Dependence on Oil Income Earnings and Diversification of the Economy – The Nigerian response

Abstract

This study looked at the contributions of oil export earnings and non oil export earnings independently to the totality of exports for Nigeria from 2007 to 2016.Nigeria economy being mostly dependent on oil export earnings stand a great risk of being vulnerable to price shocks and foreign exchange volatility. To understand why the problem persists we set out to find out the direction and magnitude of dependence of the economy on earnings from petroleum products and non-petroleum products for Nigeria for the tem –year period. The review of past work in related area was looked at as well. The data collected was from OPEC statistical bulletin from 2007 to 2016. To test the hypotheses, we adopted the linear regression model in line with existing studies in this area of finance, for instance, the works of Arumugam (1997), Berument and Kiymaz (2001) and Rahman (2009), Guha Deb and Mukherjee (2008), regression is a statistical technique used in measuring the impact of one or more variables (otherwise known as independent variables or regressors) on another variable (the dependent variable or the regressand). To perfect robustness of the research methods the statistical package used employed is the SPSS (version 16.0). The data collected was secondary data consisting of the gross export earnings, oil export earnings and non-oil earnings. The R2 for the first hypothesis showed 93.5% of the variations in the total export can be explained by the changes in the oil export earnings unlike the R2 of the second hypothesis which could only be explained with 12.4%. The condition Index also indicates that the factor 2 has a higher value (6.063) than factor 1 (1.000) which indicates a near linear dependence of the gross exports on oil exports. The residual statistical distribution in table 4.7 reveals that there is no significant difference in value between the standard predicted value and the standard residuals this suggests that conditions for normality has been met since the residuals closely follow the conditions for a true normal distribution. The variance inflation factor and tolerance level for both hypothesis was 1 which means that that the incidence of collinearity or multicollinearity is very low, an indicator of the model’s strength. So it is not significant enough to affect the reliability of the methodology in use and shouldn’t invalidate the results obtained. Nigeria’s economy depends mainly on oil revenue, the non-oil sectors have been left largely untapped. The petroleum refineries have been operating far below their previous capacity as Nigeria has been importing refined petroleum for many years now. This has exacerbated imbalances in the economy. The failure to diversify the economy is strongly evident in years of not investing oil revenues in multi-sector economic growth rather the funds have been used to lavish on unsustainable import reliance, poorly sustained policies and corruption. The banking and foreign exchange reserves to the capital market and the mortgage sector are very vulnerable the intrigues of oil price volatility in the Nigerian economy. The government should pay more attention to diversifying away from oil to other viable sectors including the agricultural sector. In addition to the potential food sufficiency this can lead to economic prosperity. Given the size of the agricultural value chains in production, inputs and mechanization, processing, marketing and finance, research and development. The jobs and wealth creation expected from this development would lead to sustainable economic growth.

Macro-economic stability and supportive regulatory and institutional frameworks are key prerequisites for economic diversification by insulating the economy from the impact of oil price volatility is necessary to lay a sound foundation for economic diversification. It requires sound fiscal policy and framework, effective liquidity management and prudent monetary policy, supportive financial sector policies and a fairly valued exchange rate.

Keywords: Dependence, oil income earnings, diversifications and Nigerian