International Journal of Research in Humanities and Social Studies Volume 6, Issue 10, 2019, PP 34-48 ISSN 2394-6288 (Print) & ISSN 2394-6296 (Online) International Journal of Research in Humanities and Social Studies V6 ● I10 ● 2019 34 Could Oil have predicted the 2016 Nigerian Economic Recession? Evidence from a Small Macroeconomic Model Iyabo Adeola OLANRELE* Research Fellow, Economics and Business Policy Research Department, Nigerian Institute of Social and Economic Research (NISER), PMB 5, UI Ojoo Road Ibadan, Nigeria *Corresponding Author: Iyabo Adeola OLANRELE, Research Fellow, Economics and Business Policy Research Department, Nigerian Institute of Social and Economic Research (NISER), PMB 5, UI Ojoo Road Ibadan, Nigeria.Email:adeyemiyabo@yahoo.com INTRODUCTION The Nigerian economy technically went into recession in the third quarter of 2016, with output growth plunging into negative rates for three consecutive quarters. The global fall in crude oil price that began in the mid-2014 was believed to have steered the economic crisis, as these two events coincided. In the era of the oil price boom, 2011 to 2013, the average annual output growth rate was5percent, with oil at US$112.4/b average annual price. A trend reversal was recorded in the wake of oil price decline of 2014 as oil price persistently remained low in 2015 and 2016, annual economic growth equally nosedived to 2.8 percent and -1.6 percent. 1 In the same vein, other factors were concurrently at work indicating possible reasons for the recession. 1 The selected price of crude oil is the Nigerian referenced spot price-bonny light crude oil price. Spending from government coffers for 2015 electioneering campaign and associated mismanagement of the public treasury, as well as lack of reliable sources of domestic revenue, despite the abundant natural resources at the various federating unit, were identified as plausible factors. Other schools of thought believed that the non-formation of a cabinet by the newly elected government in 2015 and the delayed assent to the country’s appropriation bill in the same year led to low economic activities, which resulted to the economic recession. In an economy that is public sector driven, any form of uncertainty affects investors’ confidence both at the private and public space, thus the possibility of the 2016 economic recession. However, oil resources have remained the mainstay of the economy since its discovery. In 2016, the Nigerian economy’s crude oil reserve stood at about 37 million barrels, while its production capacity at about 1.83 million barrels ABSTRACT This study examines the impact of oil on the Nigerian macroeconomy tracing the cause of the 2016 economic recession. A dynamic Structural Vector autoregressive model was employed to capture the negative oil price shocks-macroeconomic relationship. The first analysis employed data from 1980: Q1 to 2015: Q4, and the second analysis from 1980Q1 to 2017Q:4. The findings show that negative oil shocks impacted on real output, predicting the 2016 economic recession, a major transmission channel was through the exchange rate, total government revenue, and money supply and inflation rate. The Forecast Variance Decomposition revealed that real GDP variation was due to shocks from negative oil prices, and inflation rate. Shocks from the real GDP itself accounted for more than 60 percent variation. Findings from the pre-recession data were different from the estimation with full sample analysis, as soaring oil prices brought about a moderated effect of negative oil shocks on the Nigerian economy. Diversifying the economy is vital in curtailing negative oil price shocks effects, with the monetary policy authority free from undue executive intervention for efficient stabilization control. Structural impediments to economic growth require government capability in facilitating an enabling environment for private-sector led growth. Keywords: Oil price, Economic recession, Nigeria JEL Classification: E1, E3, E6