Effect Of Oil Price, And Exchange Rate On Current Account Balance In Nigeria

Abstract

Nigeria is a mono-economy that depends largely on the revenue from crude oil exports and the country’s economic policies revolve around the revenue generated from oil. However, despite the increased revenue the country generates from crude oil export, the level of development is still inadequate and Nigeria still continues to experience deficits in its current account balance. This study investigates the effect of oil price and exchange rate on current account balance in Nigeria using annual time series data for the periods 1986 to 2016. Assessment of the properties of the data suggests Vector Error Correction Model (VECM) as an appropriate method of analysis. The study revealed the presence of a long-run relationship between the variables. The study also revealed that depreciation in the real exchange rate would lead to improvement in the country’s current account balance, while a shock in oil price would produce a positive response in the current account balance of the country. This implies that a rise in oil price will lead to improvement in the country’s current account balance. In addition, the study also shows that oil price accounts for the major variation in the country’s current account balance. The policy implication of the result from this study is that proactive management of the exchange rate policy following anticipated movement in current account balance can help stabilize the exchange rate. Hence, Nigeria’s best policy option to stabilize the exchange rate and other economic indices is to improve the current account position by diversifying the economy from oil and promoting non-oil exports. Finally, a systematic reduction in propensity to consume foreign imports that could otherwise be produced locally should be aggressively pursued using fiscal and legislative instruments. This will ensure that the gain from increase in oil price is not lost due to disproportionate demand in foreign exchange to support a high import consumption pattern.