Oil price and real exchange rate appreciation: Is there Dutch disease in Nigeria?

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.