Oil price shocks and the dynamics of current account balances in Nigeria

Abstract

This paper pioneers research on the relationship between oil price shocks and current account dynamics in Nigeria, a country that doubles as an oil exporter and importer. Structural vector autoregression is applied to quarterly data from 1970Q1 to 2008Q4 to identify oil price shocks and to evaluate its net effect on Nigeria's current account balances. After introducing three control variables (output gap, real exchange rate misalignment and the lagged values of current account ratio), we impose six structural restrictions on the model to help track and identify the structural shocks of oil prices on current account balances. Overall, we find that oil price shocks have a significant short‐run effect on current account balances for Nigeria. Specifically, the impulse response of the current account ratio to oil price shocks increases speedily in the first six quarters, and then, it declines afterwards until the 30th quarter. The variance decomposition analysis shows that approximately 15.77 per cent of the variations in current account dynamics are caused by oil price shocks. The insight we draw from this finding is that there is no one‐for‐one relation between oil price shocks and current account dynamics. Exchange rate misalignment provides the offsetting effect as revealed from our results. The implication for policy is that reserve‐augmenting strategies, lax monetary policy and intensified international financial integration would need to be enhanced and sustained by policy‐makers to reinforce the positive effects of oil price shocks on the Nigerian economy.

Sources of oil price shocks and external balance in Ghana

“…In either case the trade balance of the economy would deteriorate. The result obtained is consistent with results obtained by Chuku et al (2011) and Kilian et al (2009).…”

“…Unlike Chuku et al (2011) and Kilian et al (2009), Mucuk, Gerçeker andAy (2013) focused on the effect of fluctuations in the price of oil on current account balance of Turkey and found that increases in the price of crude oil resulted in current account deficit. However, their study did not take into account the role of the source of the oil price shock which per the argument of Kilian et al (2009) andChuku et al (2011) could have influence on how oil prices would affect the current account balance.…”

“…However, their study did not take into account the role of the source of the oil price shock which per the argument of Kilian et al (2009) andChuku et al (2011) could have influence on how oil prices would affect the current account balance. Similar to the work of Mucuk et al (2013), Huntington (2015 examined the relationship between oil price and current account balance of 91 countries which included Ghana using a panel estimation technique.…”

“…Although Chuku, Akpan, Sam and Effiong (2011), used similar methodology to examine the effect of oil price shocks on the current account balance of the Nigerian economy, their study was based on a net oil exporting developing economy. The result of their study indicated that oil price shocks (supply & Demand Shocks) had a positive impact on Nigeria's current account balance.…”

Exploring the impact of oil revenues on OPEC members' macroeconomy

“…The increase in oil revenues was found to have a positive impact on Kuwait's government consumption expenditure, money supply and the consumer price index (Eltony and Al‐Awadi, ). Oil prices also played a significant impact on Nigeria's output, real exchange rate and the current account (Chuku et al ., ). However, different results were arrived at by Adeniyi et al .…”