Oil Price and Nigeria Balance of Payment: A Causality Analysis

Oil Price and Nigeria Balance of Payment: A Causality Analysis

Author(s) by Thankgod Oyinpreye Apere
Pages 81-88
Keywords Vector auto regression (VAR) model, Oil price shock, Balance of payment position
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Abstract


This research empirically investigated oil price and balance of payment in Nigeria with quarterly secondary time series data over the period 1980:1 to 2015:4 obtained from the Central Bank of Nigeria (CBN) statistical bulletin and Energy Information Administration (EIA). The ordinary least squares (OLS) for model estimation and vector auto regression (VAR) model for Granger causality test were used. Firstly, it was observed that all the variables were stationary at their first differences, using the Phillip-Perron unit root test. Having determined the stationarity of the variables we further employed the Johansen Co-integration test, and the Vector auto regression (VAR) model for Granger causality test. The study revealed a unidirectional causality relationship between balance of payment and crude oil price. The result shows that oil price granger causes balance of payment; thus, reflecting on a common premise in policy discussions that oil price shocks have large and often harmful effects on balance of payment accounts, forcing countries to borrow from abroad to offset adverse terms-of-trade shocks. Similarly, there is also unidirectional causality between oil price and exchange rate. From the results there is bi-directional causality between oil price and gross domestic product, while non- causality exists between oil price and inflation. This study therefore recommends that the Nigerian government should implement measures aimed at reshaping the structure of our trade. Specifically, there is an urgent need to strategically diversify the country export as well as to encourage the manufacturing of high-end, value added goods and services in Nigeria.

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