The Presence of Dutch Disease in Nigeria: The Implication of Rise in Oil Revenue

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue VI, June 2021 | ISSN 2454–6186

The Presence of Dutch Disease in Nigeria: The Implication of Rise in Oil Revenue

Falade, Abidemi Olufemi Olusegun
Senate Research Consulting Firm

Abstract
Nigeria major source of foreign earning has been from crude oil which has caused decline in manufacturing sector output over the years. This situation often leads to oil price fluctuations that adversely affect budget performance. The existing literatures in Nigeria has focused largely on agricultural productivity to determine the existence of Dutch Disease (DD) in Nigeria, but paid less attention to the manufacturing sector output. The study therefore, examined the presence of DD in Nigeria from the scope of manufacturing sector from 1981-2019. The data was sourced from Central Bank of Nigeria (CBN). Thereafter, The Augmented Dickey Fuller (ADF), Phillip Peron (PP) unit root test and Johansen Co-integration for pre-test; while, Toda-Yamamoto (TY) causality test and Vector Error Correction Model (VECM) were used for the formulated objectives.
The ADF and PP unit root test confirmed stationarity of all the variables at first level difference. The Johansen co-integration established two co-integration relationships at 5% level of significance. The TY confirmed one-way causality from oil revenue to manufacturing sector output in Nigeria. The lagged error correction (ECM-1) confirmed that disequilibrium that occurred in the model from the short-run to long-run was corrected at an annual rate of 4.9%. The VECM discovered that natural log of oil revenue and exchange rate were significance and indirectly related to manufacturing sector output; while, natural log of government expenditure was significant and directly relate to it with their absolute t-statistics (1.69764), (9.92788) and (3.2788) greater than t-values (t0.05= 2.056, t0.1 = 1.706) respectively. Also, trade openness exhibited a direct relationship on manufacturing sector output but non-significance. The study therefore, concluded that the presence of DD in Nigeria was driven by increase in oil revenue. Therefore, recommended that Nigeria’s government should continuously encouraging productivity in manufacturing sector through increase in capital expenditure especially on infrastructural development. Also, government should see manufacturing sector as one of the present core sectors that could facilitate development and contribute greater percentage to government revenue through diversification of the economy.

Keywords: Dutch disease (DD), manufacturing sector output, Toda-Yamamoto (TY) causality test and Vector Error Correction Model (VECM)

Introduction

Nigeria as one of the sub-Sahara African countries is naturally endowed in terms of resources and human capital. According to Taiwo (2011), the country has more than 89 natural resources that range from cash crop, cocoa, timber, cashew, etc. Also, agricultural sector alone has singled handedly financed Nigeria’s

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