Study Suggests Fuel Subsidy Reforms Drive Persistent Inflation in Nigeria
A recent study by Eric Ismail Otoakhia from Ahmadu Bello University, Zaria, published in the Central Bank of Nigeria’s Bullion, suggests that the federal government’s subsidy reforms, rather than the expansion of money supply, are a major driver behind the persistent core inflation in Nigeria.
The study, titled ‘Do Fuel Subsidy Shocks Prolong Price Instability in Nigeria?’, examines the economic repercussions of Nigeria’s approach to fuel subsidies. It highlights the counterproductive effects of subsidy reforms on the cost of living, emphasizing the challenges faced by fiscal and monetary policy coordination in ensuring economic stability.
According to the study, the removal of fuel subsidies, when accompanied by income redistribution and increased government spending on public investments, leads to a persistent increase in the price level. This, in turn, disrupts price levels and impedes fiscal-monetary policy coordination to achieve price stability.
The research also notes that while fuel subsidies offer relief against the rising cost of living by stabilizing fuel prices, they pose sustainability challenges amidst Nigeria’s significant infrastructure needs and escalating debt levels.
The study suggests exploring alternative subsidy approaches, such as agricultural subsidies, to promote food security and support the agricultural sector. It warns against depending solely on income transfers as a solution to the adverse effects of subsidy removal, given the government’s fiscal constraints.
In proposing a novel approach to manage the economic implications of subsidy removal, the study advocates for funding subsidies through direct taxes on private, non-commercial vehicles. This strategy could expand the government’s tax revenue and correct the market failures associated with prolonged energy subsidies.
Nairametrics
