Analysis of Oil Import and Exchange Rate in Nigeria

Abstract

This research investigated the relationship between oil import and exchange rate in Nigeria from 1981 to 2015. The objective of the study is to analyze the impact of oil import on the rate of exchange in Nigeria. The study adopted co integration test to ascertain the long run relationship among the variables and vector error correction mechanism to determine the influence of LOIMP on EXR. The findings from the research indicated negative insignificant relationship between oil import and exchange rate in Nigeria in the short run and negative significant correlation in the long run. CUSUM test established that the model for the estimation was stable and impulse response asymptotic analysis revealed a negative impact of oil import on exchange rate in Nigeria. Causality test in this study showed one way causation from EXR to LOIMP. The study concludes that oil import has contributed negatively to developments in the Nigerian economy and the continued depreciation of the exchange rate. Based on the negative result of oil import on exchange rate in Nigeria, the study suggests that government should restructure, transform and legalize all the local (illegal) refineries operating in the Niger Delta region, in addition to making our four refineries operate in full capacity, so as to increase the productive capacity of the country,  meet up with the domestic demand for refined oil products in the country, discourage importation of refined products  and create employment which is one of the macroeconomic problem that kept the economy in its current state. These outfits should be licensed and structured into efficient production units, underlined by quality control. Government should sincerely initiate policy that will track government and private oil investors who deliberately frustrate refining of crude oil within Nigeria due to their selfish reasons. Policies towards diversification of Nigerian economy should be encouraged and imbibed, this will reduce overdependence on oil revenue and pressure on our local currency.

Keywords: Exchange rate, Oil import, Impulse Response, Nigeria