Macroeconomic Impact of Oil Price Shocks on Government Expenditure and Economic Growth in Nigeria

Abstract

<p>The Nigerian economy depends on over 90% oil exports revenue to drive government expenditure aimed at supporting growth-enhancing fiscal investments. Oil price has therefore become the standard benchmark for estimating aggregate annual revenue projections for all fiscal budgets and overall prospects of budgetary success. Over the years, growth in oil exports revenue and associated growth in government expenditure supported by macroeconomic policy reforms have failed to diversify the economy away from its mono-cultural revenue base. This paper investigated the nexus between oil price shocks, government expenditure and economic growth in Nigeria for the period 1986 to 2018, an era marked by bold market reforms. Generalized Methods of Moments (GMM) and Vector Error Correction (VECM) techniques are used for the empirical examination of the relationship between the study variables. The results indicate a direct and significant relationship between oil price and both government expenditure and economic growth. The exchange rate and exports channels are the intermediaries that transmit oil price shocks to the economy. Similarly, findings have confirmed evidence of the Dutch Disease in Nigeria. Given the ongoing decarbonization of global energy, the study provides recommendations for an urgent shift in growth policy focus away from dependence on oil revenue to bold reforms that will fast-track fiscal and exports revenue diversification and sustainability, anchored on private sector initiatives.</p>

The Dance of Two Instruments: How Fiscal and Monetary Policy Interact in Nigeria

“…Thus, in a flexible monetary and exchange rate regime, high-income volatility will be important to necessitate robust fiscal stabilisation measures that support the selected monetary regime, as well as targeting an optimal inflation rate [28,31]. Conversely, significant and persistent volatility that plagues countries Nigeria inclusive needs exchange rate flexibility to lessen the burden of fiscal adjustment and foster the efficacy of fiscal policy [32,33]. A substantial amount of research has been done on the subject of how monetary and fiscal policy interacts.…”