The double-exposure trap : oil price shocks, exchange rate asymmetry and bank credit in Nigerian manufacturing output

Abstract

Nigeria's manufacturing sector has contracted from 21.10% of GDP in 1983 to 13.51% in 2024, a structural decline that repeated Central Bank interventions have failed to reverse. In the scorching economic landscape of Nigeria, a Sahara of oil dependence rather than a Maldives of diversified prosperity, manufacturing has languished amid recurrent shocks. This study aims to identify, measure, and formally test the asymmetric transmission of oil price shocks, exchange rate movements, and bank credit on Nigerian manufacturing output. It unveils the Double-Exposure Trap: a vicious cycle where plunging oil prices erode fiscal revenues and banking liquidity, while naira depreciations trigger crippling input cost inflation and balance-sheet deterioration for import-reliant factories. Employing a novel joint asymmetric NARDL decomposition of both oil price and exchange rate shocks alongside manufacturing-specific bank credit in a single cointegrating equation in 1981–2024 data, the study formally rejects symmetry at the 1% level. Cointegration is robustly confirmed by two independent criteria, the PSS bounds test and a highly significant error correction term, with roughly one-third of any disequilibrium corrected annually, confirming a stable long-run relationship. Results reveal dramatic asymmetries: naira depreciation causes damage to manufacturing output twenty-five times larger than the gains generated by equivalent appreciation, validating the trap's compounding channels. Bank credit emerges as a powerful super-proportional multiplier, with output returns exceeding unity, confirming that targeted credit expansion in a chronically credit-constrained sector releases idle productive capacity. The findings are grounded in five theoretical frameworks, Financial Accelerator, Financial Intermediation, Asymmetric Information, Financial Fragility and Resource Curse Theory, each predicting the directional asymmetries confirmed by the data. Applied to the 2022–2023 Naira unification episode, the model forecasts a 16.3% long-run contraction in manufacturing output, underscoring the hidden manufacturing cost of exchange rate decisions and the urgent need for countercyclical credit facilities and asymmetric exchange rate buffers.