OIL PRICE VOLATILITY AND BALANCE OF PAYMENTS (BOP): EVIDENCE OF NIGERIA

Abstract

This study examines the effect of oil price volatility on Nigerian Balance of Payment (BOP) from 1980 to 2017, using the Autoregressive Distributed Lag (ARDL) bound testing technique, and the Autoregressive Conditional Heteroscedasticity (ARCH)-type model (EGARCH-M) to examine the nature and behaviour of Nigeria’s oil (Bonny light) price volatility. The results from the ARCH-type model (EGARCH-M(1,1)) indicate that the Nigeria’s oil price volatility is not mean reverting, with negative shocks generating more impact than positive shocks, which is determined negatively by global oil supply and negatively by world oil demand. Equally, while the result of the ARDL bound test confirms the presence of co-integrating (long-run) relation between Balance of Payment and oil price volatility (and oil export and economic growth), the result from the ARDL model indicates the presence of significant negative relationship between oil price volatility and Balance of Payments in Nigeria, thus indicating the negative effect (deficit) of oil price volatility on Nigeria’s BOP, due to the overreliance and dependence of the economy on oil export. The study therefore recommends the diversification of Nigeria’s export basket, for enhanced participation of non-oil products, coupled with the adoption of the Petroleum Industry Bill (PIB), so as to enhance the productivity and performance of the country’s oil and gas industry, and making it internationally competitive