Abstract

The study investigates the impact of fuel subsidy removal on inflation trajectory in Nigeria. Monthly time series data on inflation, domestic fuel price (Proxied by pms price), exchange rate, money supply and fiscal policy (proxied by government spending) covering the period 2014M01 to 2023 m 05, were utilized for the study. The period coincided with full fuel subsidy intervention by the fiscal authority without any structural break, policy reforms or partial subsidy removal, thus, the justification for the period selection. Following some econometric diagnostic tests, a traditional Vector Autoregressive (VAR) model was employed to establish the ex-ante and ex-post inflation trajectory in pre and post subsidy removal era in Nigeria. The ex-ante result reveals significant positive response of inflation due to shocks to domestic fuel price in 11 months periods, though, transitory with about two months lag. Using the simulation-scenario analysis, the ex-post results shows the trajectory path of inflation due to subsidy removal which suggests 9 months acceleration in inflation in the future after the month the policy was announced. Also, the study establishes different scenarios of domestic fuel price and how inflation responds to such. Similarly, the study sets inflation threshold across several scenarios developed in this study and found that inflation would begin to decelerate from the month of February 2024 after 9 months of consistent upward trend from June 2023. Finally, we recommend a holistic policy collaboration between the fiscal authority and the CBN in addressing the ‘’known and expected’’ inflationary pressure coming from shocks to domestic fuel price due to subsidy removal. The fiscal authority should also roll out permanent measures to address the welfare implications of subsidy removal in Nigeria, while keeping eyes on inflation trajectory as well.