Oil revenue, institutions and macroeconomic indicators in Nigeria

Abstract

The influx of massive revenues during periods of abnormally high oil prices creates enormous challenges for policy‐makers in oil‐producing countries. In Nigeria, the prudent utilisation of oil revenues has remained elusive for policy‐makers over time. While the country has earned sizeable oil revenues from its natural endowment, poverty and income inequality have been persistent. This study tests the sensitivity of several important macroeconomic indicators to oil revenue shocks. We additionally test for the effect of ‘institutional quality’, in recognition of the important role played by the domestic institutional context in shaping the policy responses adopted by successive Nigerian governments to oil windfalls over time. The sensitivity analysis supports the general view that fluctuations in oil revenues have resulted in inflation, lower output growth and real exchange rate appreciation in Nigeria. More importantly, the aforementioned institutional variable is found to be very significant. This finding is consistent with the general assessment of fiscal performance in Nigeria during oil windfalls as being driven by domestic institutional dynamics. Ostentatious public consumption widened fiscal deficits, and government spending has been highly pro‐cyclical during windfall episodes. In conclusion, the study offers appropriate policy recommendations, which could be adopted to enhance the management of future oil windfalls in Nigeria.

External Shocks, Institutional Quality, and Macroeconomic Performance in Nigeria

“…Furthermore, Efendic et al (2010) explore the relationship between institutional improvement and economic performance in transition countries (TCs) and found that institutions play significant role in explaining economic performances in TCs. Meanwhile, Ushie et al (2013) examine the sensitivity of major macroeconomic variables to oil revenue shocks in Nigeria, using VAR approach with the inclusion of an institutional quality variable. The results show that fluctuations in oil revenues lead to hike in inflation, decreased output growth, and real exchange rate appreciation in Nigeria.…”

“…Studies by Calderon et al (2012), Ushie et al (2013), and Adigozalov and Rahimov (2015) point out the significance of institutions in influencing policy responses to exogenous 919518S GOXXX10.1177/2158244020919518SAGE OpenAbere and Akinbobola research-article20202020 1 Hallmark University, Ijebu-Itele, Nigeria 2 Obafemi Awolowo University, Ile-Ife, Nigeria shocks as well as enhancing equitable distribution of income. The studies maintain that the more qualitative institutions are, the greater the level of efficiency which will then propel economic development.…”

Sovereign wealth funds and macroeconomic stability in oil‐exporting African countries

“…Since oil‐exporting African countries derive a larger proportion of their export revenue from oil export, oil price shocks significantly impact fiscal operation and induce fiscal uncertainty in these countries. Fiscal operations are highly procyclical (see Ushie et al ., ) and hence oil price volatility is directly translated to the aggregate economy. Oil price shocks complicate the management of fiscal policy, distort budget implementation, aggravate debt problems and generate economic instability in oil‐exporting African countries.…”

Do Crude Oil Prices Affect Energy Consumption in Nigeria?

“…Specifically, macroeconomic uncertainties generated by fluctuations in crude oil prices in the international crude oil market could influence the degree to which economic activities generate incentives in the private sector and demand for energy in net oil-exporting economies (see [7]). [14] also linked fluctuations in economic activities in net oil-exporting countries to fiscal, macroeconomic and institutional challenges being generated by movements in crude oil prices.…”