Effects of Fuel Subsidy Removal on Inflation rate in Nigeria

Abstract

This study investigated the effects of fuel subsidy removal on inflation rate in Nigeria using monthly data from January 2020 to March 2024. The research employed the Autoregressive Distributed Lag (ARDL) model to analysed relationships between key economic variables, testing two primary hypotheses regarding fuel-related policy interventions on macroeconomic indicators through rigorous econometric testing and cointegration techniques. The investigation provided evidence rejecting both null hypotheses. For fuel price-inflation nexus, long-run ARDL results reveal a statistically significant positive relationship, at 1% significance level (coefficient: 0.002434, p-value: 0.0004), indicating a one-unit fuel price increase associates with 0.002434 unit inflation increase. Short-run dynamics demonstrate complex adjustment mechanisms, including initial negative effects at
first lag (coefficient: -0.00022, p-value: 0.0032), suggesting immediate economic adjustments. The results have significant policy implications, suggesting need for gradual subsidy removal approach to manage both inflationary pressures and growth stimulation effectively. The study recommended that policymakers should design implementation strategies that harness the positive growth effects identified in the study while implementing complementary measures to mitigate the long-run inflationary consequences.