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Fiscal policy generally implies basic duty of any government to manipulate the receipt and expenditure sides of its budget in order to achieve certain national objectives such as increase in per-capita income, low unemployment rate, positive balance of payments (BOP) position and price stability. The essence of fiscal policy anywhere in the world, is basically to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with sustainable economic growth. However, in oil-exporting countries, government expenditures often depend on oil revenue, which in turn depends on movement of oil price in the international market. Hence government revenues tend to be highly volatile and this is due to the unpredictable nature of oil price thus making fiscal policy more challenging in such economies.
There has been up and down movements of oil prices ranging from the historical high and low oil prices until the recent plunge in oil market; that sees oil price dropping to its lowest record level for the first time since it reached its ultimate height of over $140 per barrel in 2008. In case of crude oil exporting nations such as Nigeria and the likes, oil price shocks affect their economies first and foremost through the fiscal channel, as a very large portion (if not all) of oil generated revenue accrue to government. In particular, fiscal policy in oil-exporting countries face a number of specific challenges stemming from the fact that oil revenues, which constitute the bulk of government revenues in oil-centered economies, are exhaustible, volatile and largely originated from external demand.
|EPISODE OF OIL PRICE FLUCTUATIONS||TGR
|BETWEEN OPEC COLLAPSE AND GULF WAR||1985-1986||13.85||9.50||68.59||14.63||5.76|
|PERIODS BEFORE ASIAN FINANCIAL CRISIS||1991-1992||145.75||123.40||84.67||79.69||45.05|
|BTW ASIAN FIN. CRISIS AND
SEPTEMBER 11TH TERRORIST ATTACK
|BTW 2ND GULF WAR AND GLOBAL FIN. CRISIS||2003-2004||3247.80||2714.55||83.58||1326.08||933.49|
Source: Author’s Computation using data sourced from CBN statistical Bulletin (2014)
Note: TGR is total government revenue; TOR is total oil revenue; while TGE denotes total government expenditures
Being the largest oil producer in Africa, fiscal policy in Nigeria is likely to be sensitive to oil price shocks. Fiscal policy in Nigeria has shown a tendency of over reliance on oil revenues since the country discovered crude oil in commercial quantity. Oil has dominated the economy of the country, accounting for more than 90% of its exports and close to 80% of the government revenues. Thus, a small oil price changes can have a large impact on the country’s fiscal policy. Table 1 for example, reveals substantial responses of Nigerian fiscal policy to various historical episodes of oil prices fluctuation.
Before 1980s, the Organization of the Petroleum Exporting Countries (OPEC) seems to have firm grips of oil market, and to a very large extent determine the movement of oil prices. However, in the period 1982 to 1985, OPEC was faced with lower demand and higher supply from outside the organization. In respond, OPEC attempted to set production quotas low enough to stabilize prices. These attempts resulted in repeated failure, as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices.
When the prices kept falling despite the attempts from Saudi Arabia to keep them stabilize, they left their role as a swinger producer in OPEC in order to increase their own market share. The other OPEC members shortly followed and the market was immediately flooded with oil. These developments resulting from inability of OPEC to unanimously agreed on how to respond to the lower demand and higher supply by economies outside the organization leads to a free fall of oil price from $29 in the last quarter of 1985 to as low as $11 per barrel in the last quarter of 1986.
The episode of OPEC collapse is not without its impact on Nigerian economy. Contrary to what seems to be obtainable before the collapsed of OPEC, the average percentage share of oil revenue to total revenue between 1985 and 1986 was less than 70% thus resulted to 4% decline in oil revenue. Oil price in the international market later assumed an upward-trend during the 1990 Gulf war, and Nigeria an oil exporting economy benefited from this upward trend of oil prices. The country’s oil revenue and total revenue increased by more than 100% on average between 1989 and 1990. In a similar development, average tax and royalties from petroleum profits alsoincreases by 100% rising from N9.66 billion between 1987 and 1988 to N18.75 between 1989 and 1990. As a consequence, the average government expenditure of N50.65 billion between 1989 and 1990 is an indication of an improved expenditure component of Nigerian government fiscal policy when compare to N24.88 billion in 1987 and 1988, which may not be unconnected to the surge in the country’s oil revenue within the same period.
While the collapse of OPEC and the 1990 Gulf war episodes of oil prices fluctuation are more of political, the Asian financial crisis attributed to the falling oil prices to as low as $10, is the first major demand-side event in the history of crude oil prices. However, like the first Gulf war of 1990, the second Gulf war in 2003 also resulted in an upward rise of oil price. The oil price increase in 2003 was triggered by the political instabilities in the OPEC member countries namely the political unrest in Venezuela, U.S. invasion of Iraq as well as political unrest in the Niger Delta area of Nigeria.
Between 2007 and 2008, crude oil price regularly reached its ultimate heights, reaching its all-time record of $147.02 per barrel. Due to the outbreak of global financial crisis however, the second half of year 2008 saw oil price dropping rapidly below $40 per barrel in the late-2008/early-2009. In response, average percentage share of oil revenue to total revenue declined by 10%. While increased demand and reduced available crude oil supplies might be responsible for the rapid increase in oil prices all through late 2010 to early 2014, the recent dwindling oil prices which started in the month of June 2014 is not without a pressure on oil exporting countries that rely on higher oil prices to finance their budgets, fuel subsidies to citizens and expand drilling. The recent falling oil price era particularly between the period 2013 and 2014 might as well be responsible for the shortfall in oil revenue, the share of oil revenue on the country’s total revenue as well as the tax and royalties received from petroleum profits.
Source: CBN statistical Bulletin (2014)
Data Source: CBN statistical Bulletin (2014)
Data Source: CBN statistical Bulletin (2014)
As demonstrated in the figures below, we also examine if there has been any historical co-movement between oil price and fiscal policy in Nigeria. Depicted in Figures 1.1., 1.2 and 1.3 are indications of possible co-movements between oil price and total government revenue, oil price and total government expenditure, and between oil price and petroleum profits tax and royalties. The fiscal policy as shown in each of the figures seems to have responded strongly to the increasing oil price, which is as a result of the loss of production capacity in Iraq, Venezuela and Nigeria combined with the increasing demand worldwide.
Hence, it is apparent from the preceding discussion that the overall fiscal balance in Nigeria can be driven by any changes in the oil price given the country’s reliance on oil income, which by nature is volatile and uncertain; thus leading to complicity in the process of fiscal planning. Thus, building on this premise, the way in which Nigerian governments adjust their expenditures and revenue policies in response to oil prices shocks thus remain the focal point of this study.
In a country where oil revenue such as oil export earnings and petroleum profits tax are major sources of government revenue, it is only a commonplace knowledge that oil price changes would prompt shocks to fiscal policy in such economy. Due to persistent and highly unpredictable nature of oil price, fiscal policy in oil-exporting countries tend to face specific challenges due to the fact that oil revenues, which originates from abroad are exhaustible and volatile. These characteristics therefore, makes fiscal management more challenging in oil producing economy, where volatility of oil prices leads to corresponding volatility in oil revenues and petroleum tax; and a kind of complicity in the process of fiscal planning. By implications, fiscal policy in oil dependent economy is vulnerable to a volatile external variable (that is, oil price), which for the most part, is largely beyond the control of policy makers. Thus, policymakers in oil-producing countries are likely to be subjected to a variety of problems such as fiscal imbalances, deteriorations in the positions of national savings, reserves and even frequent economic instability. These challenges tend to be greater the larger the share of oil revenues is, in the government’s overall revenues and the larger the oil sector is in the economy.
Beside the fact that Nigeria is one of the developing economies, one of its major economic challenges is that it is susceptible to volatile macroeconomic environment constrained by external terms of trade shocks and reliance on crude oil export. With about 75% of her revenue sourced from crude oil export earnings and petroleum tax, fiscal policy in Nigeria is likely to be influenced by oil-driven volatility impacting both revenue and expenditure. This reliance on oil revenue, which in turn depends on oil price movement, tends to render fiscal management, budgetary planning, and the efficient use of public resources difficult. This among others might have contributed to the failure of fiscal policy over the year for neither facilitating the diversification and growth of non-oil sector nor reducing poverty.
There is no gainsaying that this uncertainty nature of oil price in the international market has had its share on fiscal instability in Nigeria, and the effect has largely channelized to the rest of the economy with fundamental effect on government revenue and provision of public goods. It is however, expected that different oil price shocks is likely to prompt different fiscal policy reactions. This may explain why rising or positive oil price shock can easily be accommodated by oil producing countries since it enhances fiscal policy by increasing the revenue and consequently government fiscal expenditure. On the other hand however, falling oil prices or negative oil price shocks rather constitute a major fiscal policy problem as it put a strain on oil revenue and in turn fiscal expenditure. Recent practical experience in this regard include the inability of some Nigerian state governors to effectively perform their fiscal responsibility at sub national level; mainly due to the falling oil price that started mid-2014 with the price above US$140 in 2008, now sale for around US$41 (Brent Oil price as at April, 2016).
The above therefore, is an indication that negative oil price shocks do not have an equivalent effect with positive oil price shocks. Thus, the uncertainty about future of oil price and the variability of fiscal policy in response to oil price shocks is likely to differ for positive oil price shock as against negative oil price shock. This among other implies that the way in which government adjusts their expenditure and revenue policies to oil price shocks is likely to be predicated on whether the oil price shock is negative or positive; as well as on the short or long run dynamics of the shock. Hence, understanding the short and long run asymmetric response of fiscal policy to oil price shocks is therefore, essential to avoid misconception of assuming that fiscal policy responded identically or symmetrically to both the negative and positive oil price shocks. Surprising however, is the fact that this likelihood of fiscal policy responding differently to positive and negative oil price shocks has rather received little or no attention in the literature.
It is in view of the above premise and the fact that ignoring such asymmetric impact of oil price shocks on fiscal policy is capable of prompting biasness in the evaluation of fiscal policy that motivates our consideration for the assessment of asymmetric impact of oil price shocks on fiscal policy. Unlikethe previous studies that implicitly assumes bi-directional causation between fiscal policy and oil price shocks using multivariate VAR approach, the present study instead explores nonlinear auto-regression distribution lag (NARDL) model, which enable it to differentiate between the short- and long-run asymmetry responses of fiscal policy to oil price shocks.
Against the foregoing, the following questions become pertinent:
The broad objective of this study is to find out how fiscal policies in Nigeria respond to notable oil price shocks – positive – negative that has occurred in the last 35 years. To achieve this broad objective, the study specifically hopes to:
In line with the main and various specific objectives of this study, the following hypotheses would be tested in the course of this study:
HI: The response of fiscal policy to oil price shocks is asymmetry in the case of Nigerian economy.
HI: The asymmetries response of fiscal policy to oil price shocks is both short and long run phenomenon.
HI: The vulnerability of fiscal policy to oil price shocks depends on thedimension of fiscal policy measures that is under consideration.
HI: Tax and royalties from the petroleum profits in Nigeria are significant and highly vulnerable to oil price shocks.
The scope of the study is limited to the period between 1985 and 2015. The data used for the stipulated period were quarterly data.
The major limitation the study encountered is the unavailability of daily data which would have been the appropriate data to capture the accurate volatility of the oil price for the study. Also, there was no sufficient quarterly data for the intended years to cover for the study. An attempt to extend the data length to 1980 or further was constraint by unavailability of complete macro series from both domestic and foreign official sources.
Oil price shock offers a good natural experiment to study fiscal policy of oil producing economies for many significant reasons. First, it will in the context of this present study provide a useful empirical framework for Nigeria’s economic reformers and regulators; who are striving to improve the effectiveness of fiscal policy in Nigeria. Secondly, if the outcome from each tool (that is, the response of government fiscal policy to oil price shock) is known on the basis of the empirical evidence to be provided by this study, such would assist the policy makers in choosing the appropriate fiscal measure to stimulate or stabilize the economy. For example, if policy maker knows that, compare to recurrent spending, capital spending is less susceptible to oil price shock, capital spending should be given more attention by policy makers to increase the effectiveness of fiscal policy.
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