Growth and Oil Price Fluctuation in Nigeria: A Variance Decomposition Evidence

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1 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 Growth and Oil Price Fluctuation in Nigeria: A Variance Decomosition Evidence David Umoru 1 & Janet Achikare Onimawo 1 Faculty of Arts, Mgt. & Social Sciences, Edo University, Iyamho, Edo State, Nigeria Deartment of Public Administration, Ambrose Alli University, Ekoma, Nigeria Corresondence: David Umoru, Edo State, Nigeria. david.umoru@yahoo.com Received: May 31, 17 Acceted: July 5, 17 Online Published: Setember 1, 17 doi: 1.391/ijsses.vi11 Abstract: This study examines the imact of oil rice shocks on economic growth rate in Nigeria using the imulse resonse functions and forecast error variance decomosition on quarterly data from to 1. This study finds that fluctuations in oil rices cause swings in GDP growth rate in Nigeria. The fluctuation in oil rices also dereciates Naira exchange rate. The country should branch out its revenue sources to shield the dangle effect of the fluctuation in rices of oil. Keywords: Growth Rate, Shocks, Oil Price 1. Introduction The research roblem is exlained on the basis of Nigeria s high suscetibility to fluctuations in international oil market given the intense reliance on crude oil roceeds (Akan, 9). Basically, the crux of the roblem lies in the fact that since the country is oil driven, the economy is exceedingly exosed to oil rice shocks. The recent case in oint is that in when oil rice fell from a eak of US$17 to about US$37.1 er barrel, the economy lummeted into a recession. Okonju (9) observed that during the oil boom era, GDP grew ositively by.% annually, but the growth rate turned negative in eriod receding economic recession. Even when coious studies exists on imact of erratic movement of oil rices on outut growth in Nigeria, most of these studies relied on samles that are far backward in time. Hence, the significance of this study using most recent eriodical data from to 1. The study thus aimed to ascertain effect of shocks in oil rices on GDP growth rate in Nigeria. Subsequent to this introduction, are literature review, theoretical framework, discussion of emirical estimates and the conclusion. 1 IJSSES

2 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1. Literature Review Fluctuation in oil rice and its attendant cost on growth have ersistently generated controversies. Some of the studies that advocated the ositive effects include Akan (9), Aliyu (9), Olomola (), Alley, Asekomeh, Mobalaji and Adeniran (1), Oriakhi and Osazee (13) etc. For examle, Olomola () has found that oil rice instability is statistically different from zero in exlaining GNP growth in Nigeria. Conversely, the study by Cerralo (5) uholds that volatility in oil rice imact negatively on growth. In the study by Rodriguez and Sanchez (3), the emirics had it that oil shocks have negative imact on economic growth on oil-imorting economies. Similarly, Elder et al., (9) oines that negative oil shocks may not be exansionary for oil-imorting countries in the short-run, if the oil shock creates uncertainty about rices. 3. Theoretical Framework In this study the channel of transmission of oil rice fluctuation on the economy is rooted on both the demand and suly channels (Jin, ). The suly side is made evident on the ground that crude oil is a basic inut to roduction, and increased fluctuation in oil rice leads to a rise in uncertainty in roduction costs that induces lower outut of firms. Demand side effect is made evident on the ground that variation in oil rices affects mutually consumtion and investment decisions. Theory rovides other channels of transmission which include real balance channel, income transfer channel, endogenous monetary olicy resonse and sectoral shifts hyothesis, Dutch-Disease channel, Hotelling rule and irreversibility and uncertainty channel (Adeniyi, 1). The irreversibility and uncertainty channel maintains that oil rice fluctuation raises uncertainty about future oil rices, hence delays in business investment (Guo and Kliesen, 5). In effect, uncertainty about energy rices will induce otimizing firms to ostone irreversible investment decisions as long as the exected value of additional information surasses the exected short-run return to current investment (Elder et al., 9). IJSSES

3 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No Model Secification The model secification is. Rgd( t) A Rgd( t j) A Oilv( t j) 11 j 1 j j1 j1 A Gexd( t j) A Nexch( t j) E ( t) 13 j 1 j 1 j1 j1 Oilv( t) A Oilv( t j) A Rgd( t j) 1 j j j1 j1 31 j j1 j1 A Gexd( t j) A Nexch( t j) E ( t) 3 j j j1 j1 Gexd() t A Gexd( t j) A Oilv( t j) 3 j 1 j j j1 j1 A Rgd( t j) A Nexch( t j) E ( t) 33 j 3 j 3 j1 j1 Nexch( t) A Oilv( t j) A Nexch( t j) A Rgd( t j) A Gexd( t j) E ( t) 3 j j j1 j1 Where GDP is gross domestic roduct, Oilv is fluctuation in crude oil rices, Nexch is the nominal exchange rate of the Naira vis-vis the US dollar, Gexd is government exenditure, is the maximum number of lagged observations included in the VAR equation, A is the matrix of coefficients of the resective variables, E 1, E, E 3 and E are residuals (rediction errors) for each time series.. Method of Data Analysis The vector auto regression method of analysis is adoted in the aer. The study mainly relied on the variance decomosition of the forecast error and the imulse resonse functions to aid in the interretation of a vector auto regression (VAR) model when fitted. For the VAR () of form, y( t) w A y( t 1)... A y( t ) 1 t The VAR(1) model is thus secified using the general matrix notation of a VAR() as: Y( t) W AY ( t 1) E( t) 3 IJSSES

4 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 where A A1 A... A 1 A Ik... I... k Ik w t y 1... Y., W and E( t)..... y where y, w and are k, are dimensional column vectors, Ais ( k k) is by dimensional t matrix and Y, W and E are k are dimensional column vectors. The mean squared error of the f-ste forecast of variable j is derived thus: f 1 K ' j, t f jik i k1 MSE[ y ( )] ( ) f 1 f 1 ' ' i i i i i i jj ( ) ) jj ' where j is the j th column of I K and the subscrit jj refers to that element of the matrix, i ip where P is a lower triangular matrix achieved by a Cholesky decomosition of such that PP ', where is the covariance matrix of the errors t, i i JA J ', where J [ I k... ], so that J is a ( k k) by dimensional matrix. The amount of forecast error variance of variable j accounted for by exogenous shocks to variable k is given by ( jk, f ). ( jk, f ) f 1 ' ( ji k ) i f 1 K f 1 f 1 ' ' ' jik ii i i i k 1 i jj i ( ) ( ) ) jj IJSSES

5 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 Whereas the variance decomosition determines how much of the forecast error variance of the growth rate of the Nigerian economy can be exlained by exogenous shocks to the oil rices, government exenditure and the nominal exchange rate of the Naira, imulse resonse determines the reaction of the growth function in resonse to some external change in oil rices, government exenditure and the nominal exchange rate and hence describes the reaction of the growth system as a function of time and the aforementioned variables that arameterizes the dynamic behavior of the growth rate of the Nigerian economy. The study conducted stationarity test and co-integration test to guarantee valid statistical inference. The time series data were sourced from the CBN statistical bulletin. The data covers from 199 through to Emirical Analysis 5.1 Trend Analysis/Analysis of Stationarity Test Results Grahical lot of the variables are as reresented below in Figure.1. As shown, fluctuation in the residuals of oil rices along with nominal exchange rate are found stationary at level as they both crossed the zero-line and devoid of excessive divergence from zero. Conversely, the residuals of growth rate and government sending show evidence of unit root as the line grah of the series exhibited huge divergence from the equilibrium line following a erturbation. The stationarity condition is satisfied; hence any shock to the series will lead to a subsequent time-ath that has a bounded mean and variance. The rocess is stationary and subsequent to such a shock, the time-ath for the series will eventually reconcile to what it was u to that time and the shock will be absorbed. RGDP Residuals OILPV Residuals,, -, - -, - -, GEXPD Residuals NEXCH Residuals 3,, 1, -1, - -, Figure 1: Stationarity Grahs 5 IJSSES

6 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 The study erformed stationarity test on the time series to series and found a statistical robust evidence of stationarity of all the variables in the study. Hence, first difference of the variables was hereafter adoted for estimation. 5. Analysis of Co-integration Results Given that all the variables in the study are I(I), we ran the Johansen co-integration test, found one cointegrating relation (for the trace and maximum eigen-value) with the grahical lot detailed in Figure. below. The analysis is that series are (I(1)) but some co-integrating vector of coefficients exists to form a stationary linear combination of them Cointegrating relation 1 Figure : Co-integration Grah The co-integration grah above suggests long-run relationshi of linear combination of oil rice fluctuation, government exenditure, exchange rate and growth rate in Nigeria at the 5% level. 5.3 Analysis of Granger Causality Results The emirical analysis of the Granger-causality test results of Table. is as follows: i. Unidirectional Granger-causality from oil rice fluctuation to economic growth. Here, fluctuation in oil rice increases the rediction of GDP growth rate but not vice versa. Given an F-statistic of 1.3 and a robability value of., we reject that fluctuation in oil rices does not cause redictions in GDP growth rate in Nigeria and accet the hyothesis that economic growth does not Granger cause oil rice volatility in Nigeria. ii. Bidirectional Granger-causality from government sending to GDP growth rate and vice versa. Here, economic growth increases government sending. Also, government sending redicts the variation in economic growth. iii. Bidirectional causality from the nominal exchange rate to economic growth and not vice versa. More decisively, the fluctuation exchange rate causes variation in economic growth only as shown by a significant F-statistic of 1.5 and a robability value of.. IJSSES

7 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 iv. Unidirectional Granger causality from government sending to fluctuation in oil rices in view of the F-statistics 1. and together with robability values of.135 and. resectively. v. Zero causality between the nominal exchange rate and government exenditure. This goes to show that the variation in government sending does not induce changes in the nominal exchange rate and conversely, the variation in the nominal exchange rate do not stimulate variation in government exenditure. In effect, there is indeendence between the nominal exchange rate and government sending in recent time. Table 1: Pairwise Granger Causality Test Null Hyothesis: F-Statistic Prob Oilv does not Granger Cause Rgd 1.3. rgd does not Granger Cause oilv Gexd does not Granger Cause Rgd RGDP does not Granger Cause GEXPD.9. Nexch does not Granger Cause Rgd 1.5. Rgd does not Granger Cause Nexch Gexd does not Granger Cause Oilv Oilv does not Granger Cause Gexd Nexch does not Granger Cause Oilv.1. Oilv does not Granger Cause Nexch Nexch does not Granger Cause Gexd 3.3. Gexd does not Granger Cause Nexch Analysis of the Variance Decomosition of Forecast Errors The variance decomosition for the volatility in oil rice, government exenditure, exchange rate and the growth rate of the Nigerian economy is shown in Figure.1 below. As shown, oil rice fluctuation lays significant function in causing variation in economic growth in Nigeria economy within the quarterly eriods of the various years analyzed in the study. Fluctuation in rices of oil also contributed to the variation in government exenditure in Nigeria and to the variation in the nominal exchange rate of the Naira. This is made emirically evident in the drift attern of the forecast error variance of nominal exchange rate and government sending given the exogenous shocks to oil rices within the eriod of study. In effect, the volatility of oil rices leads to about.57 ercent decline in the growth of the Nigerian economy and after two years, it results to 3.1 ercent decline. Similar results are obtained for the nominal exchange rate. The variance decomosition of the forecast error in the volatility in oil rice to itself shows that disequilibrium in oil rice can be ersistent over time. Yet, the series would adjust to eliminate any deviation from the long-run equilibrium target given the first-order integration rincile. This goes to show the existence of a linear relationshi between oil rice shocks, government 7 IJSSES

8 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 exenditure, nominal exchange rate and growth rate of the Nigerian economy. On the whole, both shocks in oil rices significantly induce swings in GDP growth in Nigeria. Variance Decomosition Percent RGDP variance due to RGDP Percent RGDP variance due to OILPV Percent RGDP variance due to GEXPD Percent RGDP variance due to NEXCH Percent OILPV variance due to RGDP Percent OILPV variance due to OILPV Percent OILPV variance due to GEXPD Percent OILPV variance due to NEXCH Percent GEXPD variance due to RGDP Percent GEXPD variance due to OILPV Percent GEXPD variance due to GEXPD Percent GEXPD variance due to NEXCH Percent NEXCH variance due to RGDP Percent NEXCH variance due to OILPV Percent NEXCH variance due to GEXPD Percent NEXCH variance due to NEXCH Analysis of the Imulse Resonse Functions Figure 3: Variance Decomosition Results The results of the imulse resonse functions shown in Figure.3 demonstrate the direction of travels government exenditure, exchange rate and the growth rate of the Nigerian economy indulged in subsequent to a standard error shock in oil rice. The shocks in oil rices are seen to contract the growth rate of the Nigerian economy within the eriod of the analysis. The shock in oil rices also dereciates the nominal exchange rate of the Naira and causes dee swings in the growth rate of real GDP in Nigeria. IJSSES

9 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 Resonse to Cholesky One S.D. Innov ations Resonse of RGDP to RGDP Resonse of RGDP to OILPV Resonse of RGDP to GEXPD Resonse of RGDP to NEXCH 1, 1, 1, 1, 1, 1, 1, 1,,,,,,,,, Resonse of OILPV to RGDP Resonse of OILPV to OILPV Resonse of OILPV to GEXPD Resonse of OILPV to NEXCH Resonse of GEXPD to RGDP Resonse of GEXPD to OILPV Resonse of GEXPD to GEXPD Resonse of GEXPD to NEXCH,,,, 5, 5, 5, 5,,,,, 3, 3, 3, 3,,,,, 1, 1, 1, 1, Resonse of NEXCH to RGDP Resonse of NEXCH to OILPV Resonse of NEXCH to GEXPD Resonse of NEXCH to NEXCH Figure : Imulse Resonse Functions The diagnostic statistics were analyzed based on the inverse roots of AR characteristic of the model residual series. Figure.3 shows grahical reort of the inverse roots of the characteristic AR olynomial shows that the estimated VAR is covariance stationary. This is made evident since all roots have modulus less than one and lie inside the unit circle. In effect, the variance decomosition of the forecast error and the imulse resonse are valid. What this means is that the mean and variance of the rocess are both finite and indeendent of time; and the covariances between airs of random values from the rocess only deends on how far aart the values are in time, but not the value of time itself. 1.5 Inverse Roots of AR Characteristic Polynomial Figure 5: Inverse Root 9 IJSSES

10 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1 Rgd,Oilv(-i) Rgd,Oilv(+i) i lag lead. *********. *********... *********. ********* ********. ******** ********. ******** ********. ******** ********. ******** *******. ******** *******. ******** ******. ******* ******. ******* ******. ******* *****. ******* *****. ******* *****. ****** ****. ****** ****. ****** ****. ****** ****. ****** ****. ***** ***. ***** ***. ***** ***. ***** ***. ***** **. **** **. **** **. **** *.. **** *.. **** *.. *** *.. *** *** *** *** ** *.. ** *.. ** *.. ** Figure : Asymtotic Correlation Matrix Figure shows the asymtotically consistent aroximations of the correlation matrix. This makes rovision of estimated VAR coefficients. The VAR global goodness-of-fit is made evident as it comares favourably with covariance-based structural equation modelling. 1 IJSSES

11 ISSN 5-9 (Online), ISSN 9-19 (Print), Setember 17, Vol., No.1. Conclusion This study finds that fluctuation in oil rices cause swings in economic growth in Nigeria. The study contributed to the large body of research that oil rice fluctuation has contractionary consequences on GDP growth rate in Nigeria. Based on the findings of the study, we recommend the need for the country to branch out its revenue sources. This will further shield the dangle effect of the fluctuation in rices of oil. References Alley, I., Asekomeh, A., Mobalaji, H., & Adeniran, A. (1). Oil rice shocks and Nigerian economic growth. Euroean Scientific Journal, 1(19), Ademola, A.(199). Consequences of oil rice shocks on the economic growth of the Nigerian economy: An econometric analysis. Journal on Social Economics, 3(3), -, -7. Adeniyi, O. A. (1). Oil Price Shocks and Economic Growth in Nigeria: Are Thresholds Imortant? Deartment of Economics and Business Studies, Redeemers University Adeniyi, O., Omisakin, O., Yaqub, J., & Oyinlola, A. (1). Oil Price-Exchange Rate Nexus in Nigeria: Further Evidence from the Nigerian Economy. International Journal of Humanities and Social Science,, (). Agbede, M.O. (13). Growth Imlications of Oil Price Shock in Nigeria. Journal of Emerging Trends in Economics and Management Sciences, (3), Aliyu, S. U. R. (9). Imact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Emirical Investigation. Research Journal of International Studies Alley, I., Asekomeh, A., Mobolaji, H., & Adeniran, Y.A. (1). Oil Price Shocks and Nigerian Economic Growth. Euroean Scientific Journal, 1(19), Asaolu, T., & Ilo, B. (1). The Nigerian Stock Market and Oil Price: A Cointegration Analysis. Kuwait Chater of Arabian Journal of Business and Management Review, 1(5). Ayadi, O. F. (5). Oil rice fluctuations and the Nigerian economy. OPEC Review, Setember () Balke, N. S., Stehen, P. A., Brown, W., and Mine Yucel (1). Oil Price Shocks and the U.S. Economy: Where Does the Asymmetry Originate? Working aer, Federal Reserve Bank of Dallas. Jimenez-Rodriquez, R., & Sanchez, M. (3). Oil rice shocks and real GDP growth emirical evidence for some OECD countries. Jin, G. (). The Imact of Oil Price Shock and Exchange Rate Volatility on Economic Growth: A Comarative Analysis for Russia Jaan and China. Research Journal of International Studies,, Olomola, H., & Adejumo, K. (). Oil rice shock and macroeconomic activities in Nigeria International Research Journal of Finance and Economics, 3. Okonju, C. (9). Oil rice fluctuations and its effects on growth. Journal of Historical Economics, (5), Oriakhi, D. E., & Osazee, I. D. (13). Oil rice volatility and its consequences on the growth of the Nigerian economy: An examination (197-1). Asian Economic andfinancial Review, 3(5), 3-7. Wilson, A., David, U., Inyiama, O., & Beatrice, E. (1). Oil rice volatility and economic develoment: Stylized evidence in Nigeria. Journal of Economics and International Finance, (), IJSSES