Asymmetric Effects of Oil Price Volatility on Government Expenditure in Oil-Importing African Countries: Evidence from Zambia

Abstract

This paper examines the impact of disaggregated oil price shocks the government expenditure in oil-importing African countries using the case of Zambia. The analysis utilizes a“Structural Vector Autoregressive (SVAR) Model” to evaluate the short-run effects, while a “Vector Error Correction Model (VECM) is employed to analyze the relationship over the long-run. Results of the short-run analysis reveal a notable positive influence of oil price shocks”on government expenditure that emanates from global aggregate and precautionary demand factors. The aforementioned results are clarified by the effects that increased global aggregate demand has on copper priсes, which in turn influences government revenue derived from taxes. Additionally, the transmission of “financial contagion and volatility spillovers” from the οil to the copper market clarifies the influence of precautionary demand on government expenditure. The findings obtained from the VECM indicate that global aggregate demand has positive effects on public sector spending in the long run. Additionally, the analysis demonstrates that the rate at which public sector spending recovers to its equilibrium level after a temporary deviation is both monotonic and statistically significant. Moreover, among the three categories of οil priсe hikes, Forecast Error Variance Decomposition analysis reveals that shocks related to precautionary demand have the most significant impact, accounting for 11.7% of the observed variation in public sector spending.