Oil Price Shock, Fiscal Policy and Manufacturing Sector in Nigeria: Evidence from SVAR

Abstract

In this study, we used SVAR framework to investigate the impact of oil shocks on manufacturing output in Nigeria via fiscal variables using annual data from 1981 to 2019 which is sourced from Central Bank of Nigeria (CBN). We found that government revenue is explained by oil price in both short- and long-run while expenditure explains revenue in the long-run, though very weak. This is an indication that spending by government can further generate more revenue in the long-run. We equally found that government expenditure is not explained by its revenue which could suggest that it is financed largely by other means like borrowing. In Addition, variations in price level is weakly explained by expenditure- indicating the import-generating nature of inflation in Nigeria. Lastly, manufacturing output is jointly explained by inflation, revenue and oil price. This means that expenditure lost its explanatory power to price level in the process. We recommend that efforts should be made to diversify the economy such that government expenditure would be financed by its generated revenue rather than borrowing or unnecessary depending on foreign aids. Also, the monetary authority should always be quick in controlling inflation so that meaningful and real impact of expenditure can be felt by the manufacturing sector which will translate to growth of the aggregate economy.