IMPACT OF CRUDE OIL PRICE VOLATILITY ON THE NIGERIAN ECONOMY

ABSTRACT
This study examined the impact of crude oil price volatility on the Nigerian economy for the period of 1970 to 2018 using annual data. The study adopted a disaggregated approach by considering three economic sectors of Nigeria; namely: Manufacturing, Transportation and Agricultural sectors and government expenditure which was decomposed into recurrent and capital components. Five models were estimated in this study. The study employed a three step econometric methodology to examine the effect of oil price volatility on the Nigerian economy in a Vector Error Correction (VEC) frame work. First, the order of integration in the time series was tested using the ADF, PP and KPSS statistics to determine the order of integration of the variables. The unit root tests revealed that the variables were integrated of same order (purely I(1) variables). The co-integration test was carried out using the Johansen and Juselius (1990, 1992) methodology. The cointegration test revealed that there was cointegration among all variables in the five models of the study; Hence, all the models were estimated using the Vector Error Correction Model. The estimated results showed that the impact of oil price volatility on the economy varies across economic sectors in Nigeria. While the manufacturing sector is adversely affected by oil price volatility, its effect on the agricultural sector is positive and significant; the transportation sector is unaffected significantly by oil price volatility. Besides, the result of the study revealed that, to some extent, oil price volatility had varying impact on disaggregate government expenditures. Although, both government recurrent and capital expenditures are negatively affected by oil price volatility; its impacts on government recurrent expenditure is stronger in the long run, while it has a stronger short run impact on government capital expenditure. These findings justify the disaggregated approach employed in this study. The study recommends that the Nigerian government must make concerted effort to diversify the government sources of revenue to protect the country against negative shocks in oil prices. Also Revenue windfall from oil should be saved and used as intervention fund to support government expenditure (particularly government capital expenditure) in periods of negative shocks in oil prices.