Unraveling the Impact of Oil Price Volatilities on Government Recurrent Expenditure in Nigeria

Abstract

This study investigates the fiscal repercussions of crude oil price volatility on government recurrent expenditure (RGEXP) in Nigeria from 1970 to 2022. Employing a three-step econometric approach, it begins with unit root tests using ADF, PP, and KPSS, which reveal a mixture of I(0) and I(1) series. The Bounds Testing technique confirms long-run cointegration among the variables, justifying the use of Vector Error Correction Model (VECM) for estimation. The results show RGEXP responds quickly to oil market disruptions, with stronger reactions in early periods. Internal shocks initially dominate, but external factors—especially government revenue (GOVR) and domestic debt (DDT)—grow increasingly impactful over time. GOVR is consistently the most significant determinant of RGEXP, while DDT’s influence intensifies in post-shock scenarios. Real GDP plays a moderate role in later periods, reflecting economic adaptation. Policy implications include the urgent need for fiscal reforms: diversify revenue sources beyond oil through tax optimization and non-oil sector growth, implement medium-term debt sustainability frameworks, and adoption oil price risk management tools such as hedging and adaptive fiscal rules. These measures aim to enhance Nigeria’s economic resilience, stabilize recurrent spending, and promote sustained macroeconomic stability.