Analysis of the Determinants of Nigeria Imports Demand

CHAPTER ONE

INTRODUCTION

  • Background of the Study

Nigeria imports are a key part of international trade and the import of capital goods in a particular is vital to economic growth. Imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. The importance of international trade in the development process has been of interest to development economists. In the recent years, because of the popularity of the globalization, the interdependence among countries at world level has increased. Every country wants to achieve rapid pace of economic development through getting the maximum benefits from the international trade and the use of modern methods in the production process. With the implementation of the World Trade Organisation (WTO) rules and substantial reduction in trade restrictions, most of the developing countries imports are increasing rapidly.

Nigeria’s economy is not exception as it depends on the pattern of world’s economy. Prior to Structural Adjustment Programme (SAP) era, the Nigeria’s import demand was on the upward trend. After political independence in 1960 and throughout 1960’s, imports were mainly of finished goods produced in European industries in exchange for our raw materials exported. However, with the import substitution industrialization policy generally adopted by most developing countries, Nigeria’s import structure changed significantly in favour of importing intermediate and capital goods.

The import structure in Nigeria for some selected years showed that the total imports rose from N756,4 million in 1970 slightly dropped in 1972 and picked up again from 1973 to 8.2 billion naira in 1978 as a result of oil boom which further strengthened the structure and volume of Nigeria’s import. It slightly decreased to 7.4 billion naira in 1979 as a result of new regime of civilian rule (Alhaji Shehu Shagari became Nigeria President) in Nigeria. Import slightly increased in 1980 and 1981, which is 9.1 and 12.8 billion naira respectively. This is because imports were liberalized in 1980. This of course contributed to balance of payment difficulties in 1981.

There was sharp reduction in total imports between 1982 and 1986, which is from 10.8 billion naira to 5.98 billion naira. This is because, there was down-turn in the economy in 1982, in which as a result of this, efforts were made to restrict imports in order to stem the dangerous trend in the balance of payments problem. In real sense, the basic instruments of control that were used in moderating the growth in imports were trade tariffs which were increased for products that were considered less essential, import licenses, import levy and total prohibition of certain imports.

The efforts were, however, known to be minimal. In addendum, low capacity utilization of industries especially in 1984 and 1985 as a result of inadequate foreign exchange to procure essential inputs was a clear evidence of the dependence of the Nigeria’s economy on imports. In 1986, with introduction of Structural Adjustment Programme (SAP), import items were reduced considerably. SAP was put in place with the aim of restructuring the economy to be less dependent on imports among others. Thus, the foreign exchange problem and the large external debt led to the adoption of the Economic stabilization (Temporary provisions) Act in April 1982. Under the act, several commodities were banned from importation and some other goods were placed under specific import licenses that were previously under the open general license system. This was influenced by the decision to control imports.

In 1983, the civilian administration was overthrown by the military on the 31st of December. The main motives of this regime (General Buhari’s regime) were to protect local industries and encourage greater use of local inputs. Import tariffs were rationalized, and schedule II of the custom Tariff (consolidation) Act of 1973, which permitted the importation of federal commodities duty-free, was abrogated, with the result that only 20 items could now be imported duty-free. Between 1987 and 1995, there was massive increase in the total imports from 19.8 billion to 75.5 billion naira except slight reduction in 1996 and 1998, that is, 56.3 and 83.7 billion naira. After 1986, regardless of the introduction of SAP and other government efforts to curb importation of goods and services, the increases structure of Nigeria imports has remained unaltered. It is against this background that this study will investigate the behaviour of Nigeria’s aggregate import demand and its determinants (functions).

  • Statement of the Problem

The investigation of import demand function has important implications for macroeconomic policy issues (Tang, 2003). Some of which are the impact of expenditure switching through exchange rate management and commercial policy on a country’s trade balance; the international transmission of domestic disturbances where import demand elasticity’s which is a crucial link between economies; and the degree to which the external balance constraint affects a country’s growth. Available evidence generally suggests that most developing countries such as Nigeria registered a persistent decline in their foreign exchange earnings from the early 1980s. This is attributed largely to the collapse of commodity prices in the world market as a result of increased import.

Thus, it was not surprising that the collapse of commodity export prices in the early 1980s engendered fiscal crises in most African countries, as reflected in their huge budget deficits. In part, this led to the adoption of economic reform programmes. Economic reform is expected to affect imports, part of the strategy to restore external balance. According to Moran (1989), this policy decision is positively harmful to investment and output in developing countries. Perhaps, this is a demonstration of the reliance on imports for domestic production. Simultaneously, it reveals the role played by foreign exchange availability in the growth process.

This in Egwaikhide’s (2009) view may have prompted several authors to be preoccupied with the determinants of import in developing countries, with the result that a number of functional specifications have been explored. As a developing economy, Nigeria has had her own share of high nominal value of aggregate import over the years. This has been the order since independence in 1960, and has been made worse by the oil booms of the 1970s that gave rise to an increase in average income, and sub-sequently increase in the demand for import.

Nigeria relied on imports, to the extent that imports as a component of total trade, have persistently been on a steady rise, resulting in deficits in Nigeria’s overall trade Balance of Payments. The adoption and implementation of various import control measures during the era of controls by the authorities could not solve the problem, then Nigeria opted for exchange rate deregulation in 1986 as a way out of it. Import control measures during the period of controls include the import substitution strategy of industrialization, high tariff rates with outright ban on some categories of commodities, coupled with the use of administratively determined exchange rate. It is of note that the objective of import control has over the period been in conflict with the objective of maintaining a steady price level. Whenever this was the case, the government has opted for measures that will ensure steady price levels as against measures for the control of imports (Egwaikhide, 2009). Hence, this study will evaluate the determinants of import demand function in Nigeria to ensure a favourable balance of trade and achieve macroeconomics stability that will foster the growth and development of the economy.

  • Research Questions

The study will address the following research questions:

  1. Is there any significance impact of the determinants of import demand function in Nigeria?
  2. Could there be bi-directional relationship between the determinants of import demand function and Nigeria economy?
  3. Does long-run relationship exist between the determinants of import demand function in Nigeria?
    • Objectives of the Study

In the attempt to provide answers to these questions, the broad objective of the study will be to investigate the determinants of Nigeria’s import demand as well as ascertain the variables that determine Nigeria’s import demand. The specific objective includes;

  • To empirically determine the significance impact of the determinants of import demand function in Nigeria.
  • To evaluate the causal relationship between the determinants of import demand function in Nigeria.
  • To ascertain the long run relationship between the determinants of import demand function in Nigeria.
    • Hypothesis of the Study

H0: There is no significance of the determinants of import demand function in Nigeria.

H0: There is no bi-directional or causal relationship between the determinants of import demand function in Nigeria.

H0: There is no long-run relationship existing between the determinants of import demand function in Nigeria.

  • Significance of Study 

The importance of import demand on the sustainable growth of any nation cannot be over-emphasized; since import is all about increasing the availability of needed goods and services of any country. This work will be of great importance to the general public, the government and its agencies.

Also, it will be of great importance to the ministry of foreign affairs, ministry of finance as well as schools. Above all, it will be a foundation for the economist, students and researchers who have interest on import demand.

  • SCOPE AND LIMITATION OF STUDY

This research will empirically evaluate the import demand function on Nigerian economy for the period of (1981 – 2015). The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistency due to poor nature of information management in Nigeria. Other constraints are; time factor, financial constraints and hosts of other constraints that prevent the researcher to present a better work than this. You can download other projects by clicking on project materials.

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