Name: Wariri, Ahwe Mereh Cephalus || Supervisor

1
Cause or Curse? An empirical study of the linkages between Oil Revenues and Nigeria’s current Exchange Rate and Inflation crises John Doe [email protected] +44 (0)1224-27xxxx www.abdn.ac.uk University of Aberdeen, King's College, Aberdeen, AB24 3FX Background Oil-producing developing countries (OPDC) heavily depend on oil export revenues. Their macroeconomic variables - exchange rate and the CPI may be affected by price and volume volatility. The 2014 price shock and reported production losses are argued to have caused unprecedented currency depreciation and inflation in Nigeria (Onigbinde 2016; BBC 2016). it is also believed that the crises were complicated by long-term mis-management of oil revenues by successive governments curse. Research Questions Do oil price and production volume Granger-cause nominal exchange rate? Does nominal exchange rate Granger-cause inflation? Do oil price and production volume Granger-cause inflation? Are other macroeconomic variables important in the determination of the CPI? Does long-term cointegration exist among the research variables? What is the overall relationship between the research variables? Are these significant? Methodology Relevant data from 19952016 sourced from authorities. Analysis based on RSE and IVE regression models in equations (1) and (2) below: Robust mix of econometric tools to test for various aspects of the models. Conclusion A long-term curse linkage exists and this vulnerability makes significant shocks to cause currency depreciation, spike inflation and possibly recession when protracted. To strengthen their currencies, OPDCs must utilise oil revenues to develop other productive sectors of their economies and ensure good governance. References BBC, (2016) ‘Nigerian economy slips into recession’. Business,. [online] Available at: http://www.bbc.co.uk/news/business-37228741 (Accessed: 12 June 2017). Onigbinde, O., (2016) ‘It’s naira or never: Nigeria needs decisive action on its currency’. The Guardian, 7 January. Name: Wariri, Ahwe Mereh Cephalus || Supervisor: Dr Xin Jin Exchange rate negatively correlated with oil price and production volume, but only latter is significant. CPI positively and significantly correlated with exchange rate. Statistically insignificant correlation between CPI, oil price and production. Large shocks to both oil price and production volume would trigger large and protracted future volatility in the CPI. Import and production volume found to be the most significant variables which determine exchange rate. Results RSE and IVE variables cointegrated at level and first difference respectively. Causality from oil price and production volume to exchange rate and pass-through to CPI. Causality from exchange rate, money supply, interest rate to CPI. = 0 + 1 + 2 + 3 + 4 + 5 + 1 (1) = 0 + 1 + 2 + 3 + 4 + 2 (2) CAUSE OR CURSE? -2 0 2 4 6 8 10 Jan-96 Dec-96 Nov-97 Oct-98 Sep-99 Aug-00 Jul-01 Jun-02 May-03 Apr-04 Mar-05 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17 Lognormal movement of Nigeria's FX Rate, CPI, Oil Price, Oil Production and Revenues - (1996-2017) FX Rate ($) YoY CPI (%) Brent Oil Price ($) Nig Oil Prod (mbpd) Oil Rev

Transcript of Name: Wariri, Ahwe Mereh Cephalus || Supervisor

Cause or Curse? An empirical study of the linkages between Oil

Revenues and Nigeria’s current Exchange Rate and Inflation crises

John Doe [email protected] +44 (0)1224-27xxxx www.abdn.ac.uk

University of Aberdeen, King's College, Aberdeen, AB24 3FX

Background Oil-producing developing countries (OPDC) heavily

depend on oil export revenues.

Their macroeconomic variables - exchange rate

and the CPI may be affected by price and volume

volatility.

The 2014 price shock and reported production

losses are argued to have caused unprecedented

currency depreciation and inflation in Nigeria

(Onigbinde 2016; BBC 2016).

it is also believed that the crises were complicated

by long-term mis-management of oil revenues by

successive governments – curse.

Research Questions Do oil price and production volume Granger-cause

nominal exchange rate?

Does nominal exchange rate Granger-cause

inflation?

Do oil price and production volume Granger-cause

inflation?

Are other macroeconomic variables important in the

determination of the CPI?

Does long-term cointegration exist among the

research variables?

What is the overall relationship between the

research variables? Are these significant?

Methodology Relevant data from 1995–2016 sourced from

authorities.

Analysis based on RSE and IVE regression models

in equations (1) and (2) below:

Robust mix of econometric tools to test for various

aspects of the models.

Conclusion A long-term curse linkage exists and this

vulnerability makes significant shocks to cause

currency depreciation, spike inflation and possibly

recession when protracted.

To strengthen their currencies, OPDCs must utilise

oil revenues to develop other productive sectors of

their economies and ensure good governance.

ReferencesBBC, (2016) ‘Nigerian economy slips into recession’.

Business,. [online] Available at:

http://www.bbc.co.uk/news/business-37228741

(Accessed: 12 June 2017).

Onigbinde, O., (2016) ‘It’s naira or never: Nigeria needs

decisive action on its currency’. The Guardian, 7

January.

Name: Wariri, Ahwe Mereh Cephalus || Supervisor: Dr Xin Jin

Exchange rate negatively correlated with oil price

and production volume, but only latter is significant.

CPI positively and significantly correlated with

exchange rate.

Statistically insignificant correlation between CPI,

oil price and production.

Large shocks to both oil price and production

volume would trigger large and protracted future

volatility in the CPI.

Import and production volume found to be the

most significant variables which determine

exchange rate.

Results

RSE and IVE variables cointegrated at level and

first difference respectively.

Causality from oil price and production volume to

exchange rate and pass-through to CPI.

Causality from exchange rate, money supply, interest

rate to CPI.

𝐶𝑃𝐼 = 𝛼0 + 𝛼1𝑃𝑅𝐼𝐶𝐸 + 𝛼2𝑉𝑂𝐿 + 𝛼3𝐸𝑋𝐶𝐻𝑅 + 𝛼4𝑀𝑂𝑁𝐸𝑌 +𝛼5𝑃𝐿𝑅 + 𝑈1𝑡 (1)

𝐸𝑋𝐶𝐻𝑅 = 𝛽0 + 𝛽1𝑃𝑅𝐼𝐶𝐸 + 𝛽2𝑉𝑂𝐿 + 𝛽3𝐼𝑀𝑃𝑅𝑇 +𝛽4𝐹𝑋𝑅𝐸𝑆 + 𝑈2𝑡 (2)

CAUSE OR CURSE?

-2

0

2

4

6

8

10

Jan

-96

De

c-9

6

No

v-9

7

Oct

-98

Sep

-99

Au

g-0

0

Jul-

01

Jun

-02

Ma

y-0

3

Ap

r-0

4

Ma

r-0

5

Feb

-06

Jan

-07

De

c-0

7

No

v-0

8

Oct

-09

Sep

-10

Au

g-1

1

Jul-

12

Jun

-13

Ma

y-1

4

Ap

r-1

5

Ma

r-1

6

Feb

-17

Lognormal movement of Nigeria's FX Rate, CPI, Oil

Price, Oil Production and Revenues - (1996-2017)

FX Rate ($) YoY CPI (%) Brent Oil Price ($)

Nig Oil Prod (mbpd) Oil Rev