OIL PRICE SHOCKS, INFLATION AND ECONOMIC GROWTH IN NIGERIA: EVIDENCE FROM SVAR ANALYSIS (1995Q1–2024Q4)
Keywords:
Oil price, Economic Growth, Inflation and Structural Vector Autoregressive (SVAR)Abstract
Oil revenue and inflation are the key determinants affecting almost all the sectors of the economy in Nigeria. This study examines the effect of oil price on inflation and economic growth in Nigeria from 1995Q1 to 2024Q4 using a Structural Vector Autoregressive (SVAR) model. The data were drawn from the CBN Statistical Bulletin and World Bank Development Indicators. The ADF unit root test with intercept reveals that the variables are stationary at first difference. The empirical results of the impulse response functions from the SVAR model and variance decomposition indicate that the response of economic growth and inflation to a unit standard deviation shock to oil price are positive and significant. Specifically, the results from variance decomposition reveal that oil price shocks explain approximately 26% of the variation in GDP and 61% of the variation in inflation over a 10-quarter horizon. The SVAR model passed key diagnostic checks: no serial correlation (LM test p = 0.958), homoskedasticity (p = 0.765), and stability (all roots lie within the unit circle). Based on these results, the study recommends that to reduce food imports, encourage economic diversification and lessen the impact of oil price shocks on price level especially food inflation, the Government should intensify its efforts to increase domestic food production by granting more funding support through its agricultural sector intervention schemes. This would help increase country’s GDP and stabilize inflation pressures.
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