Impact of Oil Price Volatility on Exchange Rate in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue II, February 2019 | ISSN 2454–6186

Impact of Oil Price Volatility on Exchange Rate in Nigeria

James Tumba Henry

 Department of Economics, Faculty of Social and Management Sciences, Adamawa State University, Mubi-Nigeria

Abstract: – Crude oil price plays an important role in influencing the economies of crude oil exporting countries like Nigeria. This impact can either be negative or positive depending on whether the price of crude oil in the international market increases or decreases. Nigeria moved from managed float exchange rate regime in 1986 shortly after the adoption of Structural Adjustment Programme (in 1986) to a free float exchange rate regime. However, time series data have shown that oil price and exchange rate are correlated because a sudden change in the price of crude oil in the international market is always accompanied by a period of fluctuations in the exchange rate value of the currencies of oil exporting countries, especially when the economy is oil-export dependent. This study therefore is aimed at examining impact of oil price volatility on exchange rate in Nigeria. In doing this, annual time series data from 1986 to 2015 were utilized. The Autoregressive Distributed Lag (ARDL) Bounds testing procedures was used for this study because the variables were integrated of order I(0) and I(1) and granger causality test were used to estimate the exchange rate and causality models respectively. The exchange rate model showed a good fit, 99 percent of the variations in the dependent variable were explained by the independent variables and hypotheses tested at 1, 5 and 10 percent levels of significance. The results indicated a negative but significant relationship between volatility of crude oil prices and exchange rates in Nigeria in the long-run. In the short-run, however, this relationship was negative and statistically not significant within the period of study. The results also showed money supply (M2), gross domestic product (GDP) and lending interest rate as important determinants of exchange rate in Nigeria in the short and long runs. The granger causality result indicated there is no causality between oil price volatility and exchange rate. The study recommended urgent shift in the Nigerian economy from crude oil export to none-oil exports through the exploration of other solid minerals and even agricultural produce. It also recommended swift effort to increasing Nigeria’s foreign exchange reserve in the short run so that it can serve as a shock absorber against crude oil price volatility that negatively affect the Naira exchange rate in the long run.

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