta, while the remaining 35% represents offshore production and involves drilling for oil in the deep waters of the continental shelf. The massive increase in oil revenue as an aftermath of the Middle – East war of 1973 created unprecedented, unexpected and unplanned wealth for Nigeria, and then began the dramatic shift of policies from a holistic approach to benchmarking them against the State of the oil sector (Oladipo and Fabayo, 2012).  The Petroleum Industry in Nigeria has brought exceptional changes to the Nigerian economy, particularly in the past five decades when it replaced Agriculture as the base of the Nigeria economy. The Oil Industry has risen to the unassailable loftiness of the Nigerian economy, contributing the lion share to gross domestic product and accounting for the bulk of federal government revenue and foreign exchange earnings since early 1970.

Crude oil discovery has had a major impact on the Nigeria economy both positively and adversely. On the negative side, this can be considered with respect to the surrounding communities within which the Oil Wells are exploited. Some of these communities suffer environmental degradation, which leads to deprivation of means of livelihood and other economic and social factors. Although large proceeds are obtained from the domestic sales and export of petroleum products, its effect on the growth of the Nigerian economy as regards returns and productivity is still questionable. Also, given the fact that the oil sector is a very crucial sector in the Nigeria economy, there is the dire need for an appropriate and desirable production and export policy for the sector. In Nigeria, though crude oil has contributed largely to the economy, the revenue has not been properly utilized. Considering the fact that there are other sectors in the economy, the excess revenue made from the oil sector can be invested in them to diversify and also increase the total GDP of the economy (Gbadebo, 2008).  Therefore, this study seek to critically examine of impact of oil revenue on the economic growth in Nigeria.

1.2 Statement of the Problem

It is now obvious that crude oil production is as critical to Nigeria as oxygen is to life. In fact, crude oil notwithstanding current effort of government remains the driver of economic policies of government. The overdependence on it has created vulnerability to every sector of the Nigeria economy particularly the general hardship in the country now. In particular, the place of oil in the mind of the average Nigerian has become more profound since the continuous deregulation of the downstream sector of the Nigeria oil industry in 2003. Nigeria is estimated to have 37.2 billion barrels of oil reserves in 2011 and produces an average of 2.13 million barrels per day (Igberaese, 2013). The hydrocarbon sector also accounts for 82 per cent of the federal government‘s revenue (World Bank, 2013). This suggests that Nigeria is heavily dependent on the oil sector for the majority of government spending, infrastructure and most economic development activities. With the increasing volatility of oil prices, the discovery of oil in other parts of the world and the instability of the global economy, oil imports from Nigeria to major economies such as the United States has steadily decreased. The U.S once imported 9-11% of its crude oil from Nigeria but in the first half of 2012, the share of imported oil from Nigeria to the

U.S has dropped to 5% (Igberaese, 2013).  Over dependence on oil revenue tends to distort and discourage sourcing of funds from other source by the government, for example, as a result of huge oil revenue flows; countries tend to de-emphasize income taxes as a source of government revenue. Besides, low tax ratios and high consumption expenditures (typically on imported goods) reinforce inflationary tendencies with regard to expenditure; government pay less or no attention to infrastructural development, encouragement of private sector investment, mechanizing the agricultural and manufacturing sector of the economy because of reliance on petroleum revenue. However, it is noted that large proceeds obtain form the domestic sales and exports of petroleum products, acts like a multipliers to other sector of the economy through government expenditure; this has generated the needs to properly investigate the relationship between oil revenue and Nigeria economic growth.

1.3 Objective of the Study

With the development of petroleum in the Nigerian economy, there has been a growing interest and concern towards its contributions to the economy and economic growth. By the end of the research the study aims at achieving the following objectives.

1. To examine the long-run relationship between oil revenue, oil price volatility and economic growth in Nigeria.
2. To find out the impact of oil revenue, Oil price volatility on gross domestic product

(GDP).

1. To examine the impact of non-oil revenue on economic growth and development of the country.
2. To determine empirically whether there is any functional long-run relationship between crude oil revenue and increase/decrease of our GDP within the period under study.

 

1.4 Research Question

1. What is the impact of oil revenue, oil price volatility on gross domestic product (GDP)?
2. What is the relationship between oil revenue, oil price volatility and economic growth?
3. What are the impact of non-oil revenue on economic growth and development of the country?
4. What are the functional long-run relationship between crude oil revenue and increase/ decrease of our GDP within the period under study?

1.5 Research Hypothesis

The following hypothesis will be tested in this study:

H1: Oil revenue and oil price volatility has no significant impact on Gross Domestic Product of Nigeria.

H2: Oil revenue and oil price volatility has no significant impact on Gross National Product of Nigeria.

H3 Oil revenue and oil price volatility has no significant impact on Per Capita Income in Nigeria.

H3: There is no long-run impact of oil revenue, oil price volatility on real economic growth in Nigeria.

 

 

1.6 Scope of the Study

This research work centers on an investigation into the impact of oil revenue on economic growth in Nigeria, limiting its scope and focus (1970-2018), likewise examine oil price volatility with the same period. This period also showed substantive empirical evidence about how Nigeria have managed it oil revenue to achieve economic growth. This period was also considered adequate to examine regime change(s), political choices, and institutional quality used for managing oil revenue as they affect economic growth in Nigeria. Several proxies have been identified for ‗managing‘ oil revenue in this study which include: (i) saving of oil revenue in a transparently and accountably operated sovereign (oil) wealth fund for future generation; (ii) investment of oil revenue in recognized and diversified portfolios abroad to ensure that real return on investment is added to the capital in (i) above and development of infrastructure and other sectors of the economy; (iii) smoothing out budget imbalances or deficits due to global oil price volatility or non-oil revenue shortfalls; and (iv) control of capital flight from oil revenues due to heavy expatriate involvement in the oil sector.

As it is expected with written work of this kind, the completion of this project would not be possible without limitation or problems encounter in the course of writing this project which includes difficulties in obtaining relevant and up-to-date, data due to poor nature of Nigeria‘s data collection and storage facilities, The first of such constraints or difficulties concerns data collection from different sources. Also was the reluctance of some library or Liberians to make data available.  Apart from the above mentioned constraints, which are capable of adversely affecting the accuracy of the results of this research work, all other errors and omissions are entirely those of the researcher.

1.7 Significance of the Study

The significance of this entire research, is to determine the overall impact of the oil sector to the growth and development of the Nigeria economy. Given the fact that the oil sector is very crucial sector in the Nigeria economy. Oil wealth is a major source of government revenue in most oil producing countries in the world especially in Nigeria. This major source of government revenue has however led to both positive and negative effect on economic growth in these countries as submitted by different researchers at different times. Generally speaking, a unanimous stand as never been taken by these researchers on the impact oil wealth has on economic growth.

Thus the significant of this study cannot be overestimated, first and foremost, the research work will be useful to Nigerian policy makers by assisting them in understanding clearly the impact of policies made on crude oil revenue on standard of living of the common man. Secondly, this research work on completion could assist students of related discipline in their course of study. Also, this study did not only add to the available literature on the research topic but also contributed to an area of study that has been scantily visited by scholars. This research work also has constituted a reference material to policy makers and prospective researchers who will be interested in topics related to this research work and hence would stimulate deep and fresh ideas, practically relevant to help key stakeholders enhance the management of oil revenue for the achievement of real economic growth and development in Nigeria. Nevertheless, this study will throw more light on the role which the crude oil plays in the reformation of the Nigerian economy.

 

 

1.8Definition of Operational terms

Economic growth: This is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

Oil sector: This is also known as the oil industry or the oil patch, includes the global processes of exploration, extraction, refining, transporting, and marketing of petroleum products. The largest volume products of the industry are fuel oil and gasoline.

Oil Price Volatility:  This is the measure of the tendency of oil price to rise or fall sharply within a period of time, such as a day, a month or a year. Lee (1998) as cited in Mgbame, Donwa and Onyeokweni (2015) defines volatility as the standard deviation in a given period and noted that volatility has a negative and significant impact on economic growth instantly, while the impact of oil price changes delays until a year.

Non-oil revenue: This is the income or proceeds generated from the commodities that are sold in the international market excluding crude oil (petroleum product). Non-oil exports on the other hand are those commodities (excluding crude oil) that are sold abroad in order to generate revenue. These non-oil exports include agricultural products or crops, manufactured goods, tourist services/receipts, solid minerals, telecommunication services and other exports.

Gross Domestic Product: This implies the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered as an indicator of a country‘s standard of living. GDP is related to national account, a subject in macro -economics. It is customarily reported on an annual basis. It is defined to include all final goods and services, that is, those that are produced by economics resources located in that nation regardless of their ownership and are not resold in form.

Inflation is defined as a generalized increase in the level of price sustained over a long period in an economy. It is a rise in the general level of prices of goods and services in an economy over a period of time.

Exchange rate: An exchange rate (also known as foreign exchange rate) between two currencies is the rate at which one currency will be exchanged for another. It is regarded as the value of one country‘s currency in terms of another currency. Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers where currency trading is continuous.

Non-oil export: These include the exportation of the non-oil produces among which are agricultural, industrial and manufacturing outputs.

Non-oil export index: This is the fraction of the total export of goods and services that are produced within the economy that are not directly related to the oil sector of the economy. The non-oil products exports are unlimited as they include cash crops, food crops, manufacturing, entertainment, tourism etc. the value of the non-oil export index shall be used for measuring the non-oil export.

AN ANALYSIS OF IMPACT OF OIL REVENUE ON THE ECONOMIC GROWTH IN NIGERIA

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