An Empirical Analysis of Nigeria’s Current Account Sustainability

Abstract

This study reexamines the sustainability of the current account in Nigeria over four decades using time-series analysis on annual data from 1981 to 2013. We focus on two analytical distinctions to the inter-temporal budget constraint (IBC) hypothesis in relation to previous studies. First, we extend the standard bivariate approach to a multivariate framework that accounts for the roles of oil price variations and financial deepening, which have important implications for resource allocation. Second is the use of the Toda–Yamamoto modified Wald (MWALD)-based causality test that is also carried out to arbitrage between the results with and without a structural break. It employs both the conventional unit root test (augmented Dickey–Fuller [ADF] and Phillips–Perron [PP]) and the unit root test with a structural break (Perron, 2006; Zivot & Andrews, 1992). It also carries out the conventional residual-based cointegration test (Engle & Granger, 1987) and the residual-based cointegration test with a structural break (Gregory & Hansen, 1995). Findings suggest that there is current account sustainability in Nigeria and structural changes were not very potent during the period under consideration. This implies that the Nigerian economy complied with the IBC hypothesis, suggesting that exports could actually finance imports. JEL Classification: F30, F32