Oil Price Volatility and its Impact on Exchange Rate in Nigeria

Abstract: Volatility in oil prices is having grave impact over the exchange rate in Nigeria. Since, Nigeria is  receiving about more than 80 per cent her revenue from oil and gas exports (CBN, 2021) and generated 11 trillion Naira in the first six months of 2022 (NBS, 2022), fluctuation in oil prices would have immediate effect over the economic activity in country and further it has impact on the exchange rate in Nigeria. Therefore, it is very important to examine the relationship between oil prices and its impact on exchange rate. For this purpose, the study used secondary data from 1985-2022 sourcing them from various bulletins of Central Bank of Nigeria (CBN) and National Bureau of Statistics (NBS). The collected data are analysed with the use of Autoregressive Distributed Lag Model (ARDL) Model, Wald Test, and Error Correction Model (ECM) techniques. The results of the study revealed that the volatility in oil prices is having negative relationship with exchange rate in both short and long-run. However, it is affecting exchange rate at the rate of -67.54 per cent in the short-run and also statistically significant at 1 per cent. In the long-run, it is having less impact, -12 per cent, over the exchange rate, however is is statistically insignificant. Moreover, the Error Correction Model (ECM) results suggest that there is a short-run relationship among the variables, and the system is tend to correct disequilibrium automatically into the equilibrium level at the rate of -8.3 per cent. Therefore, the study wishes to advise to the federal government of Nigeria to focus on short-run revenue from the oil and use it judiciously so that its impact have more realistic over the economy and economic growth, and further it reduces burden from the Naira and its exchange rate with the US Dollar is stable.

Keywords: Oil Price, Exchange Rate, Regression, Error Correction Model.

JEL Classification Number: C3, C5, E3, Y1