Fuel Subsidy Removal, Inflation and Fiscal Financing in Nigeria

Rahmon A. Folami, Olugboyega A. Oyeranti & Kazeem S. Belau

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Abstract

One of the most controversial economic policy debates in Nigeria has been the phasing out of fuel subsidies because of their impact on inflation, household welfare, and government fiscal sustainability. The subsidy policy was conceived to keep petroleum product prices lower and reduce the cost of living, but it ended up costing governments a lot of money, leading to recurring fiscal deficits and borrowing. The study analysed the long and short-run consequences of fuel subsidy removal on the sustainability of Nigeria’s fiscal policies in relation to inflation rates and fiscal financing. The Autoregressive Distributed Lag (ARDL) modelling approach was used to analyse the annual time-series data from 1990-2023. The empirical results showed that fuel subsidy removal can affect fuel prices in the short run by inducing inflationary pressures, but in the long run, it can lower the fiscal financing needs of the government by decreasing subsidy payments. The findings also indicated that fiscal financing requirements were significantly higher in response to exchange rate depreciation, while the inflationary impact on fiscal financing was relatively low. The study thus suggested that any fiscal savings obtained from subsidy removal should be clearly allocated to productive sectors like infrastructure, energy, health, education, and social protection programmes to ensure inclusive economic growth, enhance household welfare and ensure long-term fiscal stability.

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