Global oil prices and the Nigerian external sector: an empirical investigation

Abstract

Oil price shocks have a stagflationary effect on the macro economy of an oil - importing country. The effect of such shocks is determined by the size of the shock, both in terms of the percentage increase in oil prices and the real price. The dependence of the Nigerian economy on oil makes it susceptible to the vagaries of oil price shocks in the international market. This paper empirically investigated the effects of the cyclical global oil price shocks on Nigeria's external sector using Vector Autoregressive (VAR) model covering the period 2000:Q1 and 2008:Q4. The outcome of the VAR model and Pearson correlation revealed that oil price shocks largely influence the performances of the Nigerian external sector. Reserves (RES) exhibit upward trend right from the first quarter to the sixth quarter. After the sixth quarter it started moving toward the origin. External reserves increased by 0.05 per cent in the third quarter and, thereafter, continued to increase. The positive response of external reserves to oil price shocks persisted in the subsequent quarters. This implies that the level of external reserves was influenced by oil price shocks. However, the response of current account balance to oil price shocks revealed that the current account balance declined by about 0.05 per cent in the eighth quarter and remained negative due to oil price crash in 2008.