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Oil Price Fluctuations and Savings-Investment Gap

in Nigeria

An MSc Proposal

By

Ugwunweze, Ifeoma V.
PG/MSc/13/65442

Supervisor: Prof. (Mrs)S. I. Madueme


Background to the Study
Savings is believed to be a vital instrument for the attainment
of economic growth.

Nigeria has witnessed about five major unpredictability in oil


price from the 70’s till the first decade of the 21st century.

The dependence of crude oil hampered the development of


other sectors of the economy.

The low level of savings in the 21st century made the gap
between savings and investment much pronounced.

Policies have been put in place to revitalize industrialization


(SAP) and encourage savings (ECA).
Statement of Problem
The average growth rate and standard deviation of oil prices
have highly fluctuated over the years.

There exists a divergence of opinion as to the extent of the low


level of savings in Nigeria
Figure 1.1: Savings and Investment - WDI
45

40

35

30

25

20

15

10

Investment (% of GDP) Savings (% of GDP)


Statement of Problem cont...
Figure 1.2: Savings and Investment - CBN
60.00

50.00

40.00

30.00

20.00

10.00

0.00

-10.00

Savings (% of GDP) Investment (% of GDP)

Oil price shocks according to Bevan et al (1992) is believed to


affect the level of national savings in Nigeria.

Lately, the current account balance is shown to have fallen by


about 62% in 2011 as a result of huge imports.
Statement of Problem cont...
Fluctuations in oil price and the lackadaisical attitude towards
oil income savings in the ECA have constrained investment
through low level of savings.
Research Questions
1. What is the impact of oil price fluctuations on national
savings in Nigeria?
2. What is impact of oil price fluctuations on investment in
Nigeria?
3. What is the impact of oil price fluctuations on savings-
investment gap in Nigeria?

Objectives of the Study

1. To estimate the impact of oil price fluctuations on national


savings in Nigeria.
2. To estimate the impact of oil price fluctuations on
investment in Nigeria.
3. To estimate the impact of oil price fluctuations on savings-
investment gap in Nigeria.
Research Hypotheses
H01: Oil price fluctuations have made no significant impact on
national savings in Nigeria.
H02: Oil price fluctuations have made no significant impact on
investment in Nigeria.
H03: Oil price fluctuations have made no significant impact on
savings-investment gap in Nigeria.

Significance of the study


 For policy relevance.

 This study broadens the knowledge on the determinants of


bridging the savings-investment gap.
Scope of the Study
This is a country specific study based in Nigeria.

Quarterly data frequency will be used as this study deals on


capturing oil price volatility.

The variables of concern are oil price, national savings, and


national investment.
Literature Review
Conceptual Framework
 The concepts of oil price and its fluctuations, savings and its
measurement, investment, and savings-investment gap were
discussed.
Theoretical Literature
Theoretical issues of oil price
 Dutch disease theory,
 Rent-seeking theory,
 Resource rent theory.
Theoretical issues of savings and investment
 The neoclassical theory of savings and economic growth,
 Capital mobility theory,
 Real interest rate theory.
Empirical Literature
Previous studies pertaining to the study were reviewed.
Limitations of previous studies
 There seems to be a dearth of information on the impact of oil price
fluctuations/volatility on national savings and how this transmits to
investment and the gap that exists therein.

 Studies in Nigeria such as Alley et al. (2014) among others dwelt on


the relationship between oil price fluctuations and economic growth
with less emphases on indicators known to drive growth.

Value addition

 This study will fill the gap by showing the relationship between oil
price fluctuations and the drivers of economic growth in terms of
savings and investment.

 To access the determinants of bridging the savings-investment gap.


Methodology
Theoretical Framework
 This study is based on the Keynesian theory that savings is a function
of income.
𝑆=𝑓 𝑦 (3.3)

 Upon this, oil producing developing countries are believed to be


affected by the Dutch disease syndrome and as such, their income is
heavily dependent on the discovered natural resource.
𝑦 = 𝑓 𝑜𝑝𝑓, 𝑜𝑝 3.4

 Fusing equation 3.4 into equation 3.3 shows that savings is a function
of fluctuations in oil price and oil price at level.
Model Specification
Oil price fluctuations (OPF) will be generated using a well
specified GARCH (1,1) model as specified by Bollerslev (1986).
This is shown below.
𝑦𝑡 = 𝑦𝑡 ′𝛽 + 𝜀𝑡 3.5

𝜀𝑡 ≈ 𝑖𝑖𝑑 𝑁 0, ℎ𝑡 3.6
2
ℎ𝑡 = 𝜔 + 𝛼1 𝜀𝑡−1 + 𝛽1 ℎ𝑡−1 3.7

Model 1: To capture the impact of oil price fluctuations on


national savings in Nigeria, the econometric model is present
below.
𝑙𝑛𝑁𝐴𝑆𝑡 = 𝛼0 + 𝛼1 𝑙𝑛𝑂𝑃𝐹𝑡 + 𝛼2 𝑙𝑛𝑂𝑃𝑡 + 𝛼3 𝑙𝑛𝐺𝐷𝑃𝑡−1 + 𝛼4 𝑙𝑛𝐸𝑋𝑅𝑡 + 𝛼5 𝑙𝑛𝑊𝑃𝑡 + 𝛼6 𝐼𝑅𝑡
+ 𝛼7 𝑙𝑛𝐹𝐷𝑡 + 𝜇𝑡 3.8

The model follows a log-linear functional form so as to explain


the independent variables in terms of their elasticity on savings
Model Specification cont....
Model 2: The second objective of this study is to estimate the
impact of oil price fluctuations on investment in Nigeria.

𝑙𝑛𝐼𝑁𝑉𝑡 = 𝛽0 + 𝛽1 𝑙𝑛𝑂𝑃𝐹𝑡 + 𝛽2 𝑙𝑛𝑂𝑃𝑡 + 𝛽3 𝑙𝑛𝑇𝑂𝑡 + 𝛽4 𝑙𝑛𝐸𝑋𝑅𝑡 + 𝛽5 𝐼𝑅𝑡 + 𝛽6 𝑙𝑛𝐹𝐷𝑡


+ 𝜇𝑡 3.9
Model 3: The third objective is also to estimate the impact of
oil price fluctuations on savings-investment gap in Nigeria.
𝑙𝑛𝑆𝐼𝐺𝑡 = 𝛼 + 𝛽1 𝑙𝑛𝑂𝑃𝐹𝑡 + 𝛽2 𝑙𝑛𝑂𝑃𝑡 + 𝛽3 𝑙𝑛𝐺𝐷𝑃𝑡−1 + 𝛽4 𝑙𝑛𝑇𝑂𝑡 + 𝛽5 𝑙𝑛𝐸𝑋𝑅𝑡 + 𝛽6 𝑙𝑛𝐹𝐷𝐼𝑡
+ 𝛽7 𝑙𝑛𝑊𝑃𝑡 + 𝛽8 𝐼𝑅𝑡 + 𝛽9 𝐹𝐷𝑡 +𝜀𝑡 3.11

Estimation Procedure
Before estimating the multiple equation models of equation
3.8, 3.9 and 3.11, spurious regression will be avoided by
conducting a unit root test. This test will follow the Augmented
Dickey-Fuller (ADF) unit root testing procedure.
Justification of the Model
 The classical linear regression model (CLRM) as to be used
in this study within the ordinary least square (OLS)
estimation technique, possesses the BLUE property (Best
Linear Unbiased Estimator).

Diagnostic Tests
 To ensure that the assumptions of the CLRM are not
violated, the study will conduct a serial correlation test,
Ramsey RESET test, normality test and heteroskedasticity
test.

Data Source and Econometric Package


 Quarterly data covering the period of 1981 to 2012 will be
sourced from CBN (2007, 2014) Statistical Bulletin; OPEC
(2015) Statistical Bulletin; and World Bank (2015) WDI.
Eviews 9 econometric package will be used to conduct the
analysis for this study.
I
Appreciate
Your
time

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