ECONOMIC IMPACTS OF OIL PRICE SHOCKS IN NIGERIA: EVIDENCE FROM ARDL AND VECM MODELS
Authors: Kumar Thapa Arun, Oluwaseun Adeyemi Adebayo
DOI: 10.5281/zenodo.17368242
Published: April 2024
Abstract
<p><em>Nigeria's economy is heavily reliant on oil, with crude oil accounting for a significant share of government revenue and export earnings. This dependence exposes the nation to economic vulnerabilities stemming from global oil price fluctuations, which can disrupt fiscal stability and economic growth. In the context of Nigeria's Vision 2030, which aims to diversify the economy and reduce its reliance on oil, understanding the effects of oil price shocks on economic growth becomes critical for formulating resilient policies and achieving sustainable development. This study investigates the effect of oil price shocks on Nigeria's economic growth in the context of Vision 2030, which emphasizes economic diversification and resilience. The research utilizes annual time series data spanning 42 years (1981–2022) for key macroeconomic indicators: Gross Domestic Product (GDP), Crude Oil Price (COP), Crude Oil Revenue (COR), Exchange Rate (EXR), and Non-Oil Revenue (NOR). Data were sourced from the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), and World Bank. The study adopts a combination of Vector Error Correction Model (VECM) and Autoregressive Distributed Lag (ARDL) models to examine both short- and long-term relationships among the variables. Descriptive statistics revealed significant variability in GDP (mean: 226.68, standard deviation: 169.50) and other variables, reflecting Nigeria's economic volatility. The ARDL Bounds Test confirmed a long-run relationship among the variables, while the short-run estimates revealed that crude oil prices significantly impacted GDP (coefficient: 1.22, p < 0.05), and exchange rate fluctuations had both positive and negative short-term effects. Longrun results showed a negative impact of crude oil prices (coefficient: -2.26, p < 0.05) and crude oil revenue (coefficient: -0.08, p < 0.01) on GDP, emphasizing Nigeria's vulnerability to oil price shocks. Diagnostic tests confirmed the model's stability, with no evidence of serial correlation or heteroscedasticity (p > 0.05). We concluded based on the findings that oil price shocks adversely affect Nigeria's economic growth, highlighting the need for diversification to stabilize the economy. It recommends structural reforms to reduce overdependence on oil, increased investment in non-oil sectors, and exchange rate stabilization policies. These measures are critical to achieving Nigeria's Vision 2030 goals of economic resilience and sustainable growth. </em></p>
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