OIL REVENUE AND POVERTY REDUCTION: A CASE OF NIGERIA

BY

FOLAMI, RAHMON A.

(2017)

ABSTRACT

This study was carried out to examine the effects of oil revenue on poverty reduction in Nigeria.
Poverty reduction is one of key macroeconomic goals which past and present Nigerian
governments have set to achieve. The nation is endowed with different mineral resources out of
which crude oil has largely contributed to the national income of the country. Hence, it is
pertinent to evaluate the contribution of oil revenue on poverty level, to determine whether oil
revenue is a good predictor of poverty reduction in Nigeria and to establish whether any form of
directional causality exists between the two variables.
The study collected time series data mainly sourced from the database of the Central Bank of
Nigeria (CBN). The use of econometrics analysis of Multiple Linear Regressions, Pair-wise
Granger- Causality and descriptive statistics were adopted.
The regression results reveal that oil revenue has short run insignificant effects on poverty
reduction. Also, it was discovered that a bi-directional causality exists between the two variables.
The level of poverty in the country can bring about insecurity, destruction of oil pipelines,
kidnapping, etc. as a result, oil revenue will decline as evidenced by the result of the Granger
causality test. However, the long run analysis depicts that there is positive relationship between
oil revenue and poverty level in Nigeria but oil revenue has insignificant effect on poverty
reduction in the country. Other explanatory variables used indicate mixed results with poverty
reduction.
The study hereby concludes that oil revenue has influenced poverty reduction in Nigeria but the
degree could have been more significant if effective management of oil revenue and utilisation of
government expenditure towards programs that can reduce poverty level have been embarked
upon.
The study hereby recommends effective management of government revenue especially proceeds
from oil sector, and effective utilisation of government revenue on sectors that can reduce
poverty rate in the country, and diversification of Nigerian economy towards other sources of
revenue generation.
Keywords: Oil Revenue, Poverty Rate and Macroeconomic Objectives.

1
Background to the Study
The Nigerian economy is which a lay man will expect to be among the best in the world, as well
as seeing an average Nigerian living above the poverty level. The nation is endowed with
different mineral and land resources. The quantity of the deposits of such resources is expected
to have changed the pattern, behaviour and status of Nigeria as a country. Almost every state in
Nigeria has more than three natural resources through which the nation can collectively develop
towards revenue generation.
Okpanachi (2004) submits that nations with huge mineral resources such as Nigeria is likely to
be over-dependent on those mineral resources thereby neglecting other sectors but that will not
deter those countries from becoming great. Gotan (2004) views that the level of greatness of any
country is often depicted on how its endowed resources have been strategically planned,
controlled and utilized.
According to Blair (1976), Nigeria became a member of the oil cartel known as Organization of
Petroleum Exporting Countries (OPEC) in 1971 and as a result created a monitoring
governmental agency, Nigerian National Petroleum Company (NNPC) in 1977. NNPC is a major
player in both the upstream and downstream sectors.
OPEC (2014) submits that about 90% of the aggregate income of Nigeria is earned through
petroleum production and export. Also, close to 35% of the Nigerian GDP is accounted for by oil
revenue.
Adelowokan and Osoba (2015) opined that oil income being the principal source of revenue in
Nigeria ought to have more noteworthy effect in guaranteeing equal distribution of income as a
method for decreasing poverty level among her residents. Notwithstanding, they discovered that
the oil revenue are not diverted into right bearing as to government expenditure on capital tasks
and repetitive use and this as per them additionally exacerbated the poverty level in Nigeria. The
World Bank as cited by the same researchers likewise assessed that because of debasement or
popularly referred to as corruption, 80 percent of oil incomes advantage just a single percent of
the populace.
Poverty is an intricate issue. It has many confronts; it can be economical, social, political, and so
forth. Low per capita income (PCI), lack of healthy sustenance, insufficient and substandard
human services offices, and high newborn child death rate are a portion of the markers for
poverty. The worldwide standard for measuring poverty relies on upon a person's income.
International Monetary Fund (2011) described poverty as an absence of essential human needs,
for example, sufficient nourishment, apparel, lodging, clean water, or wellbeing administrations.
It is additionally an absence of instruction or opportunity, and might be related to weakness and
fears for the future, absence of portrayal and flexibility.
Poverty is dynamic and has many measurements as stated earlier. Individuals may move all
through poverty because of cataclysmic events or medical issues, need access to credit, or the
absence of characteristic assets. Poor individuals will probably live in country zones, be less
instructed and have bigger families than whatever remains of the populace. Poverty has many
causes, all of which strengthen each other. One wellspring of poverty is the absence of essential
administrations, for example, cleans water, training, and medicinal services.

2
Establishing the connection between the oil income and poverty rate has not gotten much
consideration of analysts, few investigations accessible demonstrate that Gabon, the Africa's
fourth greatest oil producer in sub-Sahara still has more than 1.5 million living beneath neediness
limit. Tropical Guinea which is one of the quickest developing economies on the planet as
anticipated by the World Bank has a yearly for every capita pay of $11,000, yet, dominant part of
its citizens are unproductively battling to live on not as much as a dollar a day. Angola procured
immense oil income practically identical to aggregate sum of global guide given to the world's
sixty poorest nations. The government of Ghana proposed oil and gas industrialization arrange in
2010 to battle poverty and imbalance which were caused because of absence of
straightforwardness in the administration of oil income. In Nigeria, the pinnacle association in
the oil business, NNPC was accused of not dispatching $18.5 billion income to the treasury of
which was additionally explored and observed to be legitimate. This by itself can sensibly battle
poverty if viably directed towards that. This study is conducted to examine the effects of oil
proceeds on poverty level in the country and to recommend effective strategy to ensure positive
impact.
Literature Review
Nigerian Oil Revenue
The Nigerian government revenue can be divided into two main headings; the oil revenue and the non-
oil revenue. Oil is the main source where government generates more income for public finances and
foreign exchange reserve. According to NEITI (2016) reports, 37.2 billion of oil reserve barrels were
available in 2013 of which larger percent was sent to the USA thereby making Nigeria to become the 4 th
largest oil supplying nation in the world to USA.
The oil sector is the most revenue generating unit for government. And government is always
concerns more about the volatility of oil prices as well as its impact on the oil revenue which
definitely will have effects on the fiscal variables. The proceeds from the sector also assist
government to cater for expenditure on public goods and render essential services to the public.
These include infrastructural development, building of schools, construction of roads, provision
of health services, security, etc.
The contributions of the oil and gas sector of the economy to the economic growth cannot be
overemphasized as it has positively touched and improved the economy in aggregate form.
However, there are challenges facing the sector and these are summarized below:
The bureaucracy and public control which are peculiar to all government parastatals is also
affecting the oil and gas sector. The sector is supervised and controlled by the NNPC and further
regulated by DPR.
There are no effective refineries in the nation to enable the venture create more income and to
give opening for work. There had been visit shared aggravations which upsets raw petroleum
generation in groups enriched with the assets. Carrying and redirection of oil based goods, oil
burglary, destruction of pipelines, and so on.
Nigeria has encountered loads of emergencies such as industrial strikes because of government
strategy on oil prices. Also, some marketers hoard products in periods of scarcity in order to sell
in the black market at higher prices. High specialized cost of generation, because of low level of
residential mechanical advancement. Environmental corruption because of the flaring of related
gas.

3
Government derives substantial revenues from the oil industry and the significant increase in the
government revenues from this sector in recent years is a reflection of three factors: increased
crude oil production, increased crude oil prices globally and the improved bargaining position of
the government with the stakeholders in the industry.
The downstream subsector of the oil and gas sector is the most tasking one for long in Nigeria.
The subsector sees to the distribution of final product to the final consumers in the domestic
markets. The decision to deregulate the subsector came in 2003 but was abandoned because it
lacked due process. The inconsistency is more glaring now with the current increase in oil prices
at the international markets. This suggests that there will more foreign income for Nigeria as well
as rise in the expenditure burden on imported refined petroleum products.
Another strange proviso that makes the Nigerian economy appears uncommon at times is the
dependency on importation of refined oil as a result of non-availability of functioning refineries
in the country. At present, Nigeria has four refineries, Port Harcourt Refinery, Warri Refinery,
Kaduna Refinery and the Second Port Harcourt Refinery.
These refineries are therefore operating below standard and perhaps they are put in order, the
combined capacities should be able to generate more than what is needed to cater for domestic
demand and which will even be exported at reasonable cost saving earnings.

Poverty Reduction
The concept of poverty is a multifaceted which includes social, economic and political elements.
Absolute and relative forms of poverty are the most common. The absolute occurs when people
lack means of getting necessary basic needs such as food, clothing and shelter while relative
poverty is described as a situation which occurs when people in a country do not enjoy a certain
minimum level of living standards as compared to the rest of the nations.
The idea can be seen from economic point of view as a circumstance of low income and
additionally low utilization. This approach has frequently been utilized for developing neediness
lines which speaks to the estimations of wage or utilization important to buy the base standard of
sustenance and different necessities of life (Obadan, 1997). Passing by this definition,
individuals are said to be poor when their deliberate way of life, computed as far as their salaries
of their utilization design, fall underneath the neediness line. The poverty line is a nonexistent
record that is utilized to isolate the poor from the rich. As indicated by the World Development
Report (1990), poverty is the powerlessness to achieve a base way of life.
Individual and physical hardship, financial hardship, socio-social hardship and political hardship
are a portion of the measurements of poverty. Hardship can be knowledgeable about wellbeing,
sustenance, proficiency, instructive handicap and absence of self-assurance absence of access to
property, salary, resources, variables of generation and back. A standout amongst the most vital
and most basic indications of destitution is the refusal of access to the essential necessities of
human presence. Individuals might be denied of their human rights due to individual and
monetary hardships. Individuals are denied as far as qualities, convictions, mentalities, learning,
data and introduction.
The reasons for poverty have been seen in two fundamental measurements; the rustic and urban
poverty. The rustic are economically disadvantageous and as a result different from those in the
urban group. The reason for poverty is recognized as unemployment, underemployment, the
failure to teach youngsters because of high cost, insufficient eating regimen, home without
4
courtesies, for example, toilets, restrooms, or kitchens, sporadic water supply and power, failure
to dress oneself enough by winning social standards.
Poverty promotes obliviousness. It advances social discontent and irritation. It contributes to the
powerlessness in many ways, especially through exploitation by wealthy individuals. Poor
people are unable to obtain or demand for their right because they are powerless. They depend
on wealthy people to fend for themselves.
Lack of education is another factor established to be promoting poverty in the world. The
children of the poor people do not have access to good education and mostly drop out of schools.
Another effect is the dependency ratio. There is high ratio of dependency to able bodied adults.
The dependencies are young children, the sick, the old or the handicapped. The reason could be
that the adults have been permanently weakened, disabled by accidents, illness or early death.
Members of these poor household or community are seasonal hungry and weakened by
infestation, parasites, sickness and malnutrition. The poor are usually have fewer assets, live in
small house. Poverty promotes ignorance. It promotes social discontent and estrangement. The
poor are always attracted by drawing on the slender reserves of cash by reduced consumption,
barters or loans from friends, relatives or trades and these make them to become vulnerable.
Poverty Reduction Strategies in Nigeria
Poverty reduction is a major goal which every reasonable government will focus on especially
where the nation experiencing high poverty rate like Nigeria is involved. It is paradoxical to
believe that Nigeria despite of her endowment in oil and huge amount she has realized from oil
sector can still be having a very high poverty rate in the world. The World Food Programmes
indicates that persistent poverty affects more than half of the population, most severely in the
Northeast and Northwest regions.
All these strategies involve government spending either in form of capital expenditure or
recurrent expenditure. In recognition of the important task of poverty reduction, government
initiated some policies in past geared towards poverty reduction through skill improvement and
the creation of awareness for self-actualization through gainful self-employment In line with
global convention of ameliorating the worsening condition of the poor, the federal government
responded by shifting public expenditure towards poverty reduction programmes and projects
were consequently initiated to cushion the effect of poverty. Some of these strategies are
enumerated below:

 The Family Economic Advancement Programme (FEAP), 1997.

 The National Directorate of Employment (NDE), 1989.
 The People’s Bank Programme (PBN) , 1990
 The Petroleum Trust Fund (PTF)
 The Directorate of Food, Roads and Rural Infrastructure (DFRRI)
 The Better Life Programme (BLP)
 The Family Support Programme (FSP)
 The Oil and Mineral Producing Areas Development Committee
 National Agency for Poverty Alleviation Programme (NAPEP)
 State Agencies for Poverty Alleviation
 National Directorate of Employment

5
Theoretical Review
The principle of Maximum Social Advantage was developed by an Economist, Hugh Dalton.
According to Dalton, public finance is concerned with government revenue and expenditures and
their overlapping activities. This principle is considered to be the fundamental principle of public
finance because it explains that the revenue collected by the government through taxation and
any other means and the dispersal of public expenditures can have significant impact on the
consumption, production and distribution of the national income of the nation.
The government through its fiscal policy and intervention programs transfers from the central
government to the populace. The fiscal activities have effects on level of income, output and
employment in the country.
The principle of maximum social advantage implies that government spending is subject to
diminishing marginal social benefits and revenues are subject to increasing marginal social costs.
Thus, an equilibrium is reached when social advantage is maximized, i.e., when the size of the
budget is such that marginal social benefits of public expenditures are equal to the marginal
social sacrifice.
Dalton emphasizes that government spending in every sector of the economy should be carried
just so far, that the advantage to the community of a further small increase in any direction is just
counter-balanced by the disadvantage of a corresponding small increase in taxation or in receipts
from any other sources of public expenditure and public income. This theory indicates that
before government can generate any revenue from any source i.e in form of taxation or sales of
its natural resources, there must be some sacrifice from the area where the revenue is sourced
from or the payers of the tax, hence, there is maximum social advantage when those who
suffered the payment or affected by extraction of resources derive benefits from the activities of
government which are passed on to them through government spending. He called the sacrifice
rendered by the populace towards the payment of taxes to the government or pollution effects
received as a result of exploration of natural resources as Maximum Social Sacrifice (MSS)
while the benefits derived from the government spending towards social and economic growth
and development, poverty alleviation programs and empowerment services as Maximum Social
Benefit (MSB).

The Keynesian Theory lays emphasis on the complex multiplier effects of government
expenditure and the link between the government expenditure and revenue. Keynes argues that
government should raise revenue enough to positively affect the economy and as a result,
poverty reduction is achieved. Furthermore, the main source of government revenue is
characterized by taxation. However, there are other ways through which government gets income
among which are sales of natural resources such as crude oil.
The Endogenous Growth Theory (EGT) holds that investment in human capital, technology and
education are huge supporters of economic growth. The theory emphasizes that when either
public investment or private investment or combination of both is done on any of the identified
endogenous variables which are education, technology and skills acquisition, the results will
cause economic improvement and the level of poverty will reduce.
These three theories are the bedrock of this study; it is believed that poverty reduction is a
macroeconomic policy in which governments at all levels will often strive to achieve. However,
the objective to have a low poverty rate in any country cannot be achieved without adequately
planning for how revenue to finance both direct and indirect projects can be sourced. The
Keynessian theory has provided us with the source of revenue and how it is spent. The EGT

6
compliments it by highlighting those areas of the economy that should be focused on in order to
achieve poverty reduction.

Empirical Review
Datt and Ravallion (1992) in their study argue that for better understanding in the concept of
poverty reduction, a better understanding on economic growth is required. They believed that
when economic growth indicator such as GDP is significant, all things possible, the poverty rate
should also reduce.
WIDER (2006) reports that a powerful state can activate income and spend it on framework,
administrations, and open merchandise that both upgrade human capital and the prosperity of
groups (particularly poor people), and additionally empowering speculation and business
creation by the private division. A viable state additionally oversees open back to guarantee that
macroeconomic adjust is kept up with approach neither excessively prohibitive, making it
impossible to demoralize private venture and development, nor excessively accommodative,
making it impossible to make high expansion and group out private investment. Fiscal issues are
along these lines at the heart of the state's part in the improvement procedure and disappointment
in this strategy region whether it is in tax collection, open uses, or in dealing with the financial
deficiency and open obligation can rapidly undermine growth and poverty reduction.
The link between finance and poverty was established by Geda et al (2006). They argued that
accessibility to finance will bring about smooth private per capital consumption and will further
reduce poverty.
Ali and Thorbecke (2000) in their studies took us to the foundation and narrate the evolution of
poverty in most prominent African countries. Similarity was detected between poverty and
inequality. However, the study of Fields (2000) gave contrary submission about inequality and
poverty. He founds no similarity between the variables after carrying similar test with Ali and
Thorbecke.
Tony et al (2006) in their quest to finding solutions to the ways developing countries can
mitigate about the mirage of the MDG goals which of course has poverty as part of its objectives
discovered that poverty can only reduce in developing nations if government expenditure is
directed towards capital investment which is assumed to producing favourable multiplier effects.
In a similar report, study by Mehmood and Sadiq (2010) indicates that there is inverse relationship
between the government expenditure and the poverty rate. The government expenditure which is expected
to facilitate growth was found to be negatively related with the anti-economic growth it ought to fight.
Jefferson (2012) establishes that as a developing economy tries to grow employment opportunities to
combat poverty reduction in their states, tax rate should also be managed not to discourage trade being
created. And that poverty is best fought by creating more job opportunities.
Similarly, Khatibu and Mudith (2014) investigated the correlation between the reduction in
income-poverty and government expenditure on growth strategies that have been implemented.
They observed positive relationship between the two and the relationship was established vis-a
vis the economic growth.
In the work of Khalid and Azrai (2015) on the effect of oil revenue on the Sudan Economy, they
discovered a causal relationship between oil revenue and the country GDP. Their discovery
indicates that a unit change in oil revenue will lead to 25% changes in the GDP.

7
The argument earlier suggests that government expenditure be directed towards specific poverty
reduction programmes. The study of Nazar and Mahmoud (2013) provides empirical support
which indicates that constructive government expenditures have positive effect on poverty
reduction.
The UNDP (2003) reports that Nigeria with an estimated population over 180 million people, has
a life expectancy of about 45 yearly, 31.6 percent literacy rate of 183 per 1000 live births for
children below five years, and very active of its population lives below poverty line. This
submission is very alarming and disheartening.
HDR (2003) in its analysis on the poverty level in Nigeria reported that in 1980, the poverty rate
was 28.1%, this numerical representation rose to 44% in 1990 which was 10 years after. The
number also increased to 65% in 1995 and in 2001 about 71% of the Nigerian population lived in
poverty.
Studies by Dwivedi (2008), Okafor (2012) and Success, Success and Ifrueze (2012), Ogbonna
and Appah (2012), etc revealed the significance of oil revenue, the petroleum profit tax on the
economic growth in Nigeria. They all corroborated the fact that oil revenue contributes largely to
the GDP by a very significant percentage.
Olofin (2012) adopted another method to verify the effects of government expenditure on
poverty reduction in Nigeria for a chosen period of time. The contributions of the new growth
theory were carefully examined. The researcher chose only the government expenditure on
defense and investigated the impact of government spending in that aspect on the poverty
reduction of the military officers in Nigeria. It was observed that investment in human capital
development such as training and continuous education programmes for the military men have
really assisted their living condition and particularly have reduced poverty among them.
Okulegu (2013) investigated the connection between public investment and poverty reduction in
Nigeria.
Adelowokan and Osoba (2015) verified the influence of oil revenue on government spending
cum the poverty rate in Nigeria. Oil revenue was found to have a significant contribution to the
government spending. However, it was shocking that the same oil revenue does not have
significant impact on poverty rate during the period under review.

Methodology
This research work utilizes a descriptive research design which is ex-post facto in nature, relying
on secondary data obtained after the occurrence of the event which the researcher has no control
over. Both inferential and descriptive statistics are relied upon to examine the relationship,
effects and granger causality of oil revenue and poverty rate. Descriptive statistics helped to
describe and understand the characteristics of the variables used in the study while inferential
statistics assist in establishing a causal relationship between the variables of study. The research
work uses time series data covering thirty-five years (35) from 1981-2015. More importantly,
this is an aggregate study on economy; hence, the population is the same as the sample. Data on
Oil Revenue accrued to the government for all the periods, poverty rate, government
expenditure, gross domestic product over the years were collected from the publications of
Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), Journals, the internet and
other documentary sources.

8
Model Specification
Model One
The model (1) here presents the approach for testing the research hypotheses formulated. This
study employed and modified the model used by Adelowokan and Osoba (2015) stated in
equation (1) below.
In the model modified, GCF which stands for Gross Capital Formation was removed as a result
of its high correlation with GDP. Hence, poverty rate (POV) will be expressed as a function of
oil revenue (OILR). This is stated in equation (2):

POV= 𝛽0 + 𝛽1GCE + 𝛽2𝐺CF+ 𝛽3GD𝑃 + 𝛽4𝐺RE + 𝛽5OILR + 𝜇t…………………………1

The above model is modified as follows:
POVt = f (OILRt)…………………………………………………………………………….2

POVt = 𝛽0 + 𝛽1OILR𝑡+ 𝛽2GCE𝑡 +𝛽3GREt+ 𝛽4GDPt+ 𝜇𝑡…………………………………..3

Model Two
This model is specified to test for Granger-causality between Oil revenue and poverty level. The
study relies on the restricted and unrestricted models of Granger (1969) as cited in Pasquale
(2007). If we say Oil revenue Granger-cause Poverty or Poverty Granger- cause Oil Revenue, we
choose the lags for the parameters i and j, then, with the use of F-statistics we find the value for
the two variables. Based on the estimated coefficients for the equations (4) and (5), hypotheses
about the relationship between OILR and POV can be formulated.

m n
OILRt = α0 + ∑ β 1 ( OILR ) t−1+¿ ∑ г j(POV)t-j + 𝜇𝑡 ………………… 4
i=1 j=1

p q
POVt = θ0+ ∑ ϕ 1 ( POV ) t−1+¿ ∑ Ѕ j(OILR)t-j + ε𝑡 ………………… 5
i=1 j=1

Where:
POVt= Poverty Rate at time t
OILRt= Oil Revenue at time t
GCE= Government capital expenditure at time t
GDP=Gross domestic product government at time t
GRE= Government Recurrent expenditure at time t
𝛽1-𝛽4 specify the coefficients of the parameters; and
m

∑ ❑ sum of the parameters in the restricted model for Oil revenue

i=1
n

∑ ❑ sum of the parameters in the restricted model for Poverty

j=1

9
𝜇𝑡 is the white noise error term.

Justification of Variables
Poverty Rate
There are different ways of measuring poverty rate as proposed in the literature. The Deninger’s
database, the Gini coefficient, annual per capita income as a measure of poverty, rate of
population living within one dollar to two dollar per day, etc. Each of these approaches to
poverty rate has its limitation. However, the general limitation of all these methods is the
unavailability of large time series data which can be useful for this study. For the purpose of this
study, data on Private Per Capita Consumption is used as a proxy for poverty rate. This is in line
with the approach of Quartey (2005) and Odhiambo (2009). The PPC is computed as the ratio
of household final Consumption expenditure (in constant 2005 US dollars) to the total
population. The reason for choosing private per capita consumption index is that the data on it is
available and the definition is consistent with the definition of the World Bank on poverty which
is described as "the inability to reach the subsistence level of life" measured in terms of basic
consumption needs (World Bank, 1990).
Oil Revenue:
In this study, Oil revenue is conceptualized as proceeds from sales of petroleum products such as
Premium Motor Sprit (PMS), Diesel, Gas, and Kerosene. Studies such as, Rupasingha and Goetz
(2007); Adelowokan and Osoba (2015) also used this as a measure of oil revenue.
Government Expenditure:
Government expenditure in this study is described as the sum of all expenses made by federal
government of Nigeria which is subdivided into recurrent and capital expenditure. Abdullah
(2000), Ranjan, Sharma, (2008) and Cooray (2009) concluded that expansion of government
spending contributes positively to economic growth which will ultimately lead to poverty
reduction, hence, the need to include government spending in the model for this study. Similarly,
Singh and Sahni (1984); Rupasingha and Goetz (2007); Ravallion, (2002); Okulegu (2013)
Adelowokan and Osoba (2015) included government expenditure in their study to examine its
impact on poverty reduction.
Gross Domestic Product:
The gross domestic product measures the total output of an entire economy. It has different
approaches to its computation. Basically, the addition of total consumption, investment,
government expenditure and net exports gives GDP. The difference between X and M is the net
export. GDP is the proxy for economic growth and going by all the empirical evidences
presented earlier, it is justifiable to include it in this study for robust result. More so, studies such
as Rupasingha and Goetz (2007); Adelowokan and Osoba (2015) also included GDP in their
model to examine its effect on poverty alleviation, hence, a need to reaffirm its effect on poverty
reduction.

10
Results
Descriptive Statistics

POV OILR GCE GDP GRE

Mean 1264.553 2197.071 360.5231 17827.15 974.0415

Median 1285.663 416.8111 241.6883 4189.250 178.0978

Maximum 1737.497 8878.970 1152.796 94144.96 3831.978

Minimum 788.0067 7.253000 4.100100 94.32502 4.750800

Std. Dev. 298.3993 2753.057 374.9018 28092.36 1260.780

Skewness 0.084323 1.006505 0.710889 1.688211 1.100574

Kurtosis 1.669733 2.646692 2.111846 4.405487 2.711928

Jarque-Bera 2.622160 6.091511 4.098313 19.50612 7.186727

Probability 0.269529 0.047560 0.128844 0.000058 0.027506

Obs 35 35 35 35 35

Source: Author’s Compilation (2017)

Unit Root Test

Variable T-Stat Prob. Order

POV -1.2873 0.6236 I(1)
D(POV) -8.5968 0.0000
OILR -1.2274 0.6010 I(1)
D(OILR) -6.0590 0.0000
GCE -0.8447 0.7932 I(1)
D(GCE) -7.6349 0.0000
GRE -2.3426 0.9999 I(1)
D(GRE) -4.8735 0.0000
GDP 3.3328 1.0000 I(1)
D(GDP) -3.9990 0.0041
Source: Author’s Compilation (2017); Note: significant level: * 1%. ** 5%

11
Multicollinearity Test

D(POV) D(OILR) D(GCE) D(GDP) D(GRE)

D(POV) 1
D(OILR) -0.4073 1
D(GCE) 0.3425 -0.1964 1
D(GDP) -0.1535 0.3033 -0.3987 1
D(GRE) -0.2132 0.3733 -0.2142 0.7510 1
Source: Author’s Compilation (2017)

The descriptive statistics reveals that the mean value of all the variables are positive, with gross
domestic product(GDP) having the highest value (17827.25) while government recurrent
expenditure (GRE) has the lowest mean value (974.04). The value of the median was far apart
from the mean value, except for oil revenue (OILR) and government capital expenditure (GCE),
this implies that most of the data are normally distributed. Furthermore, it is observed that all the
variables ranges from positive to positive as indicated in the maximum and minimum value,
implying that at no period was any of the variable is negative or zero. Also, it was discovered
that GDP, OILR and GRE are the most volatile variable while the other variables are relatively
low, as given by their standard deviations. This can be attributed to fluctuation in oil prices
which is the major source of revenue to the government. The skewness results indicate that only
the Oil Revenue and GDP have a positive skew of 1.0 and 1.6 respectively. Also, all the
variables are platykurtic since their values are less than three (3) which implies that the variables
produces lesser extreme outliers than those of the normal distribution except GDP for which is
lepokurtic with value of 4.40. The JarqueBera test is used to examine whether the residuals are
normally distributed and the results indicate that only poverty rate (POV) residual is normally
distributed while others have their probability value less than 5%.
The unit root table shows that POV, OILR, GCE, GRE and GDP are not stationary at level given
their probability value; however they were stationary at first difference. It therefore means that
the variables considered in this study are multileveled integrated and that these variables are
integrated of order one and order zero. Thus a long-run linear combination is suspected amongst
them.
The results therefore report the correlation between the variables used in this study. It shows that
OILR, GDP, GRE are negatively related to POV with only GCE having a positive relationship
with POV. Similarly, GDP, GRE are also negatively correlated with OILR. However, the
correlation coefficient for some of the cases above revealed that 95% of the cases above are less
than 50 percent which simply implies that there is no presence of multicollinearity among the
explanatory variables. Hence avoiding a spurious regression results.
Hypotheses Testing
This section presents the test of hypotheses focusing on the three hypotheses formulated. For the
stated objectives to be achieved, different econometric methods were adopted as presented
below:

12
Hypothesis One
H01: Oil Revenue has no significant short run effects on Poverty Reduction in Nigeria.

Cointegration Test Results

Hypothesized Eigenvalu 0.05 Prob.** Max- 0.05 Prob.**

No. of CE(s) e Trace Critical Eigen Critical

Statistic Value Statistic Value

 106.846  69.8188  60.2473

None *  0.847826 4 9  0.0000 7  33.87687  0.0000

 46.5990  47.8561  25.4195

At most 1  0.548130 1 3  0.0653 1  27.58434  0.0923

 21.1795  29.7970  12.6837

At most 2  0.327240 0 7  0.3466 5  21.13162  0.4818

 8.49575  15.4947  5.24650

At most 3  0.151218 5 1  0.4140 7  14.26460  0.7105

 3.24924  3.84146  3.24924

At most 4  0.096554 8 6  0.0715 8  3.841466  0.0715

Source: Author’s Compilation, (2017)

Trace test indicates 1 cointegratingeqn(s) at the 0.05 level while Max-eigenvalue test also indicates 1

cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level 

**MacKinnon-Haug-Michelis (1999) p-values

From the above, both the Trace statistics and Max-Eigen test results are given. The Trace
statistics shows that the null hypothesis of at most one cointegrating equation is accepted in
favour of the alternative hypothesis at 0.05 level. The value as indicated in the table are greater
than the critical values at 0.05 level. This means that there exists long run relationship among the
variables. Both the Trace test Max-Eigen test test indicates one cointegrating equations among
the five variables and provides us with evidence in favour of one cointegrating vectors at 5% per
cent significance level. Since the result of the Johansen cointegration test based on both test
indicated that the variables are integrated, the Vector Error Correction model is then employed.

13
Vector Error Correction Model
The coefficient of the ECM is correctly signed and statistically significant. The value shows that
the speed of adjustment of long run equilibrium is approximately 23% and significant at 10%,
suggesting that a long run causality exists between oil revenue and poverty rate in Nigeria.
Vector Error Correction Model
Coefficien
t Std. Error t-Statistic Prob.  
ECM(-1) -0.236973 0.114642 -2.067068 0.0526***
D(POV(-1) -0.682916 0.254503 -2.683332 0.0147*
D(POV(-2) -0.040151 0.230342 -0.174309 0.8635
D(OILR(-1) -0.273828 0.166359 -1.646005 0.1162
D(OILR(-2) -0.109774 0.056441 -1.944910 0.0667***
D(GCE(-1) -0.297120 0.284999 -1.042530 0.3103
D(GCE(-2) -1.009690 0.412958 -2.445020 0.0244**
D(GRE(-1) 1.146411 0.945445 1.212562 0.2402
D(GRE(-2) 1.933192 0.870130 2.221727 0.0386**
D(GDP(-1) -0.010284 0.012040 -0.854162 0.4037
D(GDP(-2) -0.060170 0.018517 -3.249437 0.0042*
C 27.83969 32.49372 0.856771 0.4022
R-squared 0.821788
Adjusted R-squared 0.718613
F-statistic 7.964977
Prob(F-statistic) 0.000051
Source: Authors Compilation, (2017)

The equilibrium correction coefficient (ECT), estimated -0.23 (23%) is highly significant, has
the correct sign, and imply a fairly low speed of adjustment to equilibrium after a shock.
Approximately 23% of disequilibria from the previous year’s shock converge back to the long-
run equilibrium in the current year.
It was further revealed that a period lag on poverty rate (POV), oil revenue(OILR), government
capital expenditure(GCE) and gross domestic product(GDP) will bring a decrease in poverty in
Nigeria given their negative coefficient while government recurrent expenditure (GRE) result to
a higher poverty rate given the positive coefficient in the short run. However, only a period lag
of POV is significant at 5% while others are insignificant. This suggests that the volume of oil
revenue, and amount spent on capital project, coupled with the gross domestic product reduce
poverty but not significant.
Conversely, a closer examination of the table above also revealed that at two period lag POV,
OILR, GCE, and GDP reduces poverty in the short run while a two period lag of GRE revealed
that a positive effect on poverty which is significant at 5 percent. Similar, OILR, GCE and GDP
are statistically significant at 10%, 5%, 5%, 5% respectively while POV is insignificant at 10%.
From the above, the R-squared revealed that the explanatory variables explain 82% of changes in
the dependent variable. This implies that only about 18% variation in the independent variable is

14
caused by other factors not considered in this study while the F-statistics shows that the result is
statistically significant as the probability value of F-Statistics is lower than 5%. Thus, this study
rejects the null hypothesis that states that oil revenue has no short run effects on poverty rate in
Nigeria.

Hypothesis Two: Oil Revenue has no significant long run effects on poverty reduction in
Nigeria.
Long Run Analysis
Since, a long run relationship is suspected among the variables, the long run estimate is given
below:
Long Run Effect
Coefficien

t Std. Error t-Statistic Prob.  

C 21.14326 44.40269 0.476171 0.6389
D(POV(-1)) -0.297936 0.227366 -1.310380 0.2042
D(OILR(-1)) 0.009349 0.057796 0.161760 0.8730
D(GCE(-1)) -0.192553 0.315135 -0.611016 0.5477
D(GRE(-1)) -0.320307 0.382746 -0.836867 0.4121
D(GDP(-1)) 0.004352 0.012201 0.356722 0.7249
D(POV(-2)) 0.388733 0.238006 1.633293 0.1173
D(OILR(-2)) 0.031596 0.048832 0.647043 0.5246
D(GCE(-2)) 0.006918 0.432177 0.016008 0.9874
D(GRE(-2)) 0.293282 0.332357 0.882430 0.3875
D(GDP(-2)) -0.009136 0.012037 -0.758964 0.4563
R-squared 0.368291
Adjusted R-squared 0.067477
F-statistic 1.224314
Prob(F-statistic) 0.331726
Source: Authors Compilation, (2017)

The coefficient of a period lag of POV, GCE and GRE shows a negative relationship with
poverty rate. This suggests that in the long run past poverty rate, government capital expenditure
and government recurrent expenditure have effect on the present poverty rate, however, the
coefficient is found to be statistically insignificant. Meanwhile, the coefficient of a period lag of
oil revenue (OILR) and gross domestic product (GDP) exert a positive insignificant effect on
poverty rate, implying that in the long run, the volume of oil revenue and gross domestic product
will not reduce poverty.
Conversely, at a two period lag, the entire variable had a positive effect on poverty rate except
for GDP that has a negative effect on poverty rate in the long run. This suggests that in the long
run gross domestic product reduces poverty in Nigeria while oil revenue and government capital
expenditure do not reduce poverty in Nigeria.

15
Furthermore, the R-Squared of the model is 0.3889 showing that the explanatory variables
explain 38% of changes in poverty rate, implying that the explanatory variables do not have the
strong ability to explain the level of poverty reduction in the long run. It remained very weak
even after adjusting for the degrees of freedom to 6.7% (Adjusted R-Squared). The F-statistic
which measures the joint statistical influence of the explanatory variables in explaining the
dependent variable was found to be statistically insignificant at 10% percent level. This therefore
suggests that in the long run, no significant impact of oil revenue influences the behaviour of
poverty level. Hence, the null hypothesis which states that oil revenue has no long run effects on
poverty reduction in Nigeria is hereby accepted.
Hypothesis Three: There is no direction of causality between oil revenue and poverty rate in
Nigeria.
Pairwise Granger Causality Tests
This is carried out to determine the direction of causality between oil revenue and poverty rate in
Nigeria. The results are presented in table 4.4 below.
Granger Causality Test
Pairwise Granger Causality Tests
 Null Hypothesis: F-Statistic Prob. 
 POV does not Granger Cause OILR  3.95612 0.0307**
 OILR does not Granger Cause POV  5.70030 0.0084*

 GDP does not Granger Cause POV  2.13549 0.1370

 POV does not Granger Cause GDP  3.86123 0.0330**

 GCE does not Granger Cause POV  4.21213 0.0252*

 POV does not Granger Cause GCE  0.56438 0.5750

 GRE does not Granger Cause POV  3.73431 0.0365*

 POV does not Granger Cause GRE  6.74165 0.0041*
Note: significant level: * 1%. ** 5% , ***10%

The direction of causality between oil revenue (OILR) and poverty level (POV) is depicted while
also revealing the direction of causality between other selected variables to make the work
robust. Specifically, the results were gathered on the direction of causality between gross
domestic product (GDP) and poverty level (POV), government capital expenditure (GCE) and
poverty level (POV); and government recurrent expenditure (GRE) and poverty level (POV), oil
revenue (OILR) and poverty and finally poverty level (POV) and oil revenue (OILR). The result
shows that the null hypothesis that states that poverty level (POV) does not Granger Cause oil
revenue (OILR) is rejected given the p-value which is below 5%, similarly, the null hypothesis
that oil revenue (OILR)does not Granger Cause poverty level (POV)is also rejected which is
statistically significant at 5%. It implies that a bi-directional relationship exist between oil
revenue and poverty in this study.
Furthermore, It was also revealed that a uni-directional relationship exist between gross domestic
product (GDP) and poverty (POV). Similar result was also obtained in the case of GCE and POV
as a uni-directional relationship was found between both variables and a bi-directional

16
relationship exist between GRE and POV. Thus, given the result, this study rejects the null
hypothesis that states that there is no direction of causality between oil revenue and poverty level
in Nigeria.
Post Diagnostic Test
F-statistic Prob
Normality Test: Jarque-Bera 1.6279 0.4430
Breusch-Godfrey Serial Correlation LM Test: 1.3950 0.2748
Heteroskedasticity Test: Breusch-Pagan-Godfrey 0.9489 0.5619
Source: Author’s Compilation, (2017)

The Breusch-Godfrey Serial Correlation Test was conducted to examine whether the variables
are serially correlated, the result shows that the probability value of Breusch-Godfrey Serial
Correlation LM Test is not significant at 5% (0.2748) as such we conclude that there is no
presence of serial correlation among the variables. Also, the normality test was carried out to
check if the residuals are normally distributed. The result of the Jarque-Bera Statistics suggests
that the residuals are normally distributed given the probability value of 44%. Thus, the
diagnostics test indicates that the residuals are normally distributed, homoskedastic and serially
uncorrelated which implies that the result of this study is not spurious and can be relied upon for
policy and recommendations.
Discussion of Findings
Having analyzed the data collected using different econometric techniques; the findings are
analyzed based on the objectives of the study.
The first objective of this study was to investigate the trend in oil revenue and poverty rate in
Nigeria. The results depict an increasing trend in oil revenue over the years; this can be attributed
to the long oil boom era with the appreciable global oil price. While the trend in the poverty level
in Nigeria has been swinging from positive to negative over the years. The trend indicates that
government needs to pay adequate attention to those strategies put in place to reduce poverty
level in the country.
The second objective of this study was to examine the short and long run effects of oil revenue
on poverty reduction in Nigeria; oil revenue (OILR) has short run effects on poverty reduction.
This is evidenced by the probability value of F-Statistics which is lower than 5%.
Also, the R-squared revealed that the explanatory variables specified explain 82% of changes in
the dependent variable. This implies that only about 18% variation in the independent variable is
caused by other factors not considered in this study. This is in concomitant with the study of
Adelowokan and Osoba (2015) which revealed that oil proceeds being the main revenue source
in Nigeria have greater impact in ensuring equal distribution of income as a means of reducing
poverty level among her citizens.
Similarly, Government Capital Expenditure (GCE) and Gross Domestic Product (GDP) will
bring a decrease in poverty level in Nigeria given their negative coefficients of -0.27, -0.29 and
-0.01 respectively while Government Recurrent Expenditure (GRE) result to a higher poverty
rate given the positive coefficient of 1.14 in the short run. The result of GRE revealed a positive

17
relationship with poverty, implying that as government recurrent expenditure increases the rate
of poverty also increases, suggesting that for Nigeria as a country to grow and for her citizens to
have a high standard of living, there is need for higher investment in government capital
expenditure. However, only a period lag of POV is significant at 5% while others are
insignificant. This suggests that the volume of oil revenue, and amount spent on capital project,
coupled with the gross domestic product reduce poverty but not significant. The results are in
conformity with the assertion of Ravallion, (2002); Okulegu (2013) Abdullah, (2000), Ranjan
and Sharma, (2008) and Cooray (2009).
In the long run, it was discovered that oil revenue has no significant effects on poverty reduction
in Nigeria. However, only government capital expenditure, government recurrent expenditure
and gross domestic product exert negative effect on poverty reduction which were however not
significant. Implying that an increase in capital expenditure, recurrent expenditure and gross
domestic product will reduce poverty, however, the effect is not felt by the populace since it is
insignificant. Conversely, oil revenue has a positive relationship with poverty level, suggesting
that an increase in oil revenue in the long run will widen the gap between the rich and the poor,
hence, leading to high poverty rate.
The third which is the last objective was to ascertain whether oil revenue there exist any
direction of causality between oil revenue and poverty rate in Nigeria. The Granger-causality test
of Pairwise was adopted and the results show that the null hypothesis that states that no direction
of causality between poverty level (POV) and oil revenue (OILR) is rejected given the p-value
which is below 5%. Similarly, the null hypothesis that oil revenue (OILR) does not Granger
Cause poverty level (POV) is also rejected which is statistically significant at 5%. It implies that
a bi-directional relationship exists between oil revenue and poverty in this study. This result
further implies that increase in oil revenue can bring down the level of poverty and also decrease
in oil revenue can bring up the level of poverty. This assertion justifies the apriori expectation of
this study. However, the result further shows that poverty Granger-cause oil revenue and this
means that if poverty level goes up to a certain level, if not critically tackled on time can bring
down the oil revenue in Nigeria. This is supported by the finding of Adelowokan and Osoba
(2015), their study reveals that insecurity will increase in Nigeria and will negatively affect the
oil revenue as a result of the government insensitivity to the level of poverty in the country. The
level of poverty in the country especially Niger Delta will bring about insecurity, vandalization
of oil pipelines, kidnapping, etc which will make oil revenue to decline. This is a Granger
causality effect. Other explanatory variables were also found to have uni-directional relationship
with poverty rate.
Conclusion
This study hereby concludes that oil revenue has positive and insignificant effect on poverty
reduction in Nigeria and that there is a bi-directional-causality between the two variables. Oil
revenue is not a predictor of poverty reduction in Nigeria. However, oil revenue being the major
source of income to government in Nigeria is capable of bringing down the level of poverty in
the country if well distributed towards the right channels. For poverty reduction to be totally
achieved in Nigeria, the proceeds from oil sector and other sources should be judiciously used to
finance government capital projects that will reduce poverty in the country.

Recommendations
Based on the findings of this study, the study recommends the following:

18
 1. Government should develop an effective financial mechanism that will monitor the
inflow and outflow of its revenue especially proceeds from oil sector.
2. Government should embark upon programs that will bring down the level of poverty in
the country.
3. Government should address the issue of insecurity in the country especially in the oil
producing states.
4. That government needs to urgently diversify the Nigerian economy as huge income from
oil sector may no longer be feasible for developmental projects.
5. Finally, various poverty alleviation programmes in Nigeria should be co-ordinated and
consolidated with the development of a comprehensive framework geared towards human
capital development.

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