Deregulating the Nigerian Economy for Enhanced Real Sector Growth

Abstract

During the first two and half decades of political independence, Nigeria adopted a regulated economic policy, ostensibly to promote rapid development of her nascent economy. Of strategic importance was the real sector which, in line with government economic objectives at the time, was classified as a preferred sector. The major policy thrust of the regime was maintenance of low interest rates, fixed exchange rate, administratively controlled credit allocation, protection of domestic industries from foreign competition, etc. However, the sub-optimal performance of the Nigerian economy during the regulated regime, as shown by declining levels of domestic production capacity, rising level of inflation, high rate of illegal importation, often, of substandard products, low rate of domestic savings, etc., is testament to inability of the regime to drive rapid economic growth, hence the adoption of a deregulated regime in July 1986. Deregulation aimed at restructuring and redirecting the Nigerian economy, promoting competition and raising productivity of the real sector. Against this background, the study therefore examines the extent to which the economic deregulation policy (embodied in government’s structural adjustment programme) impacted on the performance of the real sector in Nigeria. Specifically, it examines the extent to which changes in key indicators of economic performance like exchange rate, private sector credit, trade openness and inflation rate explain industrial output performance in Nigeria. Annual data on the variables, sourced from the publications of the Central Bank of Nigeria, were analyzed using the econometric technique of the Vector Error Correction Model. Evidence from the study indicates that exchange rate and trade openness exert significant positive impact on industrial output in Nigeria. The study also shows non-significant negative impact of financial deepening and inflation on Nigeria’s industrial output. Government should stabilize the foreign exchange earning capacity of the economy through effective diversification of its revenue sources in order to enhance the performance of the sector.