Investigating a Dynamic Relationship between Oil Revenue, Government Expenditure and GDP Per Capita Growth: The Nigerian Experience

Abstract

Within the last four decades, Nigeria economy has been struggling through a recovery process for the GDP per capita, the living standard and wellbeing of her citizens to improve. This paper examines oil revenue management and its impact on gross domestic product per capita in Nigeria from 1970 to 2015 using econometric techniques of vector autoregressive (VAR) model. The pre-estimation, tests (unit root, cointegration and lag selection criteria) informed the decision to estimate a vector error correction mechanism. The VECM estimate shows that one period lag of oil revenue had a positive but an insignificant impact on gross domestic product per capita. Furthermore, government expenditure and national savings had a negative, but an insignificant impact on gross domestic product per capita. The impulse response shows that a unit standard deviation shock to oil revenue on gross domestic product per capita will be positive from the first year till the tenth year. Whereas, government total expenditure and national savings will be negative from the first year till the tenth year. The variance decomposition shows that a shock in government total expenditure, oil revenue and gross national savings will account for an average of 2.06%, 0.09% and 2.05% variation respectively on gross domestic product per capita during a 10-year period. This implies that a shock in government expenditure would react more to GDP per capita growth and improvement of the welfare of Nigerians. This study concludes that oil revenue has a positive, but an insignificant impact on GDP per capita growth, however, government expenditure and national savings has negative but insignificant impact on GDP per capita growth. This suggests that an efficient management system of transmitting oil revenue to government expenditure and savings should be implemented to increase GDP per capita growth and improve wellbeing of Nigerians.