Oil price, trade openness, current account balances and the official exchange rate in Nigeria

Since a larger percentage of government revenue are generated from crude oil trade, the fluctuations in the price of oil have always been influencing the budget financing in Nigeria. Also, investment decisions and trade cost are been influenced by the status of the oil price. The study investigates the relationship between oil price, trade openness, current account balances and official exchange rate in Nigeria using secondary data from 1980 through 2016. The non-linear auto-regressive distributed lag (NARDL) was used to analyse the short-run and long-run link between the variables. From the findings, it was established that in the short run and long run, trade openness negatively impacts on the official exchange rate of naira to dollar in Nigeria. The consumer price index positively and significantly influences exchange rate value in Nigeria in the short run and long run. Positive changes in oil price impacted negatively on official exchange rate in the short run, but in the long run had a positive impact. Negative changes in the price of oil have a positive insignificant and negative significant impact on official exchange rate in the short run and long run, respectively. The error correction result verified that the variables (trade openness, current account, oil price and consumer price index) correct 91 per cent deviations of exchange rate from short-run equilibrium back to equilibrium in the long run. The study concludes that trade policy in Nigeria is not in favourable direction of official exchange rate in Nigeria. Also, positive changes in oil price and current account balances are strong determinants of the Nigerian official exchange rate of naira to dollar in the long run. Therefore, it is recommended that trade policies should be reviewed in Nigeria towards enhancing other sectors that would add more value to naira. JEL classification: C5, E3, F1. © 2019 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 446

• Publication year

  2019

• Venue

  Opec Energy Review

• Publication date

  2019-07-25

• Fields of study

  Economics

• Identifiers
  DOI 10.1111/OPEC.12164
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• The error correction result indicates that trade openness, current account balances, oil price, and the consumer price index explain about 91% of deviations in the official exchange rate back to long-run equilibrium.

  Confidence 0.93

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• Positive oil price changes reduce the official exchange rate in the short run but raise it in the long run.

  Confidence 0.95

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• The consumer price index positively and significantly influences the official exchange rate in both the short run and the long run.

  Confidence 0.97

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• Trade openness negatively affects the official exchange rate in both the short run and the long run.

  Confidence 0.98

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review

• consumer price index

  economic indicator

  A price-level measure used in the model as an indicator of inflationary conditions in Nigeria.

  Aliases: CPI

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• current account balances

  economic indicator

  Nigeria's current account position, included as an explanatory macroeconomic variable in the exchange-rate model.

  Aliases: current account balance, current account

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• error correction model

  method

  The adjustment component used to measure how quickly exchange-rate deviations return to long-run equilibrium.

  Aliases: ECM, error correction result

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• official exchange rate

  economic indicator

  The official naira-to-dollar exchange rate examined as the main dependent variable in the analysis.

  Aliases: naira to dollar exchange rate, exchange rate

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• oil price

  economic indicator

  The price of crude oil, modeled as a determinant of Nigeria's exchange rate dynamics.

  Aliases: crude oil price

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review
• trade openness

  economic indicator

  The degree to which Nigeria's economy is integrated with international trade, used as an explanatory variable for exchange rate behavior.

  Aliases: openness to trade

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewq (76h6bfydm6) review

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