The Impact of Oil Revenue on Revenue Generation in Nigeria Using Vector Error Correction Model (VECM)

Abstract

This study investigates the relationship between oil revenue, exports, and overall revenue generation in Nigeria using a time series approach. Stationarity tests was carried out using the Augmented Dickey-Fuller (ADF) approach, confirm that all variables are integrated of order one, I(1). Lag selection criteria suggest an optimal lag of one (1) for the Vector Error Correction Model (VECM), which highlights the existence of a cointegrating relationship. The results from the VECM indicate that oil revenue has a coefficient of -0.88845 and t-statistics value of [-30.2226] which indicated that oil revenue has a positive and significant long run effect on revenue in Nigeria. Eexports significantly influence revenue generation in the long run with the coefficient value of 0.60397 and t-statistic value of [4.39911], with adjustments occurring at a moderate speed of 40.36% annually when deviations from equilibrium arise. Diagnostic tests, including serial correlation and normality tests, suggest no significant serial correlation, although residuals are not fully normally distributed. The study therefore, recommend that the government should invest in data analytics and forecasting tools to monitor global market trends and proactively adjust policies to maximize revenue.