Academic journal article Eastern Africa Social Science Research Review

The Effects of Oil Price Volatility on the Sudanese Economy

Academic journal article Eastern Africa Social Science Research Review

The Effects of Oil Price Volatility on the Sudanese Economy

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

Since the first oil price shock of the 1970s, the impact of oil price volatility on economic performance has continued to be an important issue for researchers and policy makers. Despite extensive past empirical studies, the link between oil price volatility and macroeconomic activities remain ambiguous. Most of the empirical studies conducted before the last shock of the 2000s, found a significant inverse relationship between oil price fluctuations and economic activities (e.g. Hamilton 1983, Burbidge and Harrison 1984, and Gisser and Goodwin 1986). On the other hand, empirical studies which used data of the last decade pointed out an insignificant impact of oil prices shocks on economic performance (e.g. Olomola and Adejumo 2006, Blanchard and Gali 2007, Schmidt and Zimmerman 2007).

Prior to the oil exploitation in 1999, Sudan economy was reliant primarily on the agricultural sector as an important source of national income, public revenues and foreign exchange. However, in the aftermath of oil exportation, the economy has transformed entirely to depend on oil revenues. For example, between 1999 and 2010, crude oil exports served as the main source of foreign earnings with an average of about 80%. Oil revenues also, contributed about 65% and 20% to total government revenues and total GDP, respectively (Central Bank of Sudan 2008, 34). Accordingly, the government budget and trade balance of the country have witnessed significant development after the oil exportation (see Figure 1). As shown in the Figure, during the period (1999-2009), the country witnessed dramatic expansion in government revenues, motivated by oil earnings. The increase of total exports in such period also implies the significant role of oil exports, which have increased from about 35 per cent in 1999 to more than 90 per cent in 2009.

Owing to the increase in oil prices and production in the decade that followed the oil exploitation, Sudan economy has achieved remarkable improvements in terms of high and stable growth rates and low inflation. The gross domestic product (GDP) has increased more than fivefold from $10 billion in 1998 to $55 billion in 2009. While the surge in oil revenues boosted economic growth, it left the country highly vulnerable to fluctuations in the international oil price. For example, the dramatic fall in international oil prices from about US$ 120 per barrel in 2008 to about US$ 53 per barrel in 2009 has resulted in negative economic performance. It has been observed that in 2009 the country saw a sharp decline in budget revenues and total exports (see Figure 1).

Therefore, the effect of oil price volatility on macroeconomic variables was an urgent policy challenge in the recent decade. This paper, thus, examines the relationship between crude oil price fluctuations and economic performance of Sudan. Specifically, the paper investigates the dynamic effects of oil price fluctuations on the key macroeconomic variables, the extent the Sudan economy depends on oil windfalls, and the nature of the relationship between oil price shocks and real economic outcome, particularly GDP.

Due to the new experience of Sudan in oil exploitation, no empirical work has yet been conducted so far to investigate the dynamic impact of crude oil price shocks on Sudan's economic performance. Therefore, this paper is an endeavour to narrow the gap in the Sudanese literature on the subject. In addition, despite the secession of the South Sudan and loss of most of oil resources, Sudan is still regarded as a net exporter of oil and is expected to explore more reserves in the coming years1. Therefore, understanding the vulnerability of the economy to international oil price shocks would be useful to guide economic policy in the short and long-run.

The remainder of this paper is organized as follows: section (2) presents reviews of the theoretical and empirical literature on the economic impact of oil price shocks; Section (3) discusses the methodology and the data sources; and Section (4) presents the empirical results, while section (5) ends with conclusion and policy implications. …

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