Oil Price Shocks and the Dynamics of Current Account Balances in Nigeria

Abstract

This paper pioneers research on the relationship between oil price shocks and current account dynamics in Nigeria, a country that doubles as an oil exporter and importer. Structural vector autoregression is applied to quarterly data from 1970Q1 to 2008Q4 to identify oil price shocks and to evaluate its net effect on Nigeria's current account balances. After introducing three control variables (output gap, real exchange rate misalignment and the lagged values of current account ratio), we impose six structural restrictions on the model to help track and identify the structural shocks of oil prices on current account balances. Overall, we find that oil price shocks have a significant short‐run effect on current account balances for Nigeria. Specifically, the impulse response of the current account ratio to oil price shocks increases speedily in the first six quarters, and then, it declines afterwards until the 30th quarter. The variance decomposition analysis shows that approximately 15.77 per cent of the variations in current account dynamics are caused by oil price shocks. The insight we draw from this finding is that there is no one‐for‐one relation between oil price shocks and current account dynamics. Exchange rate misalignment provides the offsetting effect as revealed from our results. The implication for policy is that reserve‐augmenting strategies, lax monetary policy and intensified international financial integration would need to be enhanced and sustained by policy‐makers to reinforce the positive effects of oil price shocks on the Nigerian economy.