Abstract:
Nigeria has witnessed oil windfalls for decades, however, it was presumed that revenues from
oil would assist Nigeria to mark its transition from underdevelopment to industrial
development. Regrettably, the high dependence on oil sector has led to deindustrialization and
exchange rate appreciation. This paper studies the dynamic relationship between oil price and
real exchange rate for Nigeria using annual time series data over the sample period 1970 to
2018. Our analysis is based on Autoregressive distributed lag bound testing to cointegration
approach. Following the integration and cointegration tests, the results indicate that all the
variables attained long run cointegrating relationship. The results also indicate that oil price,
government expenditure and inflation contributes to real exchange rate appreciation, thus,
confirming the existence of Dutch disease. Essentially, this is a clear evidence that Dutch
disease weakens the competitiveness of the lagging sectors in Nigeria. Also, the paper
identifies unidirectional causality from oil price to real exchange rate, and bidirectional
causality between oil price and government expenditure, real exchange rate and inflation. This
means that the oil price and inflation encourages real exchange rate appreciation.
Consequently, the policy implication is to diversify the lagging sectors by investing in human
resource development, basic infrastructure and tax concessions will raise the competitiveness
level of the lagging sectors.
