Oil price volatility and macroeconomy: Tales from top two oil producing economies in Africa

Abstract

This study examines the relationship between oil price volatility and macroeconomic performance in two top net oil exporting countries in Africa (Angola and Nigeria) using quarterly data from International Monetary Fund, Central Bank of Nigeria and Angola were used to carry out the empirical analysis. Using structural Vector Autoregressive Model (SVAR), E(GARCH) and Granger Causality test results shows that oil price volatility has marginal impact on growth rate of GDP in both countries. Both impulse response function and variance decomposition shows that shocks to exchange rate from oil price volatility was the highest i.e. exchange rate appreciates when oil price increases and depreciates when oil price reduces. The Granger causality test shows that the direction of causality between oil price volatility and macroeconomic variables in Nigeria was bi-directional while the relationship in Angola was unidirectional. Hence, both countries (Angola and Nigeria) should improve upon the refining capacity of their crude oil. Also, economic diversification should be strengthening to promote indigenous production to reduce importation of those goods that could be endogenously produced