Various episodes of macroeconomic uncertainty mark the global economy. Strengthened by the increasing wave of globalization, such macroeconomic shocks spill across world economies. In both developed and emerging market economies, uncertainty is common due to the interconnectedness of countries worldwide. Different episodes of crises have significantly altered the dynamics of macroeconomic fundamentals, with financial series highly prone to volatility. Three major macroeconomic and financial crises have been witnessed in the last two decades. These include the global financial crisis (GFC) of 2008/2009, the global commodity price shock of 2015/2016, and the current global health crisis - the coronavirus (COVID-19) pandemic. The GFC, occasioned by the U.S. housing bubbles, caused international spillovers of shocks across financial markets, creating macroeconomic instability in advanced economies, less developed countries, and emerging markets. While different economies employed policies to cope with the GFC, fiscal uncertainty due to commodity price shocks struck many commodities-dependent economies as major commodity prices witnessed continuous fluctuations globally.
Indeed, externally transmitted commodity price shocks significantly affect Nigeria through the exchange, interest rate, and current account channels. As relevantly adumbrated in studies including (but not limited to) Afolabi et al. (2022), Chileshe et al. (2016), Shousha (2016), Mimir and Sunel (2015), UNDP (2014), and Allegret and Benkhodja (2011), Nigeria, like many other economies in sub-Saharan Africa(SSA) is faced with the challenge of macroeconomic growth sustainability due to its peculiar features (exchange rate misalignment, an intense concentration of exports, especially with a bias to commodities, limited productive capacities, and lack of export competitiveness among others) that facilitate the transmission of external shocks. The expectations of recovering from the prevailing shocks in virtually all economies of the world were further ruined by the current global health pandemic outbreak in the last quarter of 2019. The impact of the COVID-19 crisis has been highly devastating, with substantial human capital loss and macroeconomic and financial shocks (Adekunle, Oyolola, Atolagbe et al., 2021, 2022; Bolaji et al., 2021; Owuru, 2021). The pandemic has been dubbed a ''once-in-a-century" pandemic (Gates, 2020) and “Great Compression” when discussing the difference between COVID-19 and the Global Financial Crises (Harvey, 2020). As part of the global policy responses to curb the spread of the pandemic, many economies embarked on lockdowns, causing significant disruptions to global supply chains and magnifying the external vulnerabilities of particularly commodity and non-commodity-dependent countries.
Without being exempted, Nigeria has integrally partaken in different episodes of global uncertainty spillovers for many decades since its political independence in 1960. The country is well noted for its long dependency on oil and has long been vulnerable to oil price shocks since the 1970s when the country commenced the production of crude oil in commercial quantities. The considerable dependence of the economy on oil proceeds for over 80% and 60% of export earnings and fiscal revenues, respectively, have only fuelled the country’s internal and external imbalances over time. Specifically, the Nigerian economy witnessed a combination of positive and negative global shocks in the last four decades, the adverse impact of the GFC, and the economy remained resilient, posting an average growth of 8.4% between 2008 and 2010. Correspondingly, the price of Nigeria’s Bonny Light averaged US$81.5 per barrel over the same period. Meanwhile, the crash in crude oil prices starting from 2014Q3 saw a drastic fall in Bonny Light price to US$57.8 per barrel on December 31, 2014,
from US$101.5 per barrel on September 04, 2014. This decline continued through 2015 and 2016 until Nigeria fell into recession in 2016Q2, according to the NBS data.
Notably, the weak recovery process of the Nigerian economy in 2017Q3 from the 2016 recession was further dashed due to the coronavirus-induced recession in 2020Q3. The pandemic has engendered what could be called "a twin crisis" in Nigeria, like many other commodity-dependent economies. This crisis, spurred by the global pandemic and oil price crash, caused a dip in the oil price to as low as US$19 per barrel in April 2020 and constricted fiscal space with the attendant high debt-to-GDP ratio of 35.05% and 31.94% in 2020 and 2021 respectively. Within this period, the real output growth trajectory of the economy, however, improved as a sign of recovery from the recession in 2020Q4, with a mild growth of 0.1% and a further growth of 0.5% in 2021Q1. These growth numbers could not be de-linked from the improvement in crude oil prices (Bonny light), which stood at US$61.39 per barrel on February 11, 2021, as against US$19 per barrel on April 03, 2020; Nigeria's Bonny Light is above US$60 per barrel on average.
As the ensuing uncertainties overtime call for an inclusive policy response, policymakers in different countries have responded with a catalogue of policy mixes to address these uncertainties. However, policymakers still must be in a dilemma regarding the optimal policy mix. Why do these policy dilemmas persist? First, the policymakers may need clarification on what model best fits the dynamics of the economy at each prevailing shock. Also, it may take time to fully understand the dynamics of exogenously induced shocks (CBN, 2015). In the case of Nigeria, Uchendu (2009) asserts that uncertainty about the shock transmission and incomplete understanding of the system remains a significant challenge for monetary policy management. It is, therefore, imperative to model the dynamics of policy response to shocks in the last four decades in Nigeria.
Concerning positive and negative shocks in the last four decades, the Nigerian authorities have responded with a mix of fiscal and monetary measures to address these shocks' internal and external imbalances. Nonetheless, the empirical literature needs more consensus on the appropriate policy variable(s) to target. Many studies focused on oil price shocks (see, for instance, Kormilitsina, 2011; Adedokun, 2018; Galadima & Aminu, 2019; Adekunle, Bagudo, Odumosu and Inuolaji, 2020; Yildirim & Arifli, 2020; Olofin et al., 2020; Enwereuzoh et al., 2021, Afolabi et al., 2022, among others), monetary policy shocks (Aastveit et al., 2017; Aminu & Ogunjimi, 2019; Tule, 2020; Olofin et al., 2020), fiscal policy shocks (Olasunkanmi & Babatunde, 2013; Tule, 2020; Afolabi et al., 2022), and stock return shocks due to uncertainty and the pandemic (Salisu & Adediran, 2020; Salisu et al., 2020; Salisu & Sikiru, 2020; Salisu et al., 2021; Afolabi et al., 2022).
In this study, we focus on oil price shocks because Nigeria is a net oil exporter with the possibility that volatile commodity prices seemingly exert a significant impact on her macroeconomic fundamentals. Our study, therefore, differs from existing studies as follows. First and foremost, the literature on the nexus between oil price shocks vis-à-vis policy interventions and key macroeconomic indicators focused on Nigeria is scanty. Similarly, no study has comprehensively examined the impact of policy interventions on the macro-economy in Nigeria across three shock episodes in the last four decades. We, therefore, contribute to knowledge by testing the sensitivity of policy interventions in Nigeria to oil price shocks in the last four decades, determining the impact of policy mix on the behaviour of key macroeconomic indicators across crisis episodes, and then advise on the optimal mix of policies (fiscal and monetary) in response to internal and externally-induced shocks in Nigeria, going forward.
Following this section, the rest of the study proceeds as follows. Section Two describes the stylized facts about key economic variables employed in the study. Section Three entails the review of the relevant empirical literature. Section four highlights the methodology employed in this study. Finally, section Five discusses the empirical results, while Section Six concludes the study.