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Study Attributes Nigeria’s High Inflation to Fuel Subsidy Removal.

Study Attributes Nigeria's High Inflation to Fuel Subsidy Removal.

Study Reveals Fuel Subsidy Removal as Primary Driver of Nigeria’s Inflation Surge

A recent study conducted by Eric Ismail Otaokhia from the Department of Economics at Ahmadu Bello University, Zaria, and published in the latest edition of Bullion, a publication of the Central Bank of Nigeria (CBN), has highlighted that the removal of fuel subsidies, rather than the surge in money supply, is the principal factor behind Nigeria’s escalating inflation.

Titled “Do Fuel Subsidy Shocks Prolong Price Instability in Nigeria?”, Otaokhia’s study points out that Nigeria is grappling with the consequences of fuel subsidy removal, implemented by the Federal Government in June of the preceding year.

According to the findings, the government’s actions regarding fuel subsidies are counterproductive to the coordination of fiscal and monetary policies aimed at ensuring stable living costs.

While some stakeholders attribute the country’s escalating inflation to the significant increase in broad money supply (M3), which reached a historic high of N95.56 trillion as of February 2024, Otoakhia’s study indicates that the expansion of money supply does not lead to notable and sustained inflationary spikes. This suggests that eliminating fuel subsidies poses a more substantial risk to economic equilibrium.

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The study elaborates, “The results reveal a prolonged increase in inflation rates following a positive shock to the positive semivariance of fuel prices, indicating that fuel subsidy reforms disrupt price levels and impede fiscal-monetary policy coordination to achieve price stability.”

Nigeria’s inflation rate for February surged to 31.70 percent from 29.90 percent in January 2024, underscoring the pressing need for policy interventions to address the underlying causes of inflationary pressures.

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