Oil Revenue and the Twin Deficit Hypothesis in Nigeria

International Journal of Economics and Management Studies

© 2016 by SSRG - IJEMS Journal

Volume 3 Issue 9

Year of Publication : 2016

Authors : Ebi, BasseyOkon, Ubi, Peter Sammuel

10.14445/23939125/IJEMS-V3I5P117

How to Cite?

Ebi, BasseyOkon, Ubi, Peter Sammuel, "Oil Revenue and the Twin Deficit Hypothesis in Nigeria," SSRG International Journal of Economics and Management Studies, vol. 3,  no. 9, pp. 22-30, 2016. Crossref, https://doi.org/10.14445/23939125/IJEMS-V3I5P117

Abstract:

Several studies have yield divergent predictions about the relationship that exists between budget deficit and the trade deficitcommonly known as ‘twin deficithypothesis.The divergent in results are linked to data, methodologies, countries level of development, the structure of the economies and other phenomena making the twin deficit dilemma an interesting policy challenges that warrant a continuous study. In view of this, this paper investigates the relationship between budget deficit and the trade deficit, taking cognizance of the role of oil revenue in both trade account balanced and being the main driver of fiscal stands in Nigeria. Annual secondly time series data on budget deficit as a ratio of GDP, Trade deficit as a ratio of GDP, oil revenue, real exchange rate and inflation rate were obtained over the period 1970 to 2014.Granger causality analysis and the Vector Autoregressive (VAR) estimation techniques were employed in examining the direction and magnitude of causal ordering among the variables. The results confirms twin deficits hypothesis, but with a stronger causal ordering running both directly and indirectly from trade deficit to budget deficit through exchange rate and oil revenue. Oil revenue being important channel in the causation order, and the fact that oil revenue is externally determined by oil price and quota of oil production, We recommended that government should diversify the sources of her revenue away from oil dominance in order to reduce the external forces from trade deficit, exchange rate and oil revenue on budget deficit in Nigeria.

Keywords:

Oil revenue, Twin Deficit Hypothesis, VAR, Nigeria.

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