Estimating covariance between exchange rate devaluation and oil price volatility during COVID-19

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Abstract

The economies of West African Monetary Zone (WAMZ) countries have recorded a long trend of currency devaluation and hiking instability in oil prices. We estimated the covariance of currency devaluation and volatilities in global oil prices caused by the COVID-19 outbreak on WAMZ economies from January 30 to December 30, 2020. The BEKK model was estimated for analysis. The results from generalized autoregressive conditional heteroskedasticity (GARCH) show that all variance equation coefficients, are significant, suggesting strong volatility transmission and spillovers between the COVID-19 outbreak and oil price shocks on the economic performance of WAMZ. The estimates obtained for both current and lagged gross domestic product (GDP) equations are relatively similar. Consequently, all WAMZ economies weakly responded to shocks arising from fluctuations in international oil prices, volatility of inflation rate, and excess devaluation caused by the COVID-19 outbreak. The instabilities in oil prices and devaluation caused by the COVID-19 outbreak had decelerating consequences on the output growth of WAMZ economies. The estimated covariance effects of oil price shock and currency devaluation are negative for all countries in the study. A 1 percent devaluation-oil price shock caused by the COVID-19 pandemic resulted in negative output growth rates of 1.3 percent, 1.12 percent, 1.1 percent, and 1.09 percent in Nigeria, Sierra Leone, Ghana, and The Gambia, respectively.

Keywords: COVID-19 Outbreak, Oil Price Shock, National Output Growth, Devaluation, WAMZ, BEKK

Authors’ individual contribution: Conceptualization — D.U., S.E.E., S.S.U., and A.N.T.; Methodology — D.U., F.O.O.-O., C.C.I., and A.N.T.; Software — D.U., S.S.U., C.C.E., and O.A.I.; Data Curation — D.U., S.E.E., and A.N.T.; Writing — D.U., S.S.U., and A.N.T.; Investigation — D.U., S.E.E., C.C.E., O.A.I., F.O.O.-O., and C.C.I.; Validation — C.C.E., O.A.I., and A.N.T.; Formal Analysis — D.U., S.E.E., C.C.E., O.A.I., F.O.O.-O., C.C.I., and A.N.T.; Supervision — D.U., S.S.U., and C.C.I.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C24, C50, E20

Received: 25.11.2022
Accepted: 12.06.2023
Published online: 14.06.2023

How to cite this paper: Umoru, D., Effiong, S. E., Umar, S. S., Eleh, C. C., Ihensekhien, O. A., Ovenseri-Ogbomo, F. O., Ihuoma, C. C., & Tizhe, A. N. (2023). Estimating covariance between exchange rate devaluation and oil price volatility during COVID-19. Journal of Governance & Regulation, 12(2), 200–211. https://doi.org/10.22495/jgrv12i2art19