CRUDE OIL PRICE, EXCHANGE RATE AND THEIR EFFECT ON NIGERIA’S ECONOMY (1985 – 2015)
ABSTRACT
Nigeria is a mono-product economy in term of generating revenue from Crude oil price, which constituted its major export commodity, changes in oil prices have continued to have implications for the Nigerian economy and, in particular on the exchange rate movements. This study examined the effects of crude oil price and exchange rate on the Nigeria economy using quarterly data from the year 1985 to 2015.
Relevant descriptive and econometric analyses were employed. The econometric tests used which include the unit root tests, Johansen co-integration technique and the Vector Error Correction Model (VECM), the unit root tests was carried out using the ADF, Phillip perron and ADF-GLS; all the variables were stationary at first difference. The long run relationship among the variables was determined using the Johansen Co-integration technique and there were 3 co-integrating vectors in total, the vector error correction model was used to examine the speed of adjustment of the variables from the short run dynamics to the long run and the impulse response function was used to determine the causal impact of shocks of the independent variables to response of the dependent variables.
The result findings revealed that there is no significant relationship among Crude oil price, exchange rate and RGDP, no significant relationship among Crude oil price, exchange rate and external reserve and no significant relationship among Crude oil price, exchange rate and CPI.
The study concluded that there exist a strong empirical evidence of timing importance in the crude oil price and exchange rate relationship. And recommendations were that the country should diversify from crude oil dependency because as crude oil price increases, the CPI also increases largely. Second, government pursuit of managed float exchange rate is desirable to ensure a substantial increase in the external reserve without significant damage of the exchange rate of the country. Third, an effective management and stabilization of crude oil price by Organization of Petroleum Exporting Countries (OPEC) could reduce the effect of its shocks on economic performance of Nigeria.
Keywords: Crude Oil price, Exchange rate, Economic Growth (RGDP), CPI, External reserve.