Effect of Crude Oil Price Shock on Inflation and Exchange Rate in Nigeria

Abstract

The study examined the effect of crude oil price shock on inflation and exchange rate in Nigeria. The study adopted an ex-post facto research design, covering the period between 1990 and 2022. Secondary data were extracted from the CBN Statistical Bulletin and World Development Indicators. Multiple regression technique was used for test of hypotheses. The findings revealed a noteworthy adverse effect of oil price shocks on Nigeria's inflation rate, indicated by a probability value of 0.0180. Additionally, the impact of oil price shocks on exchange rates in Nigeria was also adverse and statistically significant, as reflected by a probability value of 0.047. Moreover, these findings align with established economic theory. The negative effect of oil price shocks on the exchange rate can be explained by the consistent devaluation of the Naira relative to the US Dollar in response to abrupt, particularly negative, changes in oil prices. The study, therefore, recommended that the government should enhance the proportion of funds allocated to the excess crude accounts relative to its revenue expenditures. By doing so, the government can build a financial cushion that can be tapped into when price shocks disrupt the crude oil market. Furthermore, it is advisable to employ contractionary monetary and fiscal policies when price shocks occur. These policies can effectively counteract excessive cost-push inflation that may result from the shocks. By reducing the overall demand in the economy through measures like higher interest rates and reduced government spending, inflationary pressures can be curbed.