International Oil Prices and External Reserves of Nigeria: A Cointegration Approach
Malgit Amos Akims *
Department of Public Policy and Administration, Kenyatta University, Nairobi, Kenya.
Farida Abdul
Accounting and Finance Department, Kenyatta University, Nairobi, Kenya.
Seddi Sebastian Maimako
Department of Business Administration, Faculty of Management Sciences, University of Jos, Jos, Nigeria.
*Author to whom correspondence should be addressed.
Abstract
The accumulation of external reserves is benefical to an economy in many folds. External reserves are used in Nigeria to guard against unfavourable terms of trade shocks and also, unforseen emergencies.The study sought to assess the relationship between international oil prices and external reserves of Nigeria with the use of a cointegration approach. This study originates from the master’s thesis of the first author. The analysis was based on time series data spanning from 1981 to 2014. The study concluded that international oil prices had significant positive relationship with external reserves of Nigeria. External reserves of Nigeria are sensitive to shocks in the international oil market. This implies that periods of high international oil prices mean periods of higher oil revenue for Nigeria. Therefore, the Federal government should ensure that such revenue generated from high international oil prices is used to increase external reserves position. Diversification of the economy is further recommended as this will cushion against the effect of external shocks on external reserves.
Keywords: International oil prices, rising and falling oil prices, external reserves, cointegration approach