SUBMITTED TO DEPARTMENT OF
BANKING AND FINANCE, SCHOOL OF FINANCIAL MANGEMENT STUDIES
ABSTRACT
The aim of this research work is to determine the
effect of oil price fluctuation on exchange rate in Nigeria. For this research
study, secondary data was appropriate because of the macroeconomic variables
involved Quarterly data from 1985 to 2018 was collected from the Central Bank
of Nigeria statistical bulletin, Organization of the Petroleum Exporting
Countries (OPEC) annual statistical bulletin, and the Nigerian National
Petroleum Corporation (NNPC) annual statistical bulletin; these data were
suitable because they show the trend of crude oil prices and exchange rate
overtime. This study employed the Vector error correction model in order to
analyze the long run relationship between crude oil price, exchange rate and
Nigeria’s economy. The findings showed that the relative contributions of RGDP,
External Reserves and Consumer Price Index to the variations in the exchange
rate and crude oil price are captured using the variance decomposition and
result presented in table 4.9 displays the forecast error variance
decomposition results for the 3 models. The numbers reported indicate the
percentage of the forecast error of macroeconomic shocks at different time
horizons from 1 to 10 periods. It is concluded that Crude oil price and
exchange rate change is usually sensitive to events around the world and
tension in the oil producing areas, this is because crude oil price and
exchange rate are exogenously determined.
TABLE OF CONTENTS
Title Page i
Certification i
Dedication ii
Acknowledgement iii
Abstract iv
Table of Contents v
Chapter
One 1
1.1 Introduction
1
1.2 Statement
of the Problems 2
1.3.0 Objective
of the study 3
1.3.1 Research
Question 3
1.3.2 Research
Hypothesis 3
1.4 Significance
of the Study 3
1.5 Scope
of the Study 4
1.6 Limitations
of the Study 4
1.7 Operational
definition of terms 5
Chapter
two 6
2.1 Conceptual
Review 6-12
2.2 Theoretical
Framework 12-14
2.3 Empirical
Review 15-19
2.4 Gap
of the Study 19
Chapter
three 20
3.1 Introduction
20
3.2 Research
Design 20
3.3 Data
specification 20
3.4 Data
collection 20
3.5 Diagnostic
text 21
3.6 Data
Analysis 21
3.6.1 A prior
expectation 22
Chapter
Four 23
4.1 Introduction
23
4.2 Diagnostic
text 23
4.3 Data
analysis 23
4.4 Correlation
analysis 24
4.5 Discussion
of findings 29
Chapter
five 30
5.1 Introduction
30
5.2 Summary
of Findings 30
5.3 Conclusion
33
5.4 Recommendation
34
5.5 Limitations
of the study 35
References 48
CHAPTER
ONE
1.0 Introduction
The trends and
dwindling of oil price in the global market has become a source of concern for
oil producing countries. The price of crude oil had dropped precariously from a
peak of $104 per barrel by the third quarter of 2014. Specifically, the OPEC
average monthly basket price of oil peaked at $107.89 per barrel in June, 2014
dwindled very sharply to $59 per barrel at end-December, 2014. It further
decelerated to $54.4 by end-March, 2015, resulting in Nigeria experiencing a
sudden and significant drop in revenue inflow from oil sales1.
Nigeria, a mono-cultural and a hydrocarbon economy depends largely on revenue
realized from oil to sustain her teeming population and the economy in order to
foster physical, political and socio-economic development. Despite the fact
that Nigeria is the 6th largest oil producer, the country also imports oil from
other countries. The surplus of exporting value over the importing value makes
Nigeria a net oil exporting country.
Oil prices have
witnessed profound fluctuations and this has implications for the performance
of macroeconomic variables, posing great challenges for policy making. The
transmission mechanisms through which oil prices have impacted on real economic
activity include both supply and demand channels. The supply side effects are
related to the fact that crude oil is a basic input to production and
consequently an increase in oil price leads to a rise in production costs that
induce firms to lower output. Oil price changes also entail demand side effects
on consumption and investment. Thus the impact (positive or negative) which oil
price volatility could have on any economy, depends on what part of the divide
such economy falls into and of course the nature of such price change (rise or
fall). However, the Nigerian economy uniquely qualifies as both an oil
exporting and importing economy by reason of the fact that she exports crude
oil, but imports refined petroleum products.
The search for oil
which began in 1907 when Nigeria Bitumen Corporation conducted exploratory work
in the country; however the firm left the country at the onset of world war.
Thereafter licenses were given to D’Arcy Exploration Company and Whitehall
petroleum. However, neither company found oil of commercial value and they
returned their licenses in 1923 (Frynas, 1999). A new license covering
357,000sq.miles was given to a new firm called shell D’Arcy petroleum
Development Company of Nigeria. The new firm was a consortium of Shell and
British petroleum (then known as Anglo-Iranian). The company began exploratory
work in 1937. Oil was discovered in non-commercial quantity at Akata near Eket
in 1953 (Frynas, 1999).Shell BP in the pursuit of commercially available
petroleum found oil in Oloibiri,
Niger Delta which is in present Bayelsa
state in 1956. Since the discovery of
oil in commercial quantity, Nigeria has been largely a mono-product economy.
The value of Nigeria’s total export revenue in 2010 stood at US$70,579 million,
while income from petroleum exports of the total export revenue was US$61,804
million representing about 87.6 percent (Ogundipe&ojeaga, 2014).
The discovery of oil
brought in the eastern and mid-eastern regions of Nigeria, this brought hope of
a brighter future for Nigeria in terms of economic development as Nigeria
became independent. In 1969 the Nigerian government enacted decree 51 to
strengthen its hold on the oil industry. With this decree the country (Nigeria)
took greater control over the granting of concession and more involvement in
the refining, distributing, and price of crude oil (Genova and Falola, 2003).
It is clear that Nigeria realized the importance of its oil industry as well as
the need to control it.
The oil dependence and
volatility of oil prices in international markets often lead to significant
problems in areas of fiscal planning, quality of public spending, and other
financial institutions when oil prices collapse. When oil prices fall, fiscal
budgets sometimes go into deficit; countries badly affected start taking loans
tied to their reserves, and incur more debt. The activities of cartel pricing
policy and oil speculators have also affected the price of crude oil, growth of
speculative activities which often influence exchange rate. Speculation causes
short run fluctuation in exchange rate, and when there is speculation or
expectation of a change in the rate of exchange or oil price, a state
disequilibrium arises. The forex reserve
is at the lowest level since October 2005 when Nigeria recorded $23.92 billion
in external reserve. With this, the central bank has ignored calls to devalue
the naira, maintaining an official exchange rate of N197 per dollar while the
currency trades at N350 per dollar at the parallel market (Financial Nigeria,
2016).
1.2 Statement
of the Problem
Nigeria as Africa’s
largest oil exporter and the world’s tenth largest oil producing country has
realized over US$ 600 billion in oil revenues since 1960, currently the 5th
highest net oil exporter in the World (CIA World Fact Book, 2015). Nigeria’s
economy is heavily dependent on natural resources where oil and gas constitutes
90% of total exports, 80% of government revenues and about 35% of GDP (Opec
Annual Bulletin, 2015).Oil price fluctuation has taken the center stage in
national economic consideration in over two decades due to its role in all
facets of life, and thereafter on all macroeconomic variables. Monetary and
financial instability is often caused by unstable oil prices in a nation such
as Nigeria which also result in setbacks in fluctuating oil price has made
planning of the economy difficult due to the multiple crises arising from it.
Oil price fluctuations create shocks in the economy leading to spiral effects
on prices of all other goods and services, and on planning by all segments in
the system, government, firms, consumers and externals. Nigeria’s daily output
level has been recently affected by the militants’ attack on oil wells in Niger
Delta area of the South-South region; OPEC and international market control of
oil prices make the effects of fluctuations harder on citizens.
The Nigeria economy has
been adversely affected by external shocks, particularly a fall in the global
price of crude oil. Growth slowed sharply from 6.2% in 2014 to an estimated
3.0% in 2015. Inflation increased from 7.8% to an estimated 9.0% in 2015. The
slow growth is mainly attributed to a slowdown in economic activity which has
been adversely impacted by the inadequate supply of foreign exchange and
aggravated by the foreign exchange restriction targeted at a list of 41
imports, some of which are inputs for manufacturing and agro industry (Africa
development bank, 2015).
1.3 Objective
of the Study
The
main objective of this study is to determine the degree to which the effect of
crude oil price fluctuation on exchange rate in Nigeria economy. The specific
objectives of this study are to:
1. To
know the effect of crude oil price on Real exchange rate against dollar
relationship.
2. To
examine the effect of crude oil price on exchange rate change
3. To
examine the relationship between the variable crude oil price and exchange rate
1.4 Research Questions
1. What
is the effect of crude oil price on real exchange rate against dollar
relationship?
2. Did
crude oil price affect exchange rate changes?
3. What
are the relationship between the variable crude oil price and exchange rate?
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