IMPACT OF OIL PRICE CHANGES ON GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA FROM 1990 - 2020

ABSTRACT

This research examined the impact of oil price changes on government expenditure and economic growth in Nigeria from 1990 to 2020 in Nigeria. Relevant conceptual, theoretical and empirical literature was reviewed. The result revealed that changes in oil prices have significant impact on government expenditure in Nigeria. The finding of the study also reveals that changes in oil prices have significant impact on the level of inflation in Nigeria. The findings of the study also reveal that. The finding of the study also reveals that changes in oil prices have significant impact real gross domestic product in Nigeria. The findings of the study reveal that relative contributions of oil revenue have significant impact on total government income and government capital expenditure in Nigeria. It was therefore concluded that changes in oil price significantly impact the government expenditure and economic growth in Nigeria. It was recommended that Nigerian government should make policies that will eradicate crude oil theft in order to boast real gross domestic product in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The Nigerian economy is currently facing a lot of challenges and most economic analysts attributed this to the fluctuating prices of crude oil in the international market. Crude oil price changes in the international market could have an impact on any economy due to the link between crude oil and all economic activities all over the world (Odularu, 2008).

Over the years the prices of crude oil fluctuate in the international market. The prices of crude oil oscillated between $23.19 and $52.43 in 1990, $20.20 and $43.95 in 1991, $19.25 and $40.65 in 1992, in 1993 price ranges from $16.75 to 34.37, in 2000 price ranges from $27.39 to $47.11, in 2005, price ranges from $50.04 to$ 75.84, $33 and$140 in 2008, $38 and $77 in 2009, $66 and $90 in 2010, $89 and $120 in 2011, $88 and $124 in 2012, $96 and $114 in 2013, $52 and $110 in 2014, $34 and $63 in 2015, $26 and $52 in 2016,  $45.13 and $64 in 2017, $57.77 and 68.15in 2018, 50.01 and 57.95 in 2019 and $32.25 and 36.88 in 2020 (Historical Crude Oil Prices (Table) (inflationdata.com)).Despite the changes in the oil price, there were progressive growth in the fluctuation from 1990 t0 2019 until 2020 when the oil price fall drastically due to the advent of Covid-19. During this moment, the global economic growth where at jeopardy as movement were stopped, firms were disrupted which in turn affected the use of the crude oil as well as the fall in price.

Monetary and fiscal policy are all aimed at achieving desirable economic trends such as price stability, full employment, exchange rate stability, economic growth and balance of payment equilibrium. It is observed that, the nation’s economy has been largely unstable, consequence of the heavy dependence on crude oil revenue and the changes of the crude oil prices. The Local Government Areas, the States and the Federal Government of Nigeria are depending greatly on the crude oil proceeds. As a result, oil dependence has exposed Nigeria to oil price changes which could result in systematic shocks (Nelson, 2018).

The global oil price has continued to fluctuate for several reasons. Unemployment is one of the macroeconomic issues affecting Nigeria's economy today, which influences variations in the price of oil. Given the socioeconomic, psychological, and political implications of unemployment, a lot of work has been put into objectively examining a number of potential causes for the steady increase in unemployment (Bouchaour&Al-Zeaud, 20102; Raifu, 2017). However, the impact of a shift in the price of crude oil on the nation's unemployment rate has received little to no attention. The price of oil, however, can affect employment in Nigeria in a number of different ways. First, from the 1956 discovery of crude oil at Oloibiri in what is now Bayelsa State and its widespread commercialization in the 1960s, crude oil has been the mainstay of the Nigerian economy, making up around 80% of all exports and 61% of all government revenue(National Bureau of Statistics, 2017; Central Bank of Nigeria, 2017). This shows that the nation's economy is too heavily dependent on the oil industry. However, the country's overreliance on oil exports and oil revenue has made the economy vulnerable to changes in the price of crude oil on the world market. This is what the economy went through in 2016, the first recession it had seen in 25 years (the previous one occurred in 1991). The economic slowdown in the second quarter of 2016 was foreshadowed by the abrupt drop in crude oil prices from approximately $114 per barrel to approximately $50 per barrel in 2014.According to data that is currently available, the GDP growth rate decreased by 1.58% during the 2016 recession, and overall government revenue and oil revenue both decreased by 17.84% and 29.66%, respectively(Central Bank of Nigeria, 2017). Government activities like investing in vital infrastructure facilities also decreased as total revenue reduced. As the largest employer in the formal economy, a reduction in government activities could exacerbate the economic crisis and the problem of persistent unemployment.

          In addition to this, Nigeria has long been dealing with an energy crisis. The production and availability of electricity have been exceedingly irregular. Because of this, the majority of businesses in Nigeria, both large and small, have had to make their own electricity by purchasing petroleum products like PMS and diesel to fuel their electricity generators. The cost of obtaining those petroleum products will directly increase the price of other inputs used by the firms, as was previously theorized.As a result, those companies' production costs would go up if the price of crude oil rose. Their profits, future investments, and output will all decline as a result of the increase in manufacturing costs. Since the number of employees and output are strongly correlated, a decrease in output will reduce a company's ability to hire more employees.In fact, it's possible that some of the current employees will need to be let go, which would exacerbate the economy's unemployment issue.

It has been proved by various countries (especially developing countries) that government expenditure in one way or the other has contributed a large quota on economic growth and development. Thus, government expenditure is the sole duty or responsibility of any country practicing mixed or socialist economic system.

Crude oil is a publicly traded commodity, its price is determined in the commodity market through the interaction of demand and supply worldwide and it constantly fluctuates. Changes in the price of crude oil force government to adjust its expenditures in line with such changes. This creates a dilemma especially for development or capital expenditures because they are entirely financed by oil revenues.

Oil is an important commodity in the economy of any country in the world because it is a major source of energy for domestic and industrial uses. Oil therefore serves as an intermediate product and as well as consumers commodity. There are different end products of oil: these include kerosene, diesel, gasoline and other changes in the prices of either the crude oil or any of the end products are expected to have impact on users and at large.

Furthermore, oil price shock (sudden increase in the price of oil) in the past resulted to increase in revenue to Nigeria and caused an increase in money supply (Oyeyemi, 2013). This increase in money supply has a serious implication for macro-economic indices like interest rate and inflation rate. The increase in money supply improved liquidity and increased spending both in real and financial assets which leads to increase in gross domestic product and reduction in unemployment rate. The momentum was not sustained. Expected structure to sustain economic development and growth were not strategically entrenched in the system of governance. Selfishness, ignorance and corruption robbed the nation the potential benefit from oil and gas industries as bulk of the revenue has been looted or mismanaged by public office holders at all levels of government. Much efforts were not taken to diversify the economy in anticipation of possible negative shocks. Decline in oil price results to a fall in government revenue. Thus, the government has to borrow in order to finance its budget. Debt servicing will possibly rise, external reserves deplete, dissatisfied persons tend to anti-social activities, federal and state allocations reduce, increase in security budget, delay in paying salaries of civil servants and demise of infrastructural projects. The reduced flow of money in growing population and economy will lead to job cuts and abysmal activities in the capital market. There has always been public outcry whenever oil price fluctuates negatively. The fundamental abuse and misallocation of oil revenue has introduced distrust in the system and perhaps silent causes of militia in various regions of nation. Some researchers believe that oil price fluctuation has a significant impact on Nigeria economy, others believe that there is no significant impact on the economy. Their findings are contradictory and is on this background that the study was motivated to fill the knowledge gap on the effects of oil price fluctuations on Nigeria economy.

There are some empirical studies to this effect most of which were carried out in developed economies whose results cannot be fully relied on in the Nigerian economic environment which is a developing economy(Khuram et al., 2015; Sidra & Abdul 2014; Dogah 2015;Qianqian, 2011;Peplin&Mubaris, 2013). Even if we are to some extent rely on these studies, their results and conclusions differ. While some researchers found a significant impact of oil price changes on government expenditure and economic growth (Khuram, et al., 2015;Alley, et al., 2014; Gunu, 2010; Oriakhi&Iyoha, 2013; Edesiri, 2014) other researchers reported that there is no significant impact of oil price changes on government expenditure and economic growth (Qianqian, 2011; Sidra & Abdul 2014; Peplin&Mubaris 2013; Philip, 2006; Ani, et al., 2014; Akin &Babajide, 2012; Apere&Ijeoma, 2013). In other words, there is lack of scholarly consensus on the impact of crude oil price changes on government expenditure and economic growth for both developed and developing economies including Nigeria. Also, the market capitalization which is one of the key economic sectors, to the best of our knowledge have not been measured by previous studies in Nigeria. This study, therefore, intend to use longer span and more recent data as well as varied economic growth indicators to verify the various positions taken in earlier studies. This study will focus on the Nigerian economic environment and measure some vital economic indicators that to the best of my knowledge other studies have not measured in Nigeria.

1.2   Statement of the Problem

The strength of the Naira to US Dollar in 1985 made Nigeria an import- oriented consumption habit that soon turned her into a perennial net importer, this turned out a major problem when oil revenue decreased alongside with international oil prices. External reserves collapsed, fiscal deficit mounted and external borrowing increased in order to finance the deficit. This led to the unstableness of the macroeconomic indicators in Nigeria.

Researchers like; Olomola (2006) reveals that oil price changes has an impact on real imports and government expenditure in Nigeria. Eltony and Al-Awadi (2001), in a study on Kuwait (one of the oil producing nations), also reveals the importance of oil price changes on government expenditure. While a study undertaken by Anashasy, (2005) in Venezuela (the highest oil producing country under OPEC) reveals a long-run relationship between oil price volatility rate and government expenditure.

Researchers like Olusegun, (2008); Christopher and Benedict(2008) did not discover any significant impact on government expenditure in Nigeria, while Mammad (2010) did not discover any significant impact of oil price changes on real government expenditure in Azerbaijan.   

The resulting dramatic increase in oil earning made Nigeria to delude itself by confusing wealth with income hence the euphoria and the oil wealth syndrome (Anyanwu 1990). The rapid monetization of her oil earnings led to a spending spree, leading to high import consumption, huge budget deficit (excess of expenditure over revenue), excess money supply and external debt overhang. It is no wonder that like other oil exporting developing nations that experienced oil boom, Nigeria caught the ‘‘Dutch Disease’’ – a situation where high but temporary oil revenue has adversely affected the  non-oil traded  goods sector, thus delaying the learning by doing experience that would improve its comparative advantage (or lessen its comparative disadvantage) in the production of manufactured goods. Thus oil revenue increases (increase in income from oil export), has turned Nigeria into a mono-cultural economy (depending solely on oil proceeds). This has made our economy undiversified, thereby leading to the neglect of investing in other vibrant sectors of the economy, mainly the agricultural sector. 

Increases and decreases in oil prices, causes changes in government revenue and subsequently government expenditure. Researches have shown a ten year time interval from 1979 to 2006 drawn in order to exhibit the inter-relationship between three important variables as regards to the research work such as; the price of oil, oil revenue and government expenditure. This is to provide support for the research question.

1.3 Objectives of the Study

The major aim of the study is to impact of oil price changes on government expenditure and economic growth in Nigeria from 1990 to 2020. Other specific objectives are as follows;

1. To ascertain the impact of changes in oil prices on Government expenditure
2. To examine the impact of changes in oil price on Nigeria’s inflation
3. To determine the impact of oil price changes on real gross domestic product in Nigeria.
4. To examine the relative contribution of oil revenue on total government income and government capital expenditure

1.4 Research Question

1. What is the impact of changes in oil prices on Government expenditure?
2. What is the impact of changes in oil price on Nigeria’s inflation?
3. What is the impact of oil price changes on real gross domestic product in Nigeria?
4. What is the relative contribution of oil revenue on total government income and government capital expenditure?

1.5 Research Hypothesis

Hypothesis 1

H0: Changes in Oil Price have no significant impact on Government Expenditure.

Hypothesis 2

H0:Changes in Oil Price have no significant impact on economic growth.

1.6 Significance of the Study

These will also analyze oil sector as a mono-cultural product base of the Nigeria economy, knowing how much have being earned, the amount invested in other sector of the economy to boost the economic activities and its resultant multiplier effect. Again the advantages as well as the disadvantages of the oil sector will also be discussed.

The results of this study would be significant for the stakeholders in the oil and gas industry and the Nigerian economy at large. It will help to further enrich the literature in this very important area of macroeconomics and finance in Nigeria. Economic planners, policymakers and macroeconomic managers will find this work as a valuable tool for improved economic planning.

1.7 Scope of the Study

The study is restricted to examine the impact of oil price changes on government expenditure and economic growth in Nigeria from 1990 to 2020.

1.8 Limitation of the Study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 Organization of the Study

This research work is classified into five main sections. chapter one contains the introduction of the study, chapter two contains the literature review, chapter three contains the methodology, chapter four covers analysis of data and interpretation of result, and chapter five covers the summary, recommendations and conclusion of the study.