Oil Price Shocks and Development Finance Flows in Nigeria

Abstract

This study developed three long-term regression models to assess the impact of oil price shocks on development finance flows in Nigeria from 2003M1 to 2023M12. It employed the ARDL model in combination with DCC-GARCH framework. The study explores both the long-run relationships and short-term volatility dynamics among oil price volatility and development finance flows, including official development assistance (ODA), foreign direct investment (FDI), and external borrowing. In addition to oil price shocks, the study also considered other macroeconomic variables, including exchange rate, monetary policy rate, inflation rate and GDP as explanatory variables. The long-run ARDL results for the ODA model show a strong degree of persistence in aid inflows, with the lagged ODA variable having a positive significant effect. Both the exchange rate and monetary policy rate also have positive significant impacts, while oil price exhibits a negative significant effect on ODA, indicating that aid inflows decline when oil prices rise. The FDI model shows that past FDI levels, exchange rate, interest rate and crude oil price significantly influences investment inflows, suggesting that favorable oil market conditions and competitive exchange rates enhance investor confidence. On the contrary, GDP, inflation, and oil price volatility are insignificant in the long run. For the external borrowing model, domestic interest rate has a positive significant effect, while other macroeconomic variables are mostly insignificant. The DCC-GARCH results indicate time-varying correlations between oil prices and all three forms of development finance, with ODA and FDI responding more to short-term oil market shocks than to long-run fundamentals. The study concludes that Nigeria’s development finance flows are highly sensitive to oil price volatility. It was recommended, among other things, that government diversify the nation's economic base by increasing investments in agriculture and manufacturing sectors. This would lessen reliance on oil exports and help stabilize development finance flows.