Impact of Oil Price Volatility on Investment and Human Capital Development in Nigeria

Abstract

The study examined oil price (revenue) volatility effect on investment and human capital development (measured with gross school enrolment) in Nigeria, using quarterly time series data from World Bank’s development indicator and Central Bank of Nigeria Statistical Bulletin 2013. EGARCH model was used to obtain the conditional variance of oil price (i.e., a measure of oil price volatility) which was employed in ordinary least square estimation. The model was also used to test for volatility persistence in oil price. ARCH test was conducted and discovery of ARCH effect justified the use of EGARCH model. From our results, the persistence effect was found large and significant; implying that volatility in oil price takes a long time to decay. Secondly, results from ordinary least square estimation revealed that oil price volatility has significant positive impact on investment in Nigeria. This implies that any sharp rise in oil price (revenue), stimulates investment through increase in government expenditure, say, on infrastructures, but the reverse happens for any sharp decline in oil price. The results also show that oil price volatility has significant negative impact on gross school enrolment in Nigeria. This indicates that high oil wealth caused by rise in oil price does not permeate the Nigeria education system. Summarily, these findings suggest that, diversification of the revenue base of the Nigerian economy is necessary in order to minimize the consequences of external shocks. Since variations in oil price, significantly influence the level of investment and school enrolment in Nigeria and considering the fact that volatility in oil price may not die out fast.