A VECM Investigation on the Nexus among Government Spending, Oil Revenues, and Economic Growth: Empirical Evidence from the Sultanate of Oman

Sarfaraz Javed; Uvesh Husain

doi:10.36923/iefrontiers.v27i2.241

Open Access Article Economics

Sarfaraz Javed ⁽¹⁾, Uvesh Husain ⁽²⁾

(1) Department of Accounting, Faculty of Business, Sohar University, Sohar, Oman,

(2) Department of Economics and Business Studies Mazoon College, Muscat, Oman

https://doi.org/10.36923/iefrontiers.v27i2.241

Issue
Vol. 27 No. 2 (2024): Continuous

Submitted
March 28, 2024

Published
June 30, 2024

Keywords:

Oil Revenues, Government Spending, Economic Growth, sultanate of Oman, VECM, multivariate co-integration analysis, error correction method

Download PDF

Abstract

This study aims to examine the impact of oil resources on the economic growth and government spending in Oman between 1989 and 2018. To enhance economic growth, it is crucial to comprehend how Oman can effectively manage its abundant resources. The objectives are to examine the correlation between oil resources, GDP, and government expenditure; to assess the interconnections that exist in both the short and long run; and to identify the causal pathways using the ARDL and VECM models. The approach involves doing unit root tests and examining long-term associations, followed by using VECM to analyze short-term dynamics. Finally, the analysis is performed on annual data obtained from the World Bank and the National Centre for Statistics and Information. The results indicate that a rise in oil revenue has a significant impact on GDP, whereas an increase in government expenditure has an adverse effect on economic growth. The findings of this research align with those of studies undertaken in other GCC states, emphasizing the significant role of oil in both economic development and public finance. An result of this research is that it will equip policymakers in Oman and other nations abundant in resources with empirical information that can be used to formulate policies for sustainable economic growth and effective resource management.

Full text article

Generated from XML file

References

Abou Elseoud, M. S., & Kreishan, F. M. J. I. J. o. E. E., & Policy. (2020). Energy-GDP nexus for oil-exporting country: The case of Bahrain. International Journal of Energy Economics and Policy, 10(6), 80. https://doi.org/10.32479/ijeep.9883

Ahmad, A. H., & Masan, S. J. I. J. o. B., & Development, E. (2015). Dynamic relationships between oil revenue, government spending, and economic growth in Oman. International Journal of Business and Economic Development, 3(2).

Alaali, F., & Naser, H. J. E., Ecology, & Environment. (2020). Economic development and environmental sustainability: Evidence from Bahrain. Energy, Ecology, & Environment, 5(3), 211-219. https://doi.org/10.1007/s40974-019-00143-4

Alam, M., Shabbir, A. M., & Alam, N. J. I. J. o. C. r. i. H., & Sciences, S. (2018). Oil and non-oil revenues in Gulf countries - A comparative analysis between Oman and UAE. International Journal of Current Research in Humanities & Social Sciences, 7(1), 44-59.

Alam, S., Rehman, S., & Butt, M. S. (2011). Trade liberalization, environmental degradation, and sustainable development in Pakistan. European Journal of Social Sciences, 19(1), 84-96.

Alawadhi, S. A., & Longe, A. E. (2024). Oil price fluctuation and their impact on macroeconomic variables: The case of Kuwait. International Journal of Energy Economics and Policy, 14(3), 375-386. https://doi.org/10.32479/ijeep.15713

Al-Mawali, H., Sharif, A., Rumman, G. A., Kerzan, F., & Liu, G. (2018). Environmental strategy, environmental management accounting, and organizational performance: Evidence from the United Arab Emirates market. Journal of Environmental Accounting and Management, 6(2), 109-118. https://doi.org/10.5890/JEAM.2018.06.002

Al-Mawali, N., Hasim, H. M., & Al-Busaidi, K. J. I. J. o. E. E., & Policy. (2016). Modeling the impact of the oil sector on the economy of Sultanate of Oman. International Journal of Energy Economics and Policy, 6(1), 120-127.

Alodayni, S. J. I. J. o. F. S. (2016). Oil prices, credit risks in banking systems, and macro-financial linkages across GCC oil exporters. International Journal of Financial Studies, 4(4), 23. https://doi.org/10.3390/ijfs4040023

AlShehabi, O. (2017). Show us the money: Oil revenues, undisclosed allocations, and accountability in budgets of the GCC States.

Alshubiri, F. N., & Hussein, M. A. J. I. J. o. S. C. M. (2016). Investigating the impact of sustainable development supply chain on economic performance: An empirical study of Sultanate of Oman. International Journal of Supply Chain Management, 5(3), 69-81.

Alshubiri, F. N., Tawfik, O. I., & Jamil, S. A. J. F. I. (2020). Impact of petroleum and non-petroleum indices on financial development in Oman. Financial Innovation, 6(1), 1-22. https://doi.org/10.1186/s40854-020-00180-7

Amir, M., Siddique, M., Ali, K., Bukhari, A. A. A., & Kausar, N. (2022). Asymmetric relationship of environmental degradation and economic growth with tourism demand in Pakistan: Evidence from non-linear ARDL and causality estimation. Environmental Science and Pollution Research International, 29(4), 5891-5901. https://doi.org/10.1007/s11356-021-15971-3

Aravind, M., & Nayar, J. J. I. J. o. E. S. M. (2020). Integration of oil with macroeconomic indicators and policy challenges in regard to Oman.

Asiri, B. K., & Abdalla, M. A. J. J. o. A. F., & Banking. (2015). Economic growth and stock market development in Bahrain. Journal of Accounting, Finance, & Banking, 5(2), 67-80.

Azad, N. F., & Serletis, P. (2022). Oil price shocks in major emerging economies. The Energy Journal, 43(4), 199-214. https://doi.org/10.5547/01956574.43.4.naza

Badeeb, R. A., Lean, H. H., & Clark, J. (2017). The evolution of the natural resource curse thesis: A critical literature survey. Resources Policy, 51, 123-134. https://doi.org/10.1016/j.resourpol.2016.10.015

Bamaiyi, G. (2024). Effect of oil price shocks on selected macroeconomic variables in Nigeria (1990-2021). International Journal of Development and Economic Sustainability, 12(1), 12-25. https://doi.org/10.37745/ijdes.13/vol12n11225

Bekhet, H. A., Matar, A., & Yasmin, T. J. R., & Reviews, S. E. (2017). CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models. Renewable and Sustainable Energy Reviews, 70, 117-132. https://doi.org/10.1016/j.rser.2016.11.089

Belullo, A., & Dužman, T. (2011). Relations among government revenues and gross domestic product (GDP) of the Republic of Croatia. Economic Research-Ekonomska Istraživanja, 24(4), 143-152. https://doi.org/10.1080/1331677X.2011.11517488

Belwal, R. (2017). Public transportation in Oman: A strategic analysis. Advances in Transportation Studies, 42.

Boughanmi, H., & Khan, M. A. J. I. J. o. E. E., & Policy. (2019). Welfare and distributional effects of the energy subsidy reform in the Gulf Cooperation Council countries: The case of Sultanate of Oman. International Journal of Energy Economics and Policy, 9(1), 228–236. https://doi.org/10.32479/ijeep.7142

Dagher, L., & Hasanov, F. (2023). Oil market shocks and financial instability in Asian countries. International Review of Economics & Finance, 84, 182-195. https://doi.org/10.1016/j.iref.2022.11.008

Demirer, R., Ferrer, R., & Shahzad, S. J. H. (2020). Oil price shocks, global financial markets, and their connectedness. Energy Economics, 88, 104771. https://doi.org/10.1016/j.eneco.2020.104771

El, H. J. I. J. o. E. E., & Policy. (2019). The impact of oil prices on stocks markets: New evidence during and after the Arab Spring in Gulf Cooperation Council economies. International Journal of Energy Economics and Policy, 9(4), 214–223. https://doi.org/10.32479/ijeep.7978

Evans, O. (2024). The investment dynamics in renewable energy transition in Africa: The asymmetric role of oil prices, economic growth, and ICT. International Journal of Energy Sector Management, 18(2), 229-247. https://doi.org/10.1108/IJESM-03-2022-0002

Fasano, U., & Iqbal, Z. (2003). GCC countries: From oil dependence to diversification. International Monetary Fund.

Franks, J. R., Barkbu, B., Blavy, R., Oman, W., & Schoelermann, H. (2018). Economic convergence in the euro area: Coming together or drifting apart? https://doi.org/10.2139/ssrn.3120337

Gazdar, K., Hassan, M. K., Safa, M. F., & Grassa, R. (2019). Oil price volatility, Islamic financial development, and economic growth in Gulf Cooperation Council (GCC) countries. Borsa Istanbul Review, 19(3), 197-206. https://doi.org/10.1016/j.bir.2018.07.005

Ge, Z. (2023). The asymmetric impact of oil price shocks on China stock market: Evidence from quantile-on-quantile regression. The Quarterly Review of Economics and Finance, 89, 120-125. https://doi.org/10.1016/j.qref.2023.03.009

Gull, S., Farid, T., & Maqsood, Z. (2023). The impact of financial development and green financing on economic growth: An ARDL estimation. Sustainable Trends and Business Research, 1(2), 101-114.

Guo, C., Zhang, X., & Iqbal, S. (2024). Does oil price volatility and financial expenditures of the oil industry influence energy generation intensity? Implications for clean energy acquisition. Journal of Cleaner Production, 434, 139907. https://doi.org/10.1016/j.jclepro.2023.139907

Hamdi, H., & Sbia, R. (2013). Dynamic relationships between oil revenues, government spending, and economic growth in an oil-dependent economy. Economic Modelling, 35, 118-125. https://doi.org/10.1016/j.econmod.2013.06.043

Hayat, A., & Tahir, M. (2019). Natural resources volatility and economic growth: Evidence from the resource-rich region.

Hussein, M. A., & Alam, S. (2019). The role of the insurance sector in the development of the economy of Oman. Global Journal of Economics and Business, 6(2), 357. https://doi.org/10.31559/GJEB2019.6.2.8

Ibrahim, O. A., Devesh, S., & Ubaidullah, V. (2017). Implication of attitude of graduate students in Oman towards entrepreneurship: An empirical study. Journal of Global Entrepreneurship Research, 7(1), 8. https://doi.org/10.1186/s40497-017-0066-2

Ibrahim, O. A., Devesh, S., Hassan, H. M., Short, P. S. o. F. B. t. O. P. S., & Economics, L. T. E. i. t. C. o. O. I. J. o. E., & Policy. (2019). Sensitivity of fiscal balances to oil price shocks: Short and long term effects in the context of Oman. International Journal of Energy Economics and Policy, 9(2), 146-155. https://doi.org/10.2139/ssrn.3442812

Iqbal, M., Arif, A. S., Jadoon, A. K., & Rana, A. D. (2023). The impact of debt service and inflation on economic growth in Pakistan: Evidence from ARDL model and approximate Bayesian analysis. Pakistan Journal of Commerce and Social Sciences (PJCSS), 17(2), 263-287.

Jafari, Y., Ismail, M. A., Othman, J., & Mawar, M. Y. (2015). Energy consumption, emissions, and economic growth in Bahrain. Chinese Journal of Population Resources and Environment, 13(4), 297-308. https://doi.org/10.1080/10042857.2015.1078493

Kharusi, S. A., & Ada, M. S. (2018). External debt and economic growth: The case of emerging economy. Journal of Economic Integration, 33(1), 1141-1157. https://doi.org/10.11130/jei.2018.33.1.1141

Kilian, L. (2014). Oil price shocks: Causes and consequences. Annual Review of Resource Economics, 6(1), 133-154. https://doi.org/10.1146/annurev-resource-083013-114701

Lawal, O. G., Alabi, N. O., Ige, S. A., & Ibraheem, R. A. (2016). The nexus between Nigerian government spending and domestic output in the presence of long-term crude oil price shock: A conditional unrestricted equilibrium correction model approach. Open Journal of Statistics, 6, 412-425. https://doi.org/10.4236/ojs.2016.63037

Liu, Z., Ahmad, I., Perveen, Z., & Alvi, S. (2023). Do the globalization and imports of capital goods from EU, US, and China determine the use of renewable energy in developing countries? Carbon Management, 14(1), 1-12. https://doi.org/10.1080/17583004.2023.2165162

Masan, S. S. (2015). Testing Keynesian versus Wagner hypothesis on the linkage between government spending and economic growth in Oman. In Proceedings of the Fourth Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Malaysia Conference).

Najmadin, S. M. (2022). Measuring the impact of oil revenues on Iraq's GDP for the duration (2005-2020). Journal of Kurdistani for Strategic Studies(7). https://doi.org/10.54809/jkss.vi7.198

Natto, S. Y. A. (2024). The impact of fluctuating oil revenues on economic growth: New evidence from Saudi Arabia. International Journal of Energy Economics and Policy, 14(1), 245. https://doi.org/10.32479/ijeep.14527

Okeke, C. C. (2019). Assessment of the impact of oil and non-oil products on Nigeria’s Gross Domestic Product (GDP). Business, Management and Economics Research, 5(5), 71-76. https://doi.org/10.32861/bmer.55.71.76

Ozturk, I., & Al-Mulali, U. (2015). Natural gas consumption and economic growth nexus: Panel data analysis for GCC countries. Renewable and Sustainable Energy Reviews, 51, 998-1003. https://doi.org/10.1016/j.rser.2015.07.005

Quint, D., & Venditti, F. (2023). The influence of OPEC+ on oil prices: A quantitative assessment. https://doi.org/10.5547/01956574.44.4.dqui

Rahmawati, F., & Intan, M. N. (2020). Government spending, gross domestic product, human development index (Evidence from East Java Province). KnE Social Sciences, 774-786. https://doi.org/10.18502/kss.v4i6.6641

Sarker, P. K., Bouri, E., & Marco, C. K. L. (2023). Asymmetric effects of climate policy uncertainty, geopolitical risk, and crude oil prices on clean energy prices. Environmental Science and Pollution Research, 30(6), 15797-15807. https://doi.org/10.1007/s11356-022-23020-w

Sun, Y., Gao, P., Raza, S. A., Shah, N., & Sharif, A. (2023). The asymmetric effects of oil price shocks on the world food prices: Fresh evidence from quantile-on-quantile regression approach. Energy, 270, 126812. https://doi.org/10.1016/j.energy.2023.126812

Sweidan, O. D., & Elbargathi, K. (2023). Economic diversification in Saudi Arabia: Comparing the impact of oil prices, geopolitical risk, and government expenditures. International Economics, 175, 13-24. https://doi.org/10.1016/j.inteco.2023.05.003

Tétreault, M. A. (2016). Gulf Arab states' investment of oil revenues. In Shifting Geo-Economic Power of the Gulf (pp. 25-38). Routledge.

Vázquez-Fariñas, M. (2023). Major economic recessions in the last quarter of the 20th century: The oil crisis (1973-1980). In The Age of Global Economic Crises (pp. 56-81). Routledge. https://doi.org/10.4324/9781003388128-3

Vohra, R. (2017). The impact of oil prices on GCC economies. International Journal of Business and Social Science, 8(2), 7-14.

Wang, K.-H., Su, C.-W., Umar, M., & Lobonţ, O.-R. (2023). Oil price shocks, economic policy uncertainty, and green finance: A case of China. Technological and Economic Development of Economy, 29(2), 500-517. https://doi.org/10.3846/tede.2022.17999

Xu, Z., Mohsin, M., Ullah, K., & Ma, X. (2023). Using econometric and machine learning models to forecast crude oil prices: Insights from economic history. Resources Policy, 83, 103614. https://doi.org/10.1016/j.resourpol.2023.103614

Yildirim, Z., & Arifli, A. (2021). Oil price shocks, exchange rate, and macroeconomic fluctuations in a small oil-exporting economy. Energy, 219, 119527. https://doi.org/10.1016/j.energy.2020.119527

Yu, M., Umair, M., Oskenbayev, Y., & Karabayeva, Z. (2023). Exploring the nexus between monetary uncertainty and volatility in global crude oil: A contemporary approach of regime-switching. Resources Policy, 85, 103886. https://doi.org/10.1016/j.resourpol.2023.103886

Zahlan, R. S. (2016). The making of the modern Gulf States: Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman. Routledge.

Authors

Sarfaraz Javed

Department of Accounting, Faculty of Business, Sohar University, Sohar

https://orcid.org/0000-0002-1992-3484

sarfaraz7216@gmail.com (Primary Contact)

Uvesh Husain

Department of Economics and Business Studies Mazoon College, Muscat

https://orcid.org/0000-0002-8502-8488

Author Biographies

Sarfaraz Javed, Department of Accounting, Faculty of Business, Sohar University, Sohar

Sarfaraz Javed is presently working at Sohar University as a full-time assistant professor. He has completed his education at Aligarh Muslim University, Aligarh, India. Dr Javed is a Laurel Award winner from Aligarh Muslim University. He has published more than 28 research papers and articles and attended more than 10 seminars, conferences and 20+ workshops nationally and internationally. Presently, he is also serving as a Managing Editor of the International Journal of Economics, Business and Human Behaviour, USA.

Uvesh Husain, Department of Economics and Business Studies Mazoon College, Muscat

Dr Uvesh Husain is working as an Associate professor at Mazoon College, Oman. He has more than 18+ years of teaching and research experience. He is equipped with an extraordinary calibre and appreciable academic potencies. He is currently associated with Mazoon College as an Assistant Dean for Academic Affairs, in Muscat, Sultanate of Oman.

Javed, S., & Husain, U. (2024). A VECM Investigation on the Nexus among Government Spending, Oil Revenues, and Economic Growth: Empirical Evidence from the Sultanate of Oman . Innovation Economics Frontiers, 27(2), 1–12. https://doi.org/10.36923/iefrontiers.v27i2.241

Download Citation

This work is licensed under a Creative Commons Attribution 4.0 International License.

Copyright / Open Access Policy: This journal provides immediate free open access and is distributed under the terms and conditions of the Creative Commons Attribution License (CC BY). This is an open-access journal, which means readers can access it freely. Readers may read, download, copy, distribute, print, search, or link to the full texts of the articles for any lawful purpose without seeking prior permission from the publisher or author. This is consistent with the Budapest Open Access Initiative's (BOAI) definition of open access.