Petroleum Price and Exchange Rate in Nigeria

Recognizing Nigeria as an oil-exporting dependent economy, a substantial number of studies confirmed crude oil price and its volatility as prime factors in exchange rate dynamics. Despite the economy’s heavy reliance on petroleum products, scholars have paid limited attention to examining the effect of petroleum prices on the exchange rate. The study investigated the effect of petroleum prices on the exchange rate using a monthly dataset from 1986:1–2021:12. The data analyzed in the study were sourced from the Central Bank of Nigeria and the Energy Information Administration. A non-recursive structural vector autoregressive estimation technique with block exogeneity restrictions was selected, given that Nigeria is a small open economy. The study showed that an increase in the petroleum price strongly contributed to the frequent depreciation of the Naira, Nigeria’s local currency unit. Additionally, the study revealed that poor foreign reserve performance had a negative influence on petroleum price movements, implying that the unabated importation of petroleum products exacerbated a substantial drain of foreign reserves. Consequently, authorities in Nigeria should develop strategies capable of reducing the economy’s overdependence on imported petroleum products, with a view to stabilizing and appreciating the country’s exchange rate, while also improving the pressure on the nation’s foreign reserves.