International oil price volatility and Nigeria's balance of payments

Abstract

Despite various government efforts, unfavorable balance of payments positions has remained substantial in Nigeria creating the risks of financial vulnerabilities and substantial internal imbalances. Since oil is Nigeria’s major revenue source, it was expedient to examine whether international oil price volatility was a major source of balance of payments (BoP) crisis in Nigeria from 1981 to 2020. The monetary theory of balance of payments formed the theoretical framework for this study and the generalized autoregressive conditional heteroscedasticity (GARCH) was used to derive values for international oil price volatility. Our result show persistent volatility clustering in oil prices. In addition to estimating the effects of international oil price volatility on Nigeria’s BoP, we disaggregated the BoP into its current and capital accounts in order to ascertain whether oil price volatility affected the two components differently. Vector autoregressive (VAR) technique was used to estimate the balance of payment equation model. Our results indicate that increasing volatility of oil price negatively and significantly impacted on balance of payment and its current account while it positively and significantly impacted on the capital account balance thus driving Nigeria’s balance of payments disequilibrium. Hence, the study recommends economic diversification as well as encouragement of alternative sources of energy to reduce domestic dependence on oil.