Fuel Subsidy Payments and Food Inflation in Nigeria

Abstract

This study examined the impact of fuel subsidy payments on domestic food price inflation in Nigeria from 2015-2022. Rising and volatile food inflation amid high fuel subsidy expenditures motivated an analysis of their linkage. An Autoregressive Distributed Lag (ARDL) model was estimated using quarterly time series data on fuel subsidy payments, global crude oil prices, agricultural productivity, per capita income, and food inflation. The results provide evidence of a statistically significant negative relationship between fuel subsidies and food inflation, both in the short and long run. The model estimates that reducing fuel subsidies transmits into higher domestic food prices within a quarter itself. Global oil prices positively impact food inflation by raising production and transport costs over time. Agricultural productivity reduces food inflation sustainably by encouraging greater output. Per capita income increases food inflation via higher demand. Overall, the findings align with the theoretical framework of cost-push drivers of food inflation. Gradual subsidy reform is recommended, coupled with investments in agriculture, social transfers for low-income households, economic diversification, and prudent monetary policy to mitigate risks of inflationary shocks.

Keywords: Fuel subsidies, Food inflation, Crude oil prices, Agricultural productivity, ARDL model

JEL Classification: E31, Q18, Q43, C22, O13.

DOI: 10.7176/EJBM/16-3-08

Publication date: April 30^th 2024