ADSU International Journal of Applied Economics, Finance and Management

Does Fuel Subsidy Removal Drive Food Inflation In Nigeria

Abstract

The removal of fuel subsidies in Nigeria has sparked widespread debates regarding its impact on key economic indicators, particularly food inflation. This study empirically investigates the relationship between fuel subsidy removal and food inflation in Nigeria, analyzing the transmission mechanisms through which rising fuel prices affect food costs. Employing annual time series data spanning from 1990 to 2024, the study utilizes the Johansen Co integration test to establish the existence of a long-run equilibrium relationship between fuel prices, transportation costs, exchange rates, agricultural output, and food inflation. Furthermore, a Vector Error Correction Model (VECM) is adopted to capture both the short-run dynamics and long-run causality within the variables. Empirical findings reveal a significant long-run relationship where fuel subsidy removal leads to sustained increases in food prices, primarily through elevated transportation and production costs. In the short run, the adjustment dynamics indicate a relatively slow convergence to equilibrium, underscoring structural inefficiencies in Nigeria’s food supply chain. The study concludes that while subsidy removal may align with fiscal consolidation goals, its inflationary repercussions on food prices necessitate complementary policy interventions. Recommendations include investments in transport infrastructure, diversification of energy sources for logistics, and social safety nets to mitigate adverse welfare effects on vulnerable populations.?