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Oil
price and macroeconomics variables have gained recognition in literature over
the years among scholars. This arguments stems from the effect of the
fluctuations in oil price and an economy’s trade balance over the years. Gnimassoun, Joets, & Razafindrabec (2017) noted
that for most oil exporting and oil importing countries, fluctuations in
oil price have a great impact on the trade balances of the economies, sometimes
results to deficit or surplus balances. In topical years, the oil price rush
forward has shown a negative impact on the trade balances on most of the oil
dependent countries such as Nigeria. Also, the unexpected increase in the price
of oil from 2003 to 2014 placed the economies of most oil dependent countries
on the boom side as the increase favoured their revenue. Considering the huge
amount of revenue generated from the oil sector by the oil exporting countries,
the allocation of the revenue in most of the economies has gained the interest
of researchers and policymakers on how the revenue are channeled if efficient
or mismanaged. Scholars such as Blanchard and Milesi-Ferretti (2009) Helbling
et al. (2011) Arezki and Hasanov (2013) noted that the fluctuations in oil
price have significant implications on the current account balances of an
economy.

In
Nigeria, one issue that is behind in literature is the nexus between oil price
fluctuations and current account balances. Many studies have focused on the
impact of oil price on economic growth, while others tried to check its
relationship with monetary and fiscal policy variables such as exchange rate,
inflation rate, and government expenditure pattern through revenue. For
example, Adamu (2015) argued on the issue
of oil price relation to government revenue and budget in Nigeria that the global
oil price fall shock in 2014 from $141/bbl to $65/bbl in 2015 made the
government to adjust its budget to $45 because of the unexpected continuous
fall in the price which determines her revenue. Also on the issue of oil price
relation to exchange rate volatility, Aliyu (2009) noted that positive change
in the oil price facilitates economic growth and increase the value of the
country currency against other currencies of the world which in turn have a
great impact on trade inflow in the economy. Contrary to the submission of Aliyu (2009), Salisu
& Mobolaji (2013) argued based on the causal direction between oil
and foreign exchange markets that, fluctuations in oil price may result into
depreciation in Nigerian currency relative to USD, while depreciation in USD
may cause oil price to increase in the global market.

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On
the relationship between oil price and inflation rate in Nigeria, Corrado and
Jordan (2002) noted the importance of understanding the fluctuations in the oil
price on general price of goods and services and other macro-economic
indicators is important to aid the efficiency of trade in the economy. Apere (2017) on
this note submitted that a direct relationship exist between oil price and
inflation in an economy. That is, any fallen or rising signing in the price of
oil brings about a fall or increase in the inflation rate. Apere (2017) further
argued from a different view that fluctuations in oil price affect inflation
through two channels; The first captures the fiscal which he explains in terms
of the purchaising power of the government in form of expenditure and the
second in terms of the change in the general price level of goods and services
(both import and export) in the economy.

To the best of our knowledge on the studies of oil price
fluctuations nexus in Nigeria, no study or few has been carried out on the relationship
between oil price fluctuations and current account balances in Nigeria. This
study therefore aimed to investigate the impact of oil price fluctuations on
current account balances in Nigeria. The choice of Nigeria is informed by its
large dependency on the oil sector as its major source of income, and also
marking the argument of the impact of oil price shocks on general price of
goods and services, currency value and trade activities. It is important to examine
how far or to what extent has the shocks in the oil price affect the balnaces
of the economy reserve.

The rest of the study is divided into five sections. Section
two holds the literature review, section three presents the data source and
methodology, section four contains the analytical framework, and section five
reveals with the conclusion and recommendations from the findings.

2.0       Literature Review

In
the 1960s, Mundell-Flemming extends the IS-LM model in order to argue on the
effect effect of monetary policy on macro-economics variables. The model
explicitly capture the relationship between goods market, money market and
foreign exchange balances. They argued that interest rate and output are
important factors an economy can make use of to regulate their economy. The
long-term dynamics was discussed by Laursen and Metzler (1950)  and Mundell (1963) but a new approach was introduced
in the 1980s by Masson and Knight (1986). Masson and Knight submitted that for
a country experiencing an expansionary fiscal shock needs a  continuous flow of foreign funds to sustain
its domestic investment which assumes current account deficit, induced by an
initial appreciation of the country’s currency value. In summary they all
argued that current account balances reacts to shocks in fiscal and monetary
policy which could be found to be in existence in Nigeria as the government
pattern of expenditure is affected by the shocks in the global oil price which
reduces their current account worth. Based on the dutch disease syndrome argument
on the revenues from natural resources trade, especially ‘oil’, the growth of
an economy that largely depends on crude oil will be affected by fluctuation is
the global oil price which place huge impedement on the income and expenditure
pattern of such economies for example Nigeria.

On the empirical front, various studies have been carried out
to examine the linkage of oil price fluctuations in different perpective, some
focus on the relationship that exists between oil prices shocks and economic
growth, some focused on oil price shocks and macroeconomics variables, while
some on oil price shocks and expenditure pattern. The empirical studies
findings include;

Gnimassoun et al. (2017) used a time varying parameter vector
autoregressive (TVP-VAR) in canada to analyse the nexus between oil price
fluctuations and current account. It was argued that oil price fluctuations
insignificantsly inluence current account balances. They noted four common
shocks that expalins the nexus bewteen oil price and current account balances;
The shocks include: (i) shocks to the
flow supply, (ii) shocks to the flow demand for crude oil reflecting the state
of the global business cycle, (iii) precautionary demand shocks oil stocks
above the ground (oil specific demand shocks for oil stocks above the ground),
and (iv) other idiosyncratic oil demand shocks (residual shocks).

On the other hand, Allegret et al (2014) incorporated the
role of financial development in the model of the nexus between oil price
fluctuations and current account balances in 27 oil exporting countries, their
results revealed oil price fluctuations positively relates to current accounts
in the countries, but found largely to depend on financial devlopment. Nader
(2017) argued on the relationship between oil price shocks and stock market in
Saudi Arabia, United Arab Emirates and Russia to be significant based on the
origin of the oil shocks and the force varies across countries and sectors. Al-Khazali
and Mirzaei (2017) empirically investigated how 
shocks in oil price affects non-bnak performing loans in 30 oil
exporting countries. They agreed that shocks inoil price negatively  and signifiacantly relates with non-bank
performing loans. Huntington (2015) similarly investigated crude oil trade
relation to current account in 91 oil 
importing and exporting countries. It was argued that net oil exports are a significant factor that
determines current account balances, but that net oil imports often do not influence current account deficits. In the
oil importing countries, it was confirmed that higher oil imports contrinbutes
to current account deficit balances for the rich countries. On the relationship
between currents accounts and exchange rate in Sub-Saharan Africa countries, Gnimassoun
and Coulibaly (2014) submitted that in the Sub-Sahara Africa countries, current
accounts over the years under study has been highly sustainable, but lower in
countries that operate on a fixed exchange rate regime.

For the Turkish economy, Ozlale and Pekkurnaz (2010) revealed
that current account response to oil price shocks in the economy of Turkey increase
gradually but falls after three months of the shocks occurrence, which
validates their conclusion that oil prices shocks significantly influence
current account in the short-run. Narayan (2013) on the economy of Fiji used a
structural vector autoregressive model to examine the impact of fuel import and
devealuation policy on current account. The study argued that deteroiation in
the current account balances in the short-run is due to fuel import increasing
activities. Relating current account to output volatility in 185 countries,
Elgin and Kuzubas (2013) argued that larger current account deficit is
attributed to higher output volatility, while the feedback effect of output
volatility to shocks in cuurent account is negative.

In the context of Nigeria, Babatunde, Adenikinju, and Adenikinju
(2013) argued that the response of stock markets to oil price shocks is
insignificant, but negatively revert at a period depending on the oil price
shocks. Also, Babatunde (2015) on the nexus between oil price shocks and
exchange rate in Nigeria argued that between january 1997 and December 2012,
positive oil price shocks were found to depreciate the exchange rate, while
negative oil price shocks appreciates the exchange rate of the country. Salisu
and Mobolaji (2013) modelled the volatility and transmission between oil price
and exchange rate for the economy of Nigeria and US using the VAR-GARCH newly
develped model, it was observed from their findings that there is a
bidirectional effect from fixed exchange rate to oil price shocks in the
economy of Nigeria and recommeneded that the inclusion of oil into a
diversified portfolio of fixed exchange rate will improve its risk-adjusted
return performance. Akinleye and Ekpo (2012) examined the macroeconomic
implications of symmetric and asymmetric oil price and oil revenue shocks in
Nigeria, using the vector autoregressive (VAR) estimation technique. They
concluded that the economy of Nigeria shows signs of the Dutch disease syndrome
in the short and long run. They futher argued from their findings that the
effect of oil price shocks on economic growth is only effective in the
long-run, while only affects the general price level marginally in the
short-run. On the importance of oil on growth of the Nigerian economy, Akinlo
(2012) used VAR method to validates his argument that an appropriate regulatory
pricing of the oil product is needed for the development of the other sectors
of the economy in Nigeria. Ishola, Olaleye, Olajide and Abikoye (2015)
empirically argued on the dynamic nexus between oil price and inflation in
Nigeria, they argued changes in crude oil price had significant effects on
inflation; inflation has been influenced by exchange rate changes and changes
in broad money supply and maximum lending rate. Adamu (2015) on the same stand
submitted that the global fall in oil prices has a significant impact on the
crude oil revenue and prices in Nigeria. Ebele and Iorember (2015) while
investigating Nigeria’s output response to shocks in oil prices using the
Benchmark Model proposed by Hamilton (2003); following Lee, Shawn and Ratti (1995),
and Mork (1989) confirmed that oil price shocks have positive and significant
effects on output growth in Nigeria for both oil and non oil GDP.

There is a lack of consensus among the existing empirical
studies on the effect of oil price fluctuation on the variables been examined.
The inconclusive argument could be as result of differences in scope,
methodology and area where the study is been carried out. This study therefore
contributes to the ongoing argument in literature by investigating the nexus
between oil price fluctuatins and current account balances in Nigeria using the
ARDL method.

3.0       Data Source and Methodology

The study rely on annual time series data from 1977 to 2015.
The dependent variable which is current account is proxy as Current account as
percentage of GDP sourced from World Development Indicators (2016), Oil price
is proxied as the Brent Oil price sourced from BP statistics (2016), Population
is proxy as population growth rate sourced from the World Development Indicators
(2016), also trade is accounted for using Trade as a percentage of GDP also
sourced from WDI (2016) (see Appendix 1). Our sample size consist of only
Nigeria. In order to estimate the parameters, the study formulated a model to
represent the relationship between current accounts and oil price fluctuations
in the Nigerian economy. The study followed the model of Primiceri (2005),
Cogley and Sargent (2005), Baumeister and Peersman (2013) and Gnimassoun et al.
(2017). The model for this study in a simplified linear form is stated as;

 

Where C is current account as the ratio of GDP, POP is the
population growth rate, GDP is gross domestic product annual growth rate, T is
trade as a percentage of GDP, u is the error term, t is the time accounted for.

Equation 1, in its linear form is transformed to linear-log
form by taking a natural logarithm of oil price. The model is therfore stated
as;

 

We specify equation 2 in econometric form as;

 

Where

 is the intercept,

are the coefficients of
the parameters, and

 is the error term at time t.

 In order to estimate
the associational relationship between current account and the independent
variables (OP, POP, GDP, T) in the short-run and the long-run, we specify the
Autoregressive Distributed Lag (ARDL) model. The long-run model is specified
as;

The short-run model of the effect of oil price fluctuation-current
account nexus is specified as;

4.0       Results
and Discussion

In order to avoid spurious
result, stationary test was carried out to ensure none of the variables are
stationary at order of integration two I(2) especially when ARDL bounds test
is to be used to capture the long-run co-movement among the variables. The
Augmented Dickey Fuller (ADF) test was used to ascertain this statement. From
the result, it was revealed that C and GDP 
were found to be stationary at I(0), while POP, T, and OP were
stationary at I(1). The results of the unit root test are presented in table 1.

Table 1. Unit Root Test Result

None

Intercept

Trend & Intercept

Variables

levels

C

-2.83552*

-2.99062*

-3.10833*

OP

0.449693

-1.50489

-1.78149

POP

-0.20651

-0.83588

-1.99219

GDP

-4.25689*

-4.90115*

-5.82293*

T

-0.90542

-2.04494

-1.85291

None

Intercept

Trend & Intercept

1st Difference

C

-5.88226*

-5.80195*

-5.77404*

OP

-5.45434*

-5.45308*

-5.3511*

POP

-2.1946**

-2.15003

-2.19208

GDP

-9.66846*

-9.53695*

-9.39947*

T

-8.47996*

-8.38958*

-8.50793*

Notes: *1, **5,
***10 percent level of significance.

Source: Authors Computation
(2017)

Bounds test cointegration
was estimated to examine the existence of long-run cointegration among the
variables in the study. From the result, it was noted that there is a long-run
cointegration among the variables as the result revealed F-statistics value of
5.697435 greater than the lower bound I0 and the upper bound I1 at 5% level of
significance.  The result is presented
below in Table 2

Table 2: ARDL Bounds Test Result

DEP/VARIABLES

F-Stat

Bounds (5%)

Outcome

I0

I1

Ct=f(OPt, POPt, GDPt,
Tt)

5.697435

3.47

4.57

Cointegration

Source: Authors Computation
(2017)

To
understand the nature of the relationship between current account and oil price
fluctuations in Nigeria in both short-run and long-run having found a long-run
cointegration relationship among the variables, ARDL (2, 2, 2, 2, 0) specification
for the relationship between current accounts and oil price fluctuation was
estimated.

The
long-run estimated coefficient result revealed that Oil price relation with
current account is negative and significant at 10% level of significance. This
implies that a 1percent increase in oil price brings about 13.7units reductions
in the current account balances. This result is in consonance with the findings
of Huntington (2015) that, oil price shocks is an important determinant of
current account balances, but against the confirmation of Allegret et al (014)
and Gnimassoun et al (2017) that oil price variations does not increase current
account but decrease. GDP had a positive and significant impact on current
account in Nigeria. The implication of this is that one unit increase in the
GDP results to 1.29units increase in the current account. Population growth and
Trade impacted negatively and insignificantly on current account. This implies
that a unit change in population growth and trade lead to 4.97unit and 0.17unit
decrease in the current account balances (see table 3 below).

Table 3: Long Run Coefficients

Variable

Coefficient

Std. Error

t-Statistic

Prob.  

LOGOP

-13.742

7.918267

-1.73548

0.096

GDP

1.285168

0.397548

3.232736

0.0037

POP

-4.97469

3.834737

-1.29727

0.2074

TR

-0.1712

0.186148

-0.91967

0.3673

C

301.0853

204.5223

1.472139

0.1545

@TREND

0.821081

0.457189

1.795932

0.0857

Source: Authors Computation
(2017)

The coefficient of the short-run
estimate revealed a significant relationship between oil price shocks and
current account balances and correctly signed with high magnitude (-0.73165);
the coefficient implied that 73% of divergence or disequilibrium caused by
previous period is converged to the long-run in the present period (See table 4
below).

Table 4: Short-run Coefficient Results

Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(C(-1))

0.2659

0.156002

1.704473

0.1018

D(LOGOP)

12.92189

4.202212

3.075022

0.0054

D(LOGOP(-1))

10.60643

6.872524

1.543309

0.1364

D(GDP)

0.276779

0.172939

1.600437

0.1231

D(GDP(-1))

-0.30399

0.184479

-1.6478

0.113

D(POP)

-3.71159

16.4098

-0.22618

0.8231

D(POP(-1))

-28.6279

15.81344

-1.81035

0.0833

D(T)

-0.12525

0.11454

-1.09355

0.2855

D(@TREND())

0.60074

0.316048

1.900785

0.0699

ECM(-1)

-0.73165

0.193474

-3.78163

0.001

Source: Authors Computation
(2017)

Individually,
all the explanatory variables insignificantly relate with current account
balances in the short-run. This implied that irrespective of the sign effect of
the variables, their significance cannot be accounted for in the current
account balances of the economy. This negates the argument of Ozlale
and Pekkurnaz (2010) that oil price fluctuations significantly influence
current account balances in the short-run.

The diagnostic test also showed
that the model does not have a serial correlation problem and free of
heteroscedasticity errors as they reveal a probability value greater than 0.05 (see table 5 below). Also the Ramsey
Reset Test revealed that the model is well specified with the probability value
greater than 10%. Therefore we conclude that the model is capable of explaining
the phenomenon in Nigeria.

Table 5:
Diagnostic Test

Breusch-Godfrey Serial
Correlation LM Test:

F-statistic

1.577635

Prob. F(2,21)

0.23

Heteroskedasticity Test:
Breusch-Pagan-Godfrey

F-statistic

0.660896

Prob. F(13,23)

0.7788

Ramsey RESET Test

Value

Df

Probability

F-statistic

1.201838

(2, 21)

0.3205

Source: Authors
Computation (2017)

 

5.0       Conclusion and Recommendations

The study analysed the nexus between oil
price fluctuations and current account balances in Nigeria using an annual data
from 1977 to 2015. The ARDL model is used to estimate the coefficients of the
parameters both in the short-run and in the long-run. The study from the findings
found a dynamic effect of oil price fluctuations on current account balances in
the economy of Nigeria. It was revealed that while oil price fluctuations
impacted positively on the current account balances, it had a negative impact
in the long-run. This implied that as oil price fluctuations increases current
account balances in the short-run, it decreases it in the long-run. Other
determinants (population growth, gross domestic product, and trade) included in
the model revealed a negative impact on current account balances in both the
short-run and the long-run except GDP which had a negative and positive effect
in the short-run and long-run respectively. The study therefore concluded that
oil price fluctuations is an important factor to be considered for current
account balances since it adjust the balance through its impact on the revenue generated
from the oil produced.

A major policy
recommendation from the findings is that government should design internal
policies to guide the economy against fluctuations in the oil price through
considering alternative trades.

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