Oilprice and macroeconomics variables have gained recognition in literature overthe years among scholars. This arguments stems from the effect of thefluctuations in oil price and an economy’s trade balance over the years.
Gnimassoun, Joets, & Razafindrabec (2017) notedthat for most oil exporting and oil importing countries, fluctuations inoil price have a great impact on the trade balances of the economies, sometimesresults to deficit or surplus balances. In topical years, the oil price rushforward has shown a negative impact on the trade balances on most of the oildependent countries such as Nigeria. Also, the unexpected increase in the priceof oil from 2003 to 2014 placed the economies of most oil dependent countrieson the boom side as the increase favoured their revenue. Considering the hugeamount of revenue generated from the oil sector by the oil exporting countries,the allocation of the revenue in most of the economies has gained the interestof researchers and policymakers on how the revenue are channeled if efficientor mismanaged. Scholars such as Blanchard and Milesi-Ferretti (2009) Helblinget al.
(2011) Arezki and Hasanov (2013) noted that the fluctuations in oilprice have significant implications on the current account balances of aneconomy.InNigeria, one issue that is behind in literature is the nexus between oil pricefluctuations and current account balances. Many studies have focused on theimpact of oil price on economic growth, while others tried to check itsrelationship with monetary and fiscal policy variables such as exchange rate,inflation rate, and government expenditure pattern through revenue. Forexample, Adamu (2015) argued on the issueof oil price relation to government revenue and budget in Nigeria that the globaloil price fall shock in 2014 from $141/bbl to $65/bbl in 2015 made thegovernment to adjust its budget to $45 because of the unexpected continuousfall in the price which determines her revenue. Also on the issue of oil pricerelation to exchange rate volatility, Aliyu (2009) noted that positive changein the oil price facilitates economic growth and increase the value of thecountry currency against other currencies of the world which in turn have agreat impact on trade inflow in the economy. Contrary to the submission of Aliyu (2009), Salisu& Mobolaji (2013) argued based on the causal direction between oiland foreign exchange markets that, fluctuations in oil price may result intodepreciation in Nigerian currency relative to USD, while depreciation in USDmay cause oil price to increase in the global market. Onthe relationship between oil price and inflation rate in Nigeria, Corrado andJordan (2002) noted the importance of understanding the fluctuations in the oilprice on general price of goods and services and other macro-economicindicators is important to aid the efficiency of trade in the economy.
Apere (2017) onthis note submitted that a direct relationship exist between oil price andinflation in an economy. That is, any fallen or rising signing in the price ofoil brings about a fall or increase in the inflation rate. Apere (2017) furtherargued from a different view that fluctuations in oil price affect inflationthrough two channels; The first captures the fiscal which he explains in termsof the purchaising power of the government in form of expenditure and thesecond in terms of the change in the general price level of goods and services(both import and export) in the economy.To the best of our knowledge on the studies of oil pricefluctuations nexus in Nigeria, no study or few has been carried out on the relationshipbetween oil price fluctuations and current account balances in Nigeria. Thisstudy therefore aimed to investigate the impact of oil price fluctuations oncurrent account balances in Nigeria.
The choice of Nigeria is informed by itslarge dependency on the oil sector as its major source of income, and alsomarking the argument of the impact of oil price shocks on general price ofgoods and services, currency value and trade activities. It is important to examinehow far or to what extent has the shocks in the oil price affect the balnacesof the economy reserve.The rest of the study is divided into five sections. Sectiontwo holds the literature review, section three presents the data source andmethodology, section four contains the analytical framework, and section fivereveals with the conclusion and recommendations from the findings.2.
0 Literature ReviewInthe 1960s, Mundell-Flemming extends the IS-LM model in order to argue on theeffect effect of monetary policy on macro-economics variables. The modelexplicitly capture the relationship between goods market, money market andforeign exchange balances. They argued that interest rate and output areimportant factors an economy can make use of to regulate their economy. Thelong-term dynamics was discussed by Laursen and Metzler (1950) and Mundell (1963) but a new approach was introducedin the 1980s by Masson and Knight (1986). Masson and Knight submitted that fora country experiencing an expansionary fiscal shock needs a continuous flow of foreign funds to sustainits domestic investment which assumes current account deficit, induced by aninitial appreciation of the country’s currency value. In summary they allargued that current account balances reacts to shocks in fiscal and monetarypolicy which could be found to be in existence in Nigeria as the governmentpattern of expenditure is affected by the shocks in the global oil price whichreduces their current account worth.
Based on the dutch disease syndrome argumenton the revenues from natural resources trade, especially ‘oil’, the growth ofan economy that largely depends on crude oil will be affected by fluctuation isthe global oil price which place huge impedement on the income and expenditurepattern of such economies for example Nigeria.On the empirical front, various studies have been carried outto examine the linkage of oil price fluctuations in different perpective, somefocus on the relationship that exists between oil prices shocks and economicgrowth, some focused on oil price shocks and macroeconomics variables, whilesome on oil price shocks and expenditure pattern. The empirical studiesfindings include;Gnimassoun et al. (2017) used a time varying parameter vectorautoregressive (TVP-VAR) in canada to analyse the nexus between oil pricefluctuations and current account.
It was argued that oil price fluctuationsinsignificantsly inluence current account balances. They noted four commonshocks that expalins the nexus bewteen oil price and current account balances;The shocks include: (i) shocks to theflow supply, (ii) shocks to the flow demand for crude oil reflecting the stateof the global business cycle, (iii) precautionary demand shocks oil stocksabove the ground (oil specific demand shocks for oil stocks above the ground),and (iv) other idiosyncratic oil demand shocks (residual shocks).On the other hand, Allegret et al (2014) incorporated therole of financial development in the model of the nexus between oil pricefluctuations and current account balances in 27 oil exporting countries, theirresults revealed oil price fluctuations positively relates to current accountsin the countries, but found largely to depend on financial devlopment. Nader(2017) argued on the relationship between oil price shocks and stock market inSaudi Arabia, United Arab Emirates and Russia to be significant based on theorigin of the oil shocks and the force varies across countries and sectors.
Al-Khazaliand Mirzaei (2017) empirically investigated how shocks in oil price affects non-bnak performing loans in 30 oilexporting countries. They agreed that shocks inoil price negatively and signifiacantly relates with non-bankperforming loans. Huntington (2015) similarly investigated crude oil traderelation to current account in 91 oil importing and exporting countries. It was argued that net oil exports are a significant factor thatdetermines current account balances, but that net oil imports often do not influence current account deficits. In theoil importing countries, it was confirmed that higher oil imports contrinbutesto current account deficit balances for the rich countries.
On the relationshipbetween currents accounts and exchange rate in Sub-Saharan Africa countries, Gnimassounand Coulibaly (2014) submitted that in the Sub-Sahara Africa countries, currentaccounts over the years under study has been highly sustainable, but lower incountries that operate on a fixed exchange rate regime.For the Turkish economy, Ozlale and Pekkurnaz (2010) revealedthat current account response to oil price shocks in the economy of Turkey increasegradually but falls after three months of the shocks occurrence, whichvalidates their conclusion that oil prices shocks significantly influencecurrent account in the short-run. Narayan (2013) on the economy of Fiji used astructural vector autoregressive model to examine the impact of fuel import anddevealuation policy on current account. The study argued that deteroiation inthe current account balances in the short-run is due to fuel import increasingactivities.
Relating current account to output volatility in 185 countries,Elgin and Kuzubas (2013) argued that larger current account deficit isattributed to higher output volatility, while the feedback effect of outputvolatility to shocks in cuurent account is negative.In the context of Nigeria, Babatunde, Adenikinju, and Adenikinju(2013) argued that the response of stock markets to oil price shocks isinsignificant, but negatively revert at a period depending on the oil priceshocks. Also, Babatunde (2015) on the nexus between oil price shocks andexchange rate in Nigeria argued that between january 1997 and December 2012,positive oil price shocks were found to depreciate the exchange rate, whilenegative oil price shocks appreciates the exchange rate of the country. Salisuand Mobolaji (2013) modelled the volatility and transmission between oil priceand exchange rate for the economy of Nigeria and US using the VAR-GARCH newlydevelped model, it was observed from their findings that there is abidirectional effect from fixed exchange rate to oil price shocks in theeconomy of Nigeria and recommeneded that the inclusion of oil into adiversified portfolio of fixed exchange rate will improve its risk-adjustedreturn performance. Akinleye and Ekpo (2012) examined the macroeconomicimplications of symmetric and asymmetric oil price and oil revenue shocks inNigeria, using the vector autoregressive (VAR) estimation technique. Theyconcluded that the economy of Nigeria shows signs of the Dutch disease syndromein the short and long run. They futher argued from their findings that theeffect of oil price shocks on economic growth is only effective in thelong-run, while only affects the general price level marginally in theshort-run.
On the importance of oil on growth of the Nigerian economy, Akinlo(2012) used VAR method to validates his argument that an appropriate regulatorypricing of the oil product is needed for the development of the other sectorsof the economy in Nigeria. Ishola, Olaleye, Olajide and Abikoye (2015)empirically argued on the dynamic nexus between oil price and inflation inNigeria, they argued changes in crude oil price had significant effects oninflation; inflation has been influenced by exchange rate changes and changesin broad money supply and maximum lending rate. Adamu (2015) on the same standsubmitted that the global fall in oil prices has a significant impact on thecrude oil revenue and prices in Nigeria. Ebele and Iorember (2015) whileinvestigating Nigeria’s output response to shocks in oil prices using theBenchmark Model proposed by Hamilton (2003); following Lee, Shawn and Ratti (1995),and Mork (1989) confirmed that oil price shocks have positive and significanteffects on output growth in Nigeria for both oil and non oil GDP.
There is a lack of consensus among the existing empiricalstudies on the effect of oil price fluctuation on the variables been examined.The inconclusive argument could be as result of differences in scope,methodology and area where the study is been carried out. This study thereforecontributes to the ongoing argument in literature by investigating the nexusbetween oil price fluctuatins and current account balances in Nigeria using theARDL method.3.0 Data Source and MethodologyThe study rely on annual time series data from 1977 to 2015.
The dependent variable which is current account is proxy as Current account aspercentage of GDP sourced from World Development Indicators (2016), Oil priceis proxied as the Brent Oil price sourced from BP statistics (2016), Populationis proxy as population growth rate sourced from the World Development Indicators(2016), also trade is accounted for using Trade as a percentage of GDP alsosourced from WDI (2016) (see Appendix 1). Our sample size consist of onlyNigeria. In order to estimate the parameters, the study formulated a model torepresent the relationship between current accounts and oil price fluctuationsin the Nigerian economy.
The study followed the model of Primiceri (2005),Cogley and Sargent (2005), Baumeister and Peersman (2013) and Gnimassoun et al.(2017). The model for this study in a simplified linear form is stated as; Where C is current account as the ratio of GDP, POP is thepopulation growth rate, GDP is gross domestic product annual growth rate, T istrade as a percentage of GDP, u is the error term, t is the time accounted for.Equation 1, in its linear form is transformed to linear-logform by taking a natural logarithm of oil price. The model is therfore statedas; We specify equation 2 in econometric form as; Where is the intercept, are the coefficients ofthe parameters, and is the error term at time t. In order to estimatethe associational relationship between current account and the independentvariables (OP, POP, GDP, T) in the short-run and the long-run, we specify theAutoregressive Distributed Lag (ARDL) model. The long-run model is specifiedas; The short-run model of the effect of oil price fluctuation-currentaccount nexus is specified as; 4.0 Resultsand DiscussionIn order to avoid spuriousresult, stationary test was carried out to ensure none of the variables arestationary at order of integration two I(2) especially when ARDL bounds testis to be used to capture the long-run co-movement among the variables.
TheAugmented Dickey Fuller (ADF) test was used to ascertain this statement. Fromthe result, it was revealed that C and GDP were found to be stationary at I(0), while POP, T, and OP werestationary at I(1). The results of the unit root test are presented in table 1.Table 1. Unit Root Test Result None Intercept Trend & Intercept Variables levels C -2.
83552* -2.99062* -3.10833* OP 0.
449693 -1.50489 -1.78149 POP -0.20651 -0.
83588 -1.99219 GDP -4.25689* -4.90115* -5.82293* T -0.90542 -2.04494 -1.
85291 None Intercept Trend & Intercept 1st Difference C -5.88226* -5.80195* -5.77404* OP -5.
45434* -5.45308* -5.3511* POP -2.1946** -2.15003 -2.19208 GDP -9.66846* -9.53695* -9.
39947* T -8.47996* -8.38958* -8.
50793* Notes: *1, **5,***10 percent level of significance.Source: Authors Computation(2017)Bounds test cointegrationwas estimated to examine the existence of long-run cointegration among thevariables in the study. From the result, it was noted that there is a long-runcointegration among the variables as the result revealed F-statistics value of5.697435 greater than the lower bound I0 and the upper bound I1 at 5% level ofsignificance. The result is presentedbelow in Table 2Table 2: ARDL Bounds Test Result DEP/VARIABLES F-Stat Bounds (5%) Outcome I0 I1 Ct=f(OPt, POPt, GDPt, Tt) 5.697435 3.47 4.
57 Cointegration Source: Authors Computation(2017)Tounderstand the nature of the relationship between current account and oil pricefluctuations in Nigeria in both short-run and long-run having found a long-runcointegration relationship among the variables, ARDL (2, 2, 2, 2, 0) specificationfor the relationship between current accounts and oil price fluctuation wasestimated.Thelong-run estimated coefficient result revealed that Oil price relation withcurrent account is negative and significant at 10% level of significance. Thisimplies that a 1percent increase in oil price brings about 13.7units reductionsin the current account balances. This result is in consonance with the findingsof Huntington (2015) that, oil price shocks is an important determinant ofcurrent account balances, but against the confirmation of Allegret et al (014)and Gnimassoun et al (2017) that oil price variations does not increase currentaccount but decrease. GDP had a positive and significant impact on currentaccount in Nigeria. The implication of this is that one unit increase in theGDP results to 1.29units increase in the current account.
Population growth andTrade impacted negatively and insignificantly on current account. This impliesthat a unit change in population growth and trade lead to 4.97unit and 0.17unitdecrease in the current account balances (see table 3 below). Table 3: Long Run Coefficients Variable Coefficient Std. Error t-Statistic Prob. LOGOP -13.742 7.
918267 -1.73548 0.096 GDP 1.285168 0.
397548 3.232736 0.0037 POP -4.97469 3.834737 -1.
29727 0.2074 TR -0.1712 0.186148 -0.
91967 0.3673 C 301.0853 204.5223 1.472139 0.1545 @TREND 0.
821081 0.457189 1.795932 0.0857 Source: Authors Computation(2017)The coefficient of the short-runestimate revealed a significant relationship between oil price shocks andcurrent account balances and correctly signed with high magnitude (-0.73165);the coefficient implied that 73% of divergence or disequilibrium caused byprevious period is converged to the long-run in the present period (See table 4below). Table 4: Short-run Coefficient Results Variable Coefficient Std.
Error t-Statistic Prob. D(C(-1)) 0.2659 0.156002 1.704473 0.1018 D(LOGOP) 12.92189 4.
202212 3.075022 0.0054 D(LOGOP(-1)) 10.60643 6.872524 1.543309 0.1364 D(GDP) 0.
276779 0.172939 1.600437 0.
1231 D(GDP(-1)) -0.30399 0.184479 -1.6478 0.
113 D(POP) -3.71159 16.4098 -0.22618 0.8231 D(POP(-1)) -28.6279 15.81344 -1.
81035 0.0833 D(T) -0.12525 0.11454 -1.
09355 0.2855 D(@TREND()) 0.60074 0.
316048 1.900785 0.0699 ECM(-1) -0.
73165 0.193474 -3.78163 0.001 Source: Authors Computation(2017)Individually,all the explanatory variables insignificantly relate with current accountbalances in the short-run. This implied that irrespective of the sign effect ofthe variables, their significance cannot be accounted for in the currentaccount balances of the economy. This negates the argument of Ozlaleand Pekkurnaz (2010) that oil price fluctuations significantly influencecurrent account balances in the short-run.
The diagnostic test also showedthat the model does not have a serial correlation problem and free ofheteroscedasticity errors as they reveal a probability value greater than 0.05 (see table 5 below). Also the RamseyReset Test revealed that the model is well specified with the probability valuegreater than 10%. Therefore we conclude that the model is capable of explainingthe phenomenon in Nigeria.Table 5:Diagnostic Test Breusch-Godfrey Serial Correlation LM Test: F-statistic 1.577635 Prob. F(2,21) 0.
23 Heteroskedasticity Test: Breusch-Pagan-Godfrey F-statistic 0.660896 Prob. F(13,23) 0.7788 Ramsey RESET Test Value Df Probability F-statistic 1.201838 (2, 21) 0.
3205 Source: AuthorsComputation (2017) 5.0 Conclusion and RecommendationsThe study analysed the nexus between oilprice fluctuations and current account balances in Nigeria using an annual datafrom 1977 to 2015. The ARDL model is used to estimate the coefficients of theparameters both in the short-run and in the long-run.
The study from the findingsfound a dynamic effect of oil price fluctuations on current account balances inthe economy of Nigeria. It was revealed that while oil price fluctuationsimpacted positively on the current account balances, it had a negative impactin the long-run. This implied that as oil price fluctuations increases currentaccount balances in the short-run, it decreases it in the long-run. Otherdeterminants (population growth, gross domestic product, and trade) included inthe model revealed a negative impact on current account balances in both theshort-run and the long-run except GDP which had a negative and positive effectin the short-run and long-run respectively. The study therefore concluded thatoil price fluctuations is an important factor to be considered for currentaccount balances since it adjust the balance through its impact on the revenue generatedfrom the oil produced.
A major policyrecommendation from the findings is that government should design internalpolicies to guide the economy against fluctuations in the oil price throughconsidering alternative trades.