DETERMINANTS OF IMPORT IN NIGERIA
ABSTRACT
The study carefully evaluates determinants of import in Nigeria. Nigerian economy suffers from a permanent current account deficit mainly due to the continuing and growing balance of trade deficit in this context there is an increasing need to identify the variables that affect Nigerian imports demand to determine the policies needed to reduce the chronic deficit in the trade balance.
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 for some categories of commodities, coupled with the use of administratively determined exchange rate. The major objectives of the paper are: investigate the determinants of the Nigerian imports, Ascertain the variables that determine demand for imports in Nigeria, analyse the behavior of the demand for imports in Nigeria, estimate the Nigerian import demand function and to estimate the size of the elasticity of the import demand function.
Concerning methodology, secondary sources of data was used for the study. E-VIEW econometrics software was used to estimate the model and evaluation of the results. Key findings from the study showed that while real gross domestic product positively affect import in Nigeria, the both variables of index of openness and real exchange rate negatively affects import. The result of real GDP and that of reach exchange is in consonance with economic theory and previous study in the area, however, the negative impact of index of openness result obtained is against apriori expectation and may be the result of distorted data collection system in Nigeria or possibly a result of the insignificance of the trade policy in Nigeria.
Recommendations for the study include; there should be measures put in place by the government to curtail the increasing import in the midst of the increasing economic activities in the Nigerian economy.
TABLE OF CONTENT
CHAPTER ONE 3
1.0 INTRODUCTION 3
1.1 BACKGROUND TO THE STUDY 3
1.2 STATEMENT OF THE PROBLEM 7
1.3 OBJECTIVES OF THE STUDY 7
1.4 RESEARCH QUESTION 8
1.5 STUDY HYPOTHESES 8
1.6 SIGNIFICANCE OF THE STUDY 8
1.7 ORGANISATION OF THE STUDY 9
CHAPTER TWO 10
2.0. LITERATURE REVIEW 10
2.1. CONCEPTUAL ISSUE 10
2.2.1. THE GROWTH OF IMPORTS IN NIGERIA 12
2.2.2. TRADE POLICY TRENDS AND OBJECTIVES 13
2.2.3. SAP AND TRADE PERFORMANCE 14
2.2.4. TREND IN IMPORT CONTROL MEASURES 15
2.2.5. STYLIZED FACTS ON TRADE POLICIES, OIL PRICES AND IMPORT 18
2.2.6. IMPORT DEMAND THEORIES AND MODEL 19
2.2.7. SAVING, INVESTMENT, AND THE BALANCE OF TRADE: 23
2.2.8. MORE DEBATES ON THEORIES OF IMPORT DEMAND 24
2.2.9. Demand and the Demand Curve 25
2.3.0. Gross domestic product: 26
2.3.1. Exchange Rate Systems: 30
2.3.2. Consumer Price Index (CPI): 34
2.4 EMPIRICAL LITERATURE 36
CHAPTER THREE 40
3.0 METHODOLOGY 40
3.1 INTRODUCTION 40
3.2 Model Specification 40
3.3 METHOD OF EVALUATION 41
3.3.1 ECONOMIC CRITERIA: 41
3.3.2 STATISTICAL CRITERIA: 41
3.3.3 ECONOMETRIC CRITERIA: 42
3.4 JUSTIFICATION OF THE MODEL: 42
3.5 DATA REQUIRED AND SOURCES. 42
3.6 ECONOMETRIC SOFTWARE: 43
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
An import is a commodity brought into a territory, especially across a national border, from an external source. Importation and exportation are the defining financial transactions of international trade. An import in the receiving country is an export from the sending country.
In international trade, the exportation and importation of goods are limited by import quotas and mandates from custom authority. The importing and exporting countries may impose a tariff (tax) on the goods. In addition, the exportation and importation of goods are subject to trade agreements between the importing and exporting countries.
Import consists of transactions in goods and services to a resident of a country from non-residents. The exact definition of imports in national income accounts includes and excludes specific border cases. A general view of imports in national income accounts is given below.
An import of a commodity occurs when there is a change of ownership from non-resident to a resident; the does not necessarily mean that the commodity in question physically crosses the frontier. However, in specific cases, national accounts impute changes of ownership even though in legal terms no change of ownership takes place. For example, cross frontier financial leasing, cross border deliveries between affiliates of the same enterprise, commodities cross the border for significant processing to order or repaid. Also smuggled goods must be included in the import measurement.
Imports of services comprise all services rendered by non-residents to residents. In national income accounts, any direct purchases by residents outside the economic territory of a country are recorded as imports of services, therefore all expenditure by tourists in the economic boundary of another country are considered part of the imports of services. Also international flows of illegal services must be included.
Basically, there are two types of import, which include:
1. Industrial and consumer goods.
2. Intermediate goods and services.
Industrial goods are made up of machinery, manufacturing plants and materials, and any other commodity or component used by other industries or firms. They are based on the demand for consumer goods that they may help to produce. They are classified as either production goods or support goods. Production goods are used in the production of final consumer goods, while support goods are, in general, used as inputs or raw materials to produce consumer goods. They are derived demand because they are demanded to produce consumer products.
Consumer goods are ready for consumption and satisfaction of human wants, such as clothing or food. Consumer goods are not used in the production of other goods. They are tangible commodities that are produced to satisfy the wants of the buyer. Consumer goods are classified as durable goods, non-durable goods, or consumer services.
Durable goods have a significant lifespan of three years or more. The consumption of a durable good is spread out over time the entire life of the good, which causes demand for maintenance and upkeep. Bicycles, furniture, and cars are examples of durable consumer goods.
Non-durable goods are goods that are purchased for immediate consumption or use, and they have a lifespan that is less than three years. Beverages, food and clothing are examples of non-durable consumer goods.
Consumer services are intangible services or products that are produced and consumed at the same time. Car washes and hair cuts are good examples of consumer services.
Intermediate goods or producer goods or semi-finished products are goods, such as partly finished goods, used in the production of other goods including final goods. They are used either for resale or for further production in the same year. They are generally purchased by one by one production unit from another production unit. They also have derived demand as their demand depends on demand for final goods. The value of intermediate goods is merged with the value of final goods. In the production process, intermediate goods either become part of the final goods, or are changed beyond recognition in the process. Examples include sugar when used as an input or ingredient in other food production, steel used in the production of many other goods, such as bicycles, car engines, plant, ply wood, pipe and tube, and ancillary parts, purchases of trucks, vehicles, aircraft, etc by government for military purposes to produce defense services.
In the broad sense, there are three types of importers:
1. Those looking for any product around the world to import and sell.
2. Those looking for foreign sourcing to get their products at the cheapest price.
3. Those using sourcing as part of their global supply chain.
Direct import refers to a type of business importation involving a major retailer and an overseas manufacturer. The retailer bypasses the local supplier or middleman and buys the final product directly from the manufacturer, possibly saving in added cost data on the value of imports and their quantities often broken down by detailed lists of products are available in statistical collections on international trade published by the statistical services of intergovernmental organizations e.g. UNSTAT, FAOSAT, OECD, supranational statistical institutes (e.g. Eurostat) and national statistical institute.
It is generally embraced that developing countries require increasing quantities of certain imports they cannot produce themselves efficiently.
In recent years, because of the prevalence of globalization, the interdependence among countries of the world has increased immensely and very rapidly. Each economy tries to achieve rapid pace of economic growth and economic development by getting the maximum advantages or benefits from world trade and use modern methodologies in the production process. With the implementation of World Trade Organisation (WTO) rules, regulation, and substantial reduction in trade restrictions, world trade expanded at a very fast rate. Imports represent great priority in the economy overall for all countries of the world. There is a direct relationship between import and economic variables such as investment, consumption and output, imports play an important role in the context of the total balances in the national economy and create the right conditions for growth (Fathalla, 2006).
Similarly, imports contribute to the growth of GDP components, it promotes the standard of living for individuals through spending on imported goods and services plus it raises the level of domestic investment and increase the estimated productivity of the economic sectors through intermediate goods imports (Abdali, 2007).
International trade has a crucial role in the Nigerian economy, to its central role in economic production, employment, balance of payments, and the supply of production inputs for the domestic market and consumer goods. Prior to the Structural Adjustment Programme (SAP) era, the Nigeria’s import demand was on the upward trend. After political independence in 1960 and throughout 1960s, Nigeria’s imports were mainly finished produced in European Countries in exchange for our raw materials exported. However, with the Import substitution Industrialisation Strategy generally adopted by most developing countries, Nigeria’s import structured changed significantly in favour of importing intermediate and capital product.
In 1986, with the introduction of Structural Adjustment Programme (SAP), import items were reduced considerably. SAP was adopted with the aim of restructuring the Nigerian economy to be less dependent on imports among others. Thus, the foreign exchange problem and the huge external debt led to the adoption of Economic Stabilisation (Temporary Provision) Act in April 1982.
Under the act, several commodities were banned from being imported, and some other commodities were placed under strict and 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 31st December. The major motive of this General Buhari’s regime was to protect domestic industries and encourage greater use of local inputs. Importation tariffs were rationalized, and schedule II of the custom tariff (consolidation) Act of 1973, which permitted he 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 naira except slight reduction in 1996 and 1998 that is 56.3 billion naira and 83.7 billion naira. After 1986, regardless of the introduction of SAP and other government efforts to reduce or control importation of goods and services, the increasing structure of Nigeria’s import has remained unchanged.
1.2 STATEMENT OF THE PROBLEM
Nigerian economy suffers from a permanent current account deficit mainly due to the continuing and growing balance of trade deficit in this context there is an increasing need to identify the variables that affect Nigerian imports demand to determine the policies needed to reduce the chronic deficit in the trade balance.
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 for 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 conflicts with the objective of maintaining a steady price level. Whenever this was the case, the government has often time opted for measures that will ensure steady price level as against measures for the control of imports. (see Egwaikhide,1999). The consequences of this are the fact that imports remained on a steady rise, with no solution yet in sight.
Interestingly, past studies like those by Ajayi (1975), Egwaikhide (1999),
Aliyu (2001), and Shehu and Aliyu (2007) revealed that some variables like real income, real exchange rate, foreign exchange are the main determinants of Nigeria’s import. In the light of this, the study seeks to assess the effects of the major components of Nigeria’s import demand function, with a view to ascertaining the determinants of import in Nigeria alongside its welfare effect on the Nigerian Economy.
1.3 OBJECTIVES OF THE STUDY
The broad objective of the study is to investigate the determinants of the Nigerian imports.
Specifically, the study seeks to:
1. Ascertain the variables that determine demand for imports in Nigeria.
2. Analyse the behavior of the demand for imports in Nigeria.
3. Estimate the Nigerian import demand function.
4. Estimate the size of the elasticity of the import demand function.
1.4 RESEARCH QUESTION
In order to achieve the objectives of the study, the study will address the following question:
What are the determinants of Nigerian import?
1.5 STUDY HYPOTHESES
H1: There is a positive relationship between GDP and demand for imports in Nigeria.
H1: There is a negative relationship between exchange rate and demand for imports in Nigeria.
H1:There is a positive relationship between trade openness and demand for imports in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The importance of the study heavily reflects on the trade balance in favour of import in a narrow export base. Limited variety of imports, limited exports over imports, and the possibility of pressure on imports to try to narrow the imbalance and the gap between exports and imports (AL-Jafari, 2000, p.8), also contribute to the study.
1. Detect the impact of imports on the various sectors and what are the factors affecting it.
2. Assess the reality of the Nigerian trade relations for the formulation of policies and options exchange in the future with the countries of the world provides an opportunity to restore economic interdependence and trade between Nigeria and the rest of the world.
3. Assess the size and type of constraints and obstacles faced by foreign trade and development of recommendations and future prospects of foreign trade in Nigeria.
4. Shed light on the options trade and the future prospects of the Nigerian economy and economic policies and actions should be taken to change this reality so as to enhance the capabilities of the Nigerian economy.
5. The study will enable us assess the extent to which estimates are in conformity with those previously obtained by earlier studies. It is expected to provide empirically predictive estimates that will be of relevance in a number of ways.
6. Also for policy, it will provide valid and reliable information on how best to regulate the value of Nigeria’s import demand in the midst of growing income and by extension provide policy options for the regulation of Nigeria’s balance of payment position.
7. For research, it will add to the existing literature available for use by researchers.
1.7 ORGANISATION OF THE STUDY
Touching this introduction, chapter two discusses review of literature, while chapter three presents theoretical framework and model specification. Chapter four discusses data presentation and empirical results. Summary, conclusion and recommendations are contained in the last chapter.
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