Manufacturing Sector Performance Exchange Rate Volatility and Inclusive Growth In Nigeria 1981 2015
The effects of the recent global economic crisis on Nigeria have reaffirmed the urgent need for the diversification of the economy. Although, no country is immune to such global crisis, the over reliance on oil export revenue by Nigeria exposes her exchange rate and economy excessively to external shocks. Therefore, there is the need to conduct a research of this nature to examine Nigeria's exchange rate sensitivity. This study employed Neo Classical theory with financial intervention using Cobb Douglas growth model in assessing the impact of manufacturing productivity, exchange rate volatility on inclusive growth in Nigeria using the time series data from 1981 to 2015. The study investigates the long run agriculturally driven economic inclusive growth using Johansen Co integration test and Normalized Co integration. This study found out there is a long run relationship between these variables. While manufacturing sector exact more long run effect on per capita income. Introduction The Nigerian economy slowed down from 7.4% growth in 2011 to 6.6% in 2012. The oil sector continues to drive the economy with average growth of about 8.0% compared to 0.35% for non oil sector (Omoh, 2013) The Central Bank of Nigeria in its annual reports emphasized that during the 1960s and early 1970s, manufacturing activities were positively growth and value added per worker was at par with, if not higher than that in other African countries (CBN, 2010) During this period the share of manufacturing in GDP nearly doubled from less than 5 percent to 8 percent and on that trend many people believed that the country was on a path to industrialization. The manufacturing sector plays a catalytic role in a modern economy and has many dynamic transformations. In any growing economy, the manufacturing sector is a leading sector in many respects. It creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors (Ogwuma, 1995) In terms of contributing to the Gross Domestic Products, the manufacturing sector is recognized, but it has been overtaken by the services sector in a number of countries, including Nigeria. An important dilemma in international finance is the exchange rate puzzle. This issue is important because exchange rate fluctuations are likely, in turn, to determine economic performance in relation to firms' performance among others. It is a dilemma because of its randomness. The volatility and unpredictability of exchange rate is due to the confluence of the factors that affect it (Anoruo et al, 2006; Benita and Lauterbach, 2007; Hanias and Curtis, 2008) As such, the issue of exchange rate fluctuations is controversial and has been a subject of much debate. A large number of studies and articles addressed the issue both theoretically and empirically and found different results, which have made the debate further controversial. The traditional view is that fluctuations in exchange rates affect relative domestic and foreign prices, causing expenditures to shift between domestic and foreign goods (Khan et al, 2010; Benita and Lauterbach, 2007; Betts and Kehoe, 2005) The new view is that relative prices are not much affected by exchange rate fluctuations in the short run (Cheong, 2004) In general, when a currency depreciates it will result in higher import prices if the country is an international price taker, while lower import prices result from appreciation. The potentially higher cost of imported inputs associated with exchange rate depreciation increases marginal costs and leads to higher price of domestically produced goods (Kandil, 2004) Furthermore, import competing firms might increase prices in response to foreign competitor price increases to improve profit margins. The extent of such price adjustment depends on a variety of factors such as market structure, the relative number of domestic and foreign firms in the market, the nature of government exchange rate policy and product substitutability (Fouquin et al, 2001; Sekkat and Mansour, 2000) Most Nigerian manufacturing companies depend on imported inputs in the form of equipment, plant and machinery and other materials and given the fact that bulk of the country's foreign earnings is from oil earnings which provides 95.0 per cent of the foreign exchange earnings according to the 2013 world fact book of the United State Central Intelligence agency, thus revealing the extent of the vulnerability of these companies to swings in the exchange rate which is greatly affected by fluctuations in the oil price in the international market. Mohammad (2010) notes that the risks associated with volatile exchange rates are major impediments for countries such as Nigeria that attempt to develop through export expansion strategy and financial liberalization. Besides, Chong and Tan (2008) hinted that the impact of exchange rate fluctuations on economic fundamentals is substantially great if an economy does not provide possible tools in reducing currency risk in its market place which unfortunately, is the case in Nigeria. They further argued that exchange rate fluctuations have a catalytic effect on various parties as well as countries. One of the most dramatic events in Nigeria over the past two decades was the devaluation of the Nigerian Naira with the adoption of a Structural Adjustment Programme (SAP) in 1986. A cardinal objective of the SAP was the restructuring of the production base of the economy with a positive bias for the production of agricultural exports. The foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and therefore boost domestic production. Significantly, this depreciation resulted in changes in the structure and volume of Nigeria's exports and imports. However, the volatility, frequency and instability of the exchange rate movements since the beginning of the floating exchange rate raise a concern about the impact of such movements on Nigerian manufacturing companies. Nigerian manufacturing sector has remained underdeveloped and is not showing significant growth despite the implementation of Structural Adjustment Programme (SAP) According to Delude (1999) apart from objectives not realized, exchange rate policy and management under Structural Adjustment Programme (SAP) have left some issues unresolved and/or created some distortions in the economy, one of which is deindustrialization. A close look at the relative contribution of manufacturing production to Gross Domestic Product (GDP) before and after SAP shows that SAP, indeed, triggered a shrinking of the manufacturing sector in Nigeria. In 1980, manufacturing accounted for 8.4% of Gross Domestic Product (GDP) This relative share rose to 9.9% in 1983, and was still 8.7% in 1986 (CBN, 2010b) But, with the adoption of SAP, the manufacturing sector's relative share in GDP began to fall and reached a low of 5.29% in 1989 and fell further to 5% of the GDP in 1997 (CBN, 2010b) However, since enthronement of democracy in 1999, the contribution of the sector's GDP increased slightly to 9.6% in 2007 but fell to 7.7% in 2012 (NBS, 2012) Apart from structural rigidity, poor quality of labour force, high interest rate, corruption etc. (Delude, 1999) can be responsible for the poor performance of the sector; exchange rate volatility is also a major factor that affects its performance. 2. Summary of Gaps in Literature Years Authors Objective of Study Data Results Critiques 2015 Emmanuel O. Saliu W. To examine the hazards of the manufacturing sector and Economic growth in Nigeria from 19812015 Secondary data from 1981 2015 The results reveal the negative relationship manufacturing sector performance and economic growth in Nigeria 2014 Ibukun C. Saliu. To asses an empirical analysis of the relationship between inclusive growth and its deteminance from 1981 2014 Secondary data from 1981 to 2014 The findings reveal that inflation and population growth has a positive relationship with inclusive growth while FDI and capital has a negative relationship with inclusive growth in the short run. 2013 Ozunmba B. Anayochukw O. An assessment of the sectoral performance and inclusive growth in Nigeria. Secondary data from 1990 2013 Manufacturing shows a positive significant relationship between with inclusive growth however, agriculture and science Years Authors Objective of Study Data Results Critiques 2007 Gajanan Malhotra To measure the capacity utilization and its determinants on the Indian economy Secondary data from 1979 to 1996 They found that capacity utilization rates were higher in earlier time period, dropped in the mid 80s and started rising in the early 90s. Insufficient data 2002 Yucel and Kurt Primary Data Jan. 2000 October 2002 Exporter companies were more exposed to business risk than nonexporter companies Small sample size 1999 Kin estimated a model of economic capacity utilization and its determinants Secondary data The evidence from U.S manufacturing showed that capital expansion not accompanied by market growth and higher materials and capital prices contributed to lower capacity utilization 1997 Carrado Mattay how capacity utilization can impact on economic growth using the nonparametric tool of correlation analysis Correlation of 0.9 existed between annual changes in the real output of goods and the index of capacity utilization for manufacturing. Correlation result is unreliable since it only examined the strength of relationship not its impact 3. Stylized Facts The growth of Nigeria per capital income oscillates between upward and downward trend from 1981 to 2013. This indicates an unstable inclusive growth behaviour and uncertain welfare state in the county (see Figure 1) Manufacturing sector's productivity of Nigeria roses slightly from 1980s except sudden increase in 1990 and fell