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FUEL SUBSIDY REMOVAL IN NIGERIA: An Analysis of Dynamic General Equilibrium Effects

FUEL SUBSIDY REMOVAL IN NIGERIA: An Analysis of Dynamic General Equilibrium Effects

 

Abstract: Global market conditions and unsustainable fiscal deficits show that Nigeria’s government can no longer sustain a high level of fuel subsidy. These partly informed the policy shift towards the removal of fuel subsidy. This shift generated tension in both the fiscal sector and social
environment due to uncertainties about the economic and welfare cost of the policy. Using a recursive dynamic computable general equilibrium
framework (CGE) consistent with the peculiarities of the Nigerian economy, this paper analyses the potential benefit-loss tradeoffs associated with domestic response to a 60 per cent increase in the
international price of petroleum: the first option is where the increase was not passed on to domestic consumers, implying a corresponding
increase in domestic fuel subsidy; second, is a gradual removal of the fuel subsidy; and finally, a sudden and complete removal of the fuel subsidy. It was found that subsidizing domestic fuel consumption brings about reductions in GDP, government revenue, investment, aggregate
exports and imports, and households income by 4.3 per cent, 2 per cent, 27.2 per cent, 2.7 per cent, 9.6 per cent, and 5 per cent respectively.
However, the negative impacts on the macro economy are less with a gradual reduction of fuel subsidy, and smallest with a one-shot complete removal of fuel subsidy. It was observed that rural poor households are the worst hit in all the case scenarios, and as such any intervention by
government should ensure that any money saved as a result of the policy reform be devoted to activities that would strongly benefit the poor.

JEL classification: H31, E20, E13

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