The impact of oil price shocks on an oil exporting country: A mixed methods approach

Rahma, Elsiddig (2016) The impact of oil price shocks on an oil exporting country: A mixed methods approach. Doctoral thesis, Northumbria University.

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Abstract

Since the advent of exporting oil in 1999, Sudan’s economy became more reliant on the proceeds of crude oil export. This situation exposed the economy to the negative effect of crude oil price shocks. In general, oil price increase positively impacts the economy of oil exporting countries, while oil importing economies suffer. That is, oil price increase boosts economic activities in oil exporting countries while it retards economic growth in oil importing countries. Unlike developed economies, there is a paucity of research in the relationship between oil Price shocks and the macroeconomy in developing countries. In this context, Sudan lacks appropriate fundamental economic knowledge and understanding of the complex relationship between its macroeconomy and oil price shocks. This research contributed towards filling this gap. To this end, the overall objective of this thesis was to examine the impact of crude oil price shocks on Sudan’s macroeconomy over the period 2000 – 2011. In doing so, this research answered the following question: what was the impact of oil price shocks on the public budget, Gross Domestic Product (GDP) growth and unemployment rates, sectors’ growth rate and current account.
The research employs the Convergent Parallel Mixed Methods Design, in which the Vector Auto-Regression (VAR) model and Delphi method are used. The main findings show that negative real crude oil price shocks have a greater influence on the majority of the macroeconomic variables compared to positive shocks. Findings from the public budget VAR model suggests that real crude oil price shocks have asymmetric effect on the public budget. This is attributable to the use of a predetermined crude oil price in the annual public budget. This finding is consistent with those of Jbir and Zouri-Ghorbel (2009) and Ibrahim and Mohamed (2012) in the Tunisian and Iranian economies, respectively. Therefore, adoption of a conservative approach in determining the benchmark price in the public budget is very crucial to avoid persistent withdrawals from the Central Bank. Results obtained from the current account VAR model indicate that negative and positive real oil price shocks have symmetrical effects on the trade and current account balances. This finding is in line with those of Le and Chang (2013) and Allegret et al (2014) in Malaysia and some African oil exporting countries, respectively. However, oil increase improves the trade and current account balance, but at the expense of the non-oil exports. Therefore, there is a need for export restructure, diversification and support for non-oil exports. Furthermore, the GDP growth and unemployment VAR model shows that real crude oil price shocks symmetrically affect the GDP growth rates. Similar results of the negative effect on GDP growth is reported in Nigeria and Iran by Akin and Babajide (2011a) and Farzanegan and Markwardt (2009), respectively. However, negative real crude oil price significantly impacted the unemployment rate. Finally, the sectors’ growth VAR model shows that increase in crude oil price positively affected agricultural and service sector growth rates, while it negatively impacted industrial sector growth. Decrease in real crude oil price influenced agricultural sector to increase, whereas industrial and services sectors growth rates suffer. These findings are consistent with those obtained by Binuomote and Odeniyi (2013) and Ahmed and Wadud (2011) in the in Nigerian Malaysian economies, respectively.
The significance of this research is its contribution to the existing body of knowledge on the relationship between crude oil price shocks and the macroeconomy in oil exporting developing countries, mainly Sudan, and the use of the mixed method approach in this research investigation. This research addressed the dynamic interrelationship between the crude oil price shocks and the macroeconomy. The outcome of this research provides key decision makers with the relevant information to design appropriate economic policies to mitigate the negative effects of crude oil price shocks.

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