The Dynamic Relationship between Oil Revenue, Government Spending and Economic Growth in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume II, Issue IV, April 2018 | ISSN 2454-6186

The Dynamic Relationship between Oil Revenue, Government Spending and Economic Growth in Nigeria

Olukayode, MAKU¹, Aduralere Opeyemi, OYELADE²

  ¹Department of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria
²University of Ibadan, Nigeria

Abstract: – This study investigated the dynamic relationship between oil revenue, government spending and economic growth in Nigeria over the period 1980 to 2014. Econometric techniques which included correlation analysis, unit root test, co-integration, Granger causality and error correction model were employed to determine the direction of causality and the magnitude of impacts. The estimated coefficient of the error correction term, ECM(-1) which is also the speed of adjustment to equilibrium, was negative and statistically significant as required by the Granger representation theorem. The speed of adjustment to equilibrium required 46 per cent within a year when the variables drifted away from their equilibrium values. Also, the ECM result revealed that capital expenditure (CEXP); recurrent expenditure (REXP); oil revenue (OREV) and gross capital formation (GCF) drove economic growth positively at 5 per cent level of significance, respectively. This implied that a hundred percentage point increase in capital expenditure (CEXP); recurrent expenditure (REXP); oil revenue (OREV) and gross capital formation (GCF) caused a rise in growth of about 44 per cent; 97 per cent; 85 per cent and 29 per cent, respectively. Broad money supply (M₂) negatively affects economic growth and it is insignificant.

Key Words: Capital Expenditure; Recurrent Expenditure; Oil Revenue and Gross Capital Formation

I. INTRODUCTION

Oil revenue refers to the income earned from the sale of crude oil and it is the dominant source of government revenue, accounting for about 90 percent of total exports, and this approximates to 80% of total government revenues (Ishola et al, 2015). Since the oil discoveries in the late 1950s, oil has become the dominant factor in Nigeria economy. Nigeria relied largely on revenue from oil to finance its budget.

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