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Exchange rate determination in oil dominated African economies: A comparative analysis of Nigeria and Angola
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African countries of Nigeria and Angola are examples of countries naturally endowed with abundant deposit of crude oil and these countries depend so much on oil exploration for export revenue and foreign exchange earnings. The rate of exchange rate fluctuation in these countries is suspected to have a link with the countries’ oil price and revenue. This study investigates and compares the significance or otherwise of crude oil price in the determination of exchange rate in these oil dominated economies. An autoregressive distributed lag model is used in the study, and it is estimated for Angola and Nigeria. The findings of the research show that the price of crude oil has a long-term, significant negative impact on the exchange rates in both Nigeria and Angola; hence, a rise in the price of crude oil causes the exchange rates of both countries to appreciate over time. In these nations, trade openness and gross domestic product are also found to be common factors that have an inverse effect on the exchange rate. In the short term, the real interest rate has a major impact on the exchange rate in Nigeria, whereas it has little effect in Angola. Equally, net capital flows has short run significant effect on exchange rate in Angola, its short run effect on exchange rate in Nigeria is insignificant. It is recommended that economic diversification initiatives should be given top priority by policymakers in Nigeria and Angola. They should increase investments in non-oil sectors, particularly in agriculture and industry, and set up efficient systems for managing and preserving oil earnings.
Keywords: Exchange Rate Appreciation, Crude Oil Price, Autoregressive Distributed Lag Model, Net Capital Flows, JEL Classification: C22, F31, O24.
Title: Exchange rate determination in oil dominated African economies: A comparative analysis of Nigeria and Angola
Description:
African countries of Nigeria and Angola are examples of countries naturally endowed with abundant deposit of crude oil and these countries depend so much on oil exploration for export revenue and foreign exchange earnings.
The rate of exchange rate fluctuation in these countries is suspected to have a link with the countries’ oil price and revenue.
This study investigates and compares the significance or otherwise of crude oil price in the determination of exchange rate in these oil dominated economies.
An autoregressive distributed lag model is used in the study, and it is estimated for Angola and Nigeria.
The findings of the research show that the price of crude oil has a long-term, significant negative impact on the exchange rates in both Nigeria and Angola; hence, a rise in the price of crude oil causes the exchange rates of both countries to appreciate over time.
In these nations, trade openness and gross domestic product are also found to be common factors that have an inverse effect on the exchange rate.
In the short term, the real interest rate has a major impact on the exchange rate in Nigeria, whereas it has little effect in Angola.
Equally, net capital flows has short run significant effect on exchange rate in Angola, its short run effect on exchange rate in Nigeria is insignificant.
It is recommended that economic diversification initiatives should be given top priority by policymakers in Nigeria and Angola.
They should increase investments in non-oil sectors, particularly in agriculture and industry, and set up efficient systems for managing and preserving oil earnings.
Keywords: Exchange Rate Appreciation, Crude Oil Price, Autoregressive Distributed Lag Model, Net Capital Flows, JEL Classification: C22, F31, O24.
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