Interactive Effects of Crude Oil Price and Exchange Rate on Economic Growth in Nigeria

Abstract

This study examined the interactive effects of crude oil price and official exchange rate on economic growth in Nigeria. The estimation was carried out on annual time series data spanning from 1986 to 2021 with the aid of ARDL model. The data for the study were sourced from World Bank Database and Statistical Bulletin of the Organisation of Petroleum Exporting Countries (OPEC). Two distinct but interwoven models were estimated. Findings from model 1 and model 2 show evidence of co-integration. The results from model 1 further revealed that crude oil price and official exchange rate have significant and positive relationship with economic growth in the long-run period. In the short-run, only crude oil price has significant and positive relationship with economic growth. However, model 2 result shows that the interaction between crude oil price and official exchange rate have significant and positive influence on economic growth both in the short-run and long-run periods. The long-run results were corroborated by the robustness check conducted using Robustness Least Square (RLS). However, ARDL model 1 result shows only a significant evidence of short-run negative relationship between rate of inflation and economic growth in Nigeria during the study periods. Though, findings from RLS did show a significant and negative long-run relationship between inflation rate and economic growth in Nigeria. The study recommends that policy makers in Nigeria should enact policies, programs and exercise the needed commitment to change the narrative from mono-cultural economy that hugely depend on oil export to a diversified export-oriented economy. These can be achieved through increased investment in mechanised agriculture and industrialisation. Government should encourage private investment in local refineries as an antidote for subsidy removal and a remedy for draining huge forex from the importation of refined oil. It is hope that this will increase Nigeria’s foreign exchange earnings thereby appreciating foreign exchange rate of the Naira, attaining a unified foreign exchange rate and subsequently achieving a sustained economic growth