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Oil price and USD-Naira exchange rate crash: Can economic diversification save the Naira?

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  • Alley, Ibrahim

Abstract

Naira lost half of its foreign exchange value in less than two years following 2014 oil price crash, and has not recovered despite numerous government's attempts. This study thus evaluated the potential of economic diversification (proxied by non-oil export performance) in saving the Naira by analysing a nexus between oil price, exchange rate and nonoil export. Estimation of a rearranged current account equation within Autoregressive Distributed Lag (ARDL) and Vector Autoregressive (VAR) models, using monthly data from January 2008 to December 2015 yielded the following results. There is a direct relationship between oil price and exchange rate, and this affirms that sharp decline in the former induced the latter's deterioration. Increase in non-oil exports led to appreciation of USD-Naira exchange rate both in the short run and the long run. Import, on the other hand, induced depreciation of the exchange rate in the long run. Diversification, by increasing export revenue and reducing import bills, therefore has a great potential to improve the value of Naira.

Suggested Citation

  • Alley, Ibrahim, 2018. "Oil price and USD-Naira exchange rate crash: Can economic diversification save the Naira?," Energy Policy, Elsevier, vol. 118(C), pages 245-256.
    • Handle: RePEc:eee:enepol:v:118:y:2018:i:c:p:245-256
    DOI: 10.1016/j.enpol.2018.03.071
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    More about this item

    Keywords

    E6; F3; F4; Oil price; Exchange rate; Economic diversification; ARDL model; VAR model;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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