The external sector shocks and macroeconomics in Nigeria

Abstract

The study examines the relationship between some key macroeconomic indicators in Nigeria and the external sector. During the period under review, it was discovered that crude oil had a lion’s share of Nigeria’s export earnings and the international demand for the country’s non-oil exports was unimpressive due to the development of synthetic alternatives, discriminative tariffs and new entrants in the global market (Central Bank of Nigeria, 2008). Consequently, most of the research on this topic hinged their framework on shocks from the oil sector (see Lukman and Olomola, 2016). In contemporary times, however, the contribution of crude oil to Nigeria’s gross domestic product has been dwindling. As at 2019, the entire oil and gas industry contributed less than 10% of Nigeria’s gross domestic product (Central Bank of Nigeria (CBN), 2019). There was the need to examine the external sector from a more comprehensive approach and framework. Therefore, this study evaluated the impact of shocks from Nigeria’s terms of trade and major foreign stock market index on macroeconomics in Nigeria. The methodology adopted for this study is the vector autoregressive technique, impulse response function and the error variance decomposition method. The findings show that the gross domestic product, price level and interest rate respond strongly in the short run (1-2 years), gradually fluctuates in the medium term (3-5 years) and become stable in the long run (6-10 years) due to shocks from the Dow Jones index and Nigeria’s terms of trade. Thus, intervention policies should focus on mitigating the impact of external sector shocks on macroeconomics in the short and medium terms when the impact is enormous.