Trivariate analysis of oil revenue, government spending and economic growth in Nigeria

• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/opec.12124
• Author: Abosede E. Ogundare,Ismail O. Fasanya
• Date: 01 June 2018

Trivariate analysis of oil revenue,

government spending and economic growth

in Nigeria

Ismail O. Fasanya*

,

** and Abosede E. Ogundare*

*Department of Economics, Federal University of Agriculture, P.M.B 2240, Alabata, Abeokuta, Nigeria.

Email: fascojnr@yahoo.com; fasanyaio@funaab.edu.ng

**Centre for Econometrics and Allied Research (CEAR), University of Ibadan, Ibadan, Nigeria.

Abstract

This study examines the dynamic relationship between oil revenue, government spending and

economic growth in Nigeria. Since the discovery of oil, oil proceeds have dominated the country’s

federation account and have improved public spending. In this paper, we analyse if the huge

government spending has improved the rate of economic growth. To do this, the multivariate

vector autoregression framework with special attention to Generalised Impulse Response Function

is adopted in analysing the annual data of oil revenue, total government expenditure and real Gross

Domestic Product from 1980 to 2015. We find evidence that oil receipts remain the major route

which public spending is financed and the fundamental source for growth. Hence, there is need for

the government to diversify the sources of foreign exchange inflow of the country. The

diversification of the economy is required to insulate it from external shocks. It is recommended

for Nigeria to explore ways of reviving its huge agricultural potential which has been neglected

since the discovery of oil in addition to exploring its rich untapped solid minerals deposit in order

to promote diversification of the economy away from a mono cultural product base.

1. Introduction

Oil is one of the main sources of energy that always had an effective role on the world

economy and the macroeconomy, especially in the oil-exporting countries (Garkaz

et al., 2012). Detailed look at the world around, we can find that any activity as well as

human society is almost impossible without the use of energy as it serves as a raw

material to many industries. This process also generates employment to those working in

the oil sector. Oil is the major source of energy and income in Nigeria. Before the advent

of oil (Crude oil), agriculture used to be the core of the Nigerian economy which plays a

vital role in shaping the economic and political destiny of the country (Abolaji, 1986). In

the 1960s, agricultural products provided about 80 per cent of the total export earnings

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107

and the main cash crops were cocoa, palm oil, groundnut etc. In 1962, agriculture

accounted for about N229.8 million and 82 per cent of the nation’s total values of

export. More so, in 1964, a total of N356.4 million was realised which represented 85

per cent of the country’s total export for that year. However, by 1976, of N274.2 million

that came from export, agriculture accounted only for 4 per cent of the nation’s earnings,

even with the take-over of export financing by the Finance Development House, the

earnings from the non-oil export (which agriculture products dominated) have not

improved by the end of 1991. It only managed to provide 3.8 per cent out of the total

revenue. This was because of the oil boom and excess dependence on its earnings.

During this time, the need and consumption pattern shifted and became import—

oriented. According to National Bureau of Statistics (NBS, 1997), the 1970s witnessed a

drastic change in the Nigerian economy where share of agriculture to Gross Domestic

Product (GDP) significantly dropped from about 40 per cent in the early 1970s to about

20 per cent in the 1980s and 16 per cent in the 1990s. Since the oil sector assumed a

wider dimension to account for about 20 per cent of Gross Domestic Product (GDP), it

also accounted for 81 per cent of government revenue and 96 per cent of export

earnings. The outcome of the oil boom of the 1970s is the spectacular change that crept

into the Nigerian economy with devastating effect still lingering till today (Ijeh, 2010).

The heavy dependence on oil as the main source of revenue to the economy is highly

vulnerable. To all intents and purposes, the strengths and weaknesses of Nigeria

economy are immensely being subjected to the dictates of oil revenue which is highly

volatile and exogenously determined, that is, oil prices are not being determined within

Nigeria.

Moreover, the macroeconomy is often affected by changes in oil price which lead

to instability in the economy. For example, in 1979, when oil price increased from

14.02 dollar per barrel, to 31.61 dollar per barrel, inflation was about 12 per cent

while exchange rate was about 0.6 naira to a dollar. Furthermore, in 1989, oil price

reduced to 18.23 dollar per barrel, inflation rose to 50.47 per cent while exchange

rate stood at 7.39 naira to a dollar. In recent times, the price of oil that hoovers

around 40 dollars per barrel in the late 2016 also had a corresponding effect on most

of the monetary policy variables in Nigeria. As a result, the unanticipated changes in

oil prices have influenced the behaviour of monetary policy instruments in the

country overtime. Hence, since history has proven that a country’s natural oil reserve

can actually deplete to zero. What then will be the faith of Nigeria if faced with such

situation?

The rest of the paper proceeds as follows. Section 2 presents the literature review.

Section 3 focuses on the methodological approach while the empirical analysis and result

of the paper are discussed in section 4 and in section 5, conclusion and policy

implications are drawn.

OPEC Energy Review June 2018 ©2018 Organization of the Petroleum Exporting Countries

108 Ismail O. Fasanya and Abosede E. Ogundare