ENERGY POLICY AND MACROECONOMIC OUTCOMES IN NIGERIA: A SIMULATION ANALYSIS    ABDULSALAM S.A., (PHD)

Abstract

Despite the changing energy policies framework and the enormous domestic endowments

of non-renewable and renewable primary energy resources in Nigeria, macroeconomic

performance did not stimulated pride. The Nigerian energy outcomes faced persistent inad

equate quantity, poor quality, and inefficient in meeting industrial and socioeconomic

attributes of growth in Nigeria. This study examines the impact of energy policies on

economic growth in Nigeria for 1980 – 2010. Using macro-econometric model, the study

suggests that energy policies has a positive impact on real sector productivity, government

consumption and other macroeconomic variables, but has a negative impact on socio-

economic variables. This outcome has adversely affected living standards of the population

and exacerbated income and energy poverty in Nigeria. Thus, the study suggests the need

for energy policies that can effectively be implemented without any negative consequence

on the growth of GDP in Nigeria.

Introduction

Energy output potential in Nigeria is massive, but exploration, production, distribution and consumption to infrastructural and industrial needs are poorly managed and inadequate. Thus, this chronic energy infrastructural gap might have either a positive or adverse effects on macroeconomic outcomes in Nigeria.

Estimates show several important facets of energy policy, availability consumption and macroeconomics outcomes in Nigeria.

First, estimates suggest that crude oil and natural gas reserves are currently estimated at 35 billion barrels and 185 trillion cubic feet, respectively, coal reserves are substantial at 2.75 billion metric tons, hydro resources are estimated at 14,750 Megawatts, solar radiation is estimated at 3.5-7.0 Kilowatt hour/m2 per day, wind energy 2.0-4.0 m/s, wind energy at 150,000 Terra Joule per year and biomass at 144 million tons per year

Second important facet of the energy in Nigeria is that, total energy consumption was 4 Quadrillion Btu (107,000 kilotons of oil equivalent). Of this, combustible renewables and waste accounted for 80.2 percent of total energy consumption

Thirdly, despite this potential and energy policy impact assessment on energy output performance, inadequate policy choices and it usages reveal Nigeria’s energy crises

Thus, the nature of Nigeria’s energy policies and crises is highlighted by two key growth questions:

i. does energy policy have a positive impact on economic growth?

ii. in particular, what is the impact of the energy policy on long term economic outcomes?

i. This paper adds to this literature by assessing the impact of the energy policy and consumption the Nigerian economy and how increased in investment in energy sector might improve macroeconomic outcomes and economic growth.

ii. We develop and estimate a macro-econometric model of the Nigerian economy. We then validate this model and use it to simulate the potential impact of energy policy on key macroeconomic outcomes.

iii. The model not only provides quantitative estimates of the potential impact of energy consumption and policy but also highlights the mechanisms through which the effects can manifest themselves.

THEORETICAL MODEL AND EMPIRICAL STRATEGY

To investigate the macroeconomic impact of energy policy on macroeconomics outcomes, economic growth and energy policy effect are conceptualized as a simple macro-econometric structural model (see table 1.1).

Summarizing macro-econometric energy policy effect model we propose that:

Where:- y- the endogenous variables, to be explained by the model

x - the exogenous variables, these are time dependent parameters and are either

given (strictly exogenous variables) or to be decided on (controls, instruments)

e- the stochastic elements (whilst these elements and especially their time

series properties are vitally important in the estimation of the model, they are

usually disregarded in the simulation phase)

θ - time invariant parameters, either determined by (formal) estimation or by

other considerations, e.g., they may be imposed.

ep- represent energy policy effect coefficients

),,)(,)(,)(( 101010t

epnt

ept

epntt exxyfy

The state of the economy at time will be a function of the state of the economy at time t +1;

the values of policy (control) and other exogenous variables (yt ); shocks to the system (xt );

and parameters (θ) that characterize the precise relationship between the variables.

We estimate y and x and then estimate the parameters θ by using various statistical techniques.

Once estimates of θ are found, the model can be used for policy experiments.

Policy experiments simply involve using the model to find out the values for states of the economy (the y's) when different policy configurations effects (the x's) are tried.

The macroeconomic model of the Nigeria comprises of 30 equations set of equations and closer identities, of which 19 are stochastic.

Stochastic equations specify the manner in which an economic variable responds to changes in other variables, including random disturbances.

The remaining equations are definitional or identities and hold exactly in each time period.

The model in divided into several blocks describing various facets of the Nigerian economy.

These components of the model are described next; in particular how energy policy might affect each macroeconomic outcome. The full set of estimated equations is reported in Tables 1.2.T

he macro-econometric model is guided by most common macroeconomic frameworks

Estimation of Equations and Simulation Experiments There are 19 stochastic equations in the model. Each individual equation was

estimated using two-stage least squares (2SLS). EViews software was used both for estimating individual equations and for the

simulation experiments.

Simulation Experiments The simulation experiments comprise a baseline simulation and one experiment. The baseline simulation was designed to validate the model to ensure that it is

suitable for the simulation experiments. The baseline simulation requires us to solve the model using the sample data. By

solving the model, we generate the equilibrium values for the endogenous variables of the model.

In validating the model, the focus was on the ability of the model to track actual historical data and its ability to predict future observed values of key macroeconomic variables.

Data Collection and the Choice of Variables and Identities

The data on macroeconomic variables are obtained from two sources:

Nigeria’s National Bureau of Statistics (NBS) and Central Bank of

Nigeria’s Statistical Bulletin. In addition, we also obtained data from

other secondary sources.

Also in data collation process we create the variables of interest from

the raw data, and separate the variables into exogenous variables,

endogenous variables explained by identities, and endogenous variables

explained by stochastic equations

Results

Goodness of Fit We assessed the ability of the model to predict actual historical data and

also its ability to predict the future path of key macroeconomic outcomes. For the first goodness of fit test, we used the model to predict values of all 20 endogenous variables for the period 1980 to 2000.

We then compared the results from this baseline simulation to actual historical data from the same period. In general, the results from the baseline simulation closely track the historical data.

The average difference between the baseline simulation values and actual data across all twenty variables ranged from 0.01% to 2%. To conduct the next test, we used our model to predict the future path of our endogenous variables for the period 2001 to 2008.

Again the predicted values from the model closely track the actual data from the same period. The average difference between the predicted and actual values ranged from 0.4% to 2% (see table 1.3 and figure 1.4). The figures show that the simulated values are able to replicate most of the critical turning points of the historical data.

OBJECTIVE ONE

The Impact of Energy policy and Economic growth

Overall the results show the equations in the model fit the data well (have high R-squared).

Most of the results are also consistent with a priori expectations. For example, energy

policy effect variable are positively related to output of oil and gas, agriculture capacity

utilization, manufacturing, revenues and is negatively related to private consumption

government expenditure (even at disaggregated level – recurrent and capital).

The results related to effects of energy policy on macroeconomic also seem reasonable and

largely follow a priori expectations. For example, the results show that energy policy has a

positive effect and increases aggregate productive and capacity utilization. However,

energy policy variable choices came at a cost of increasing government expenditure (even

at disaggregated level – recurrent and capital) and private consumption.

OBLECTIVE TWOSimulation Experiments: - The impact of the energy policy

on long term economic outcomes i. To simulate the potential effects economic growth if energy policy effect

increase energy consumption and production by 5 per cent, we assumed that the increase in energy consumption would have a positive effect on macroeconomic variable.

ii. Table 1.0 shows the results from this simulation experiment. The simulation results suggest that the increase in energy variable policy effect causes a substantial increase in output of manufacturing sector (9.66 percent), Oil and Gas (0.70 percent), but slight increase in output of Agriculture (0.14 percent).

iii. The positive effect on output of manufacturing and oil &gas, which is energy intensive, suggests a more efficient use of energy input can enhance productivity.

iv. The direct effect of energy policy on gross fixed capital formation (1.15), capacity utilization (2.30), government revenue (0.19), import of capital (0.19) and import of raw material (0.004)can be attributed to increase in productivity and a reduction in import of manufacturing good (-1.18).

i. This increase in production and income results to increase in capital consumption (0.17) and government expenditure.

ii. However, it effect on private consumption and consumer price index is largely negative.

iii. The results also show that effect energy policy choices would result in increase in productivity, government revenue and import of raw material, consequently having a direct effect on balance of payments. Overall, the predicted effects of changes in energy policy on the real economy are relatively significant.

iv. Although, literatures do not seem to show in absolute values, based on the result, we would conclude that a percent change in energy policy effects led to an increase in productivity growth rate from about an average of 0.7 percent in oil and gas and agriculture output per annum and about 9 percent in manufacturing output.

v. If we extrapolate over the period 2000 to 2009 the result suggests that overall 5 percent change in energy consumption corresponds to 3.1 percent change in productivity in Nigeria. This is also consistent with the Keynesian transition mechanism of fiscal changes and productivity.

Macroeconomic Variable % 5 effective Energy Policy Choices

Capital Expenditure(CE) -0.089

Government Consumption (CG) 0.1739

Private Consumption (CP) -4.25244

Consumer Price Index (CPI) 0.067602

Capacity Utilizations (CUR) 2.302903

Demand of Money (DM) 0.328058

Government Expenditure (GE) 0.31062

Gross Fixed Capital Formation (GFCF) 1.155637

Government Revenue (GR) 0.19479

Import of Capital good (MKG) 0.454405

Import of Manufacturing goods(MMG) 1.175411

Import Raw Material (MRG) 0.003567

Exchange rate (REXR) -0.14512

Total recurrent Expenditure(TRE) 0.591111

Oil Export (XOIL) 0.62162

Agriculture Output (YA) 0.14642

Manufacturing Output (YM) 9.65563

Output of Oil &Gas(YOG) 0.705511

Capit

al Expendit

ure

(CE)

Govern

ment

Consu

mpti

on (

CG

)

Pri

vate

Consu

mpti

on (

CP)

Consu

mer

Pri

ce Index (

CPI)

Capaci

ty U

tiliza

tions

(CU

R)

Dem

and o

f M

oney (

DM

)

Govern

ment

Expendit

ure

(G

E)

Gro

ss F

ixed C

apit

al Fo

rmati

on (G

FCF)

Govern

ment

Revenue (

GR

)

Import

of

Capit

al good (

MK

G)

Import

of

Manufa

cturi

ng g

oods(

MM

G)

Import

Raw

Mate

rial (M

RG

)

Exch

ange r

ate

(R

EX

R)

Tota

l re

curr

ent

Expendit

ure

(TR

E)

Oil E

xport

(X

OIL

)

Agri

cult

ure

Outp

ut

(YA

)

Manufa

cturi

ng O

utp

ut

(YM

)

Outp

ut

of

Oil &

Gas(

YO

G)

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

-0.0890000000000002

0.1739

-4.25244

0.0676020000000001

2.302903

0.3280580000000010.3106200000000011.155637

0.194790.4544051.175411

0.00356700000000001

-0.14512

0.5911109999999980.621620.14642

9.65563000000003

0.705511

Chart 1.0:% 5 Increase in Energy Policy and Consumption

% 5 Increase in Energy Consumption

Summary and Conclusion

This study examines the impact of energy consumption on economic growth in

Nigeria for 1980 – 2008. Using macroeconomic model, the results related to effects of

energy consumption on macroeconomic also seem reasonable and largely follow a

priori expectations and show that energy consumption has a protective effect and

increases aggregate productive and capacity utilization.

The simulation results also suggest that the increase in energy consumption causes a

substantial increase in output of manufacturing sector, Oil and Gas and output of

Agriculture. The positive effect on output of manufacturing and oil &gas, which is

energy intensive, suggests a more efficient use of energy input can enhance

productivity.

Thus, the study suggests the need for energy conservation policies that can effectively

be implemented without any negative consequence on the growth of GDP in Nigeria.

Also, the current energy infrastructure in Nigeria is modestly

insufficient to promote sustainable economic development, the

paper recommend that the need to stimulate economic growth by

investing more on energy and by reducing energy inefficacy in the

supply and use of energy.

Additionally, Nigeria can invest in R $ D to innovate know-how that

makes alternative energy sources more feasible, thus mitigating

pressure in environment. They can, furthermore, increase energy

utilization and establish a price mechanism which may encourage

the use of renewable and environmental friendly energy sources.

MANY THANKS