Current Account Balance and External Shocks in Nigeria

Abstract

As a small open economy, Nigeria is highly vulnerable to adverse effect of external shocks since independence. These shocks manifest in form of oil price shocks, exchange rate volatility, global financial crisis and terms of trade shocks. This paper however investigated the impact of external shocks to oil price, exchange rate and terms of trade on the fluctuations in current account balance being an important macroeconomic variable. Multivariate Vector error correction model (VECM) was employed on quarterly data of current account, terms of trade, exchange rate and oil price. Data on current account, terms of trade and exchange rate were drawn from world development indicator and oil price was sourced from the OPEC database. The result of the impulse response function showed a negative and significant impact of external shocks on the current account fluctuations in Nigeria in the long run. The data analysis confirmed that a positive shock to the variables produce a positive response of the current account which improves it while a negative shocks deteriorates current account. The variance decomposition results showed that a significant portion of fluctuations in current account can be explained by the terms of trade shocks. The results also showed that a shock to the oil price produces term of trade shock. However, the study suggests a robust and forward-looking policy to cushion the adverse effect of external shocks in Nigeria. Also, there is need for the country to diversify her export base to reduce total reliance on oil export.