ENERGY SUBSIDY REFORMS AND INFLATION DYNAMICS IN NIGERIA: SOCIO-ECONOMIC IMPACTS AND POLICY IMPLICATIONS

Abstract

This study investigates the relationship between energy subsidy reforms, proxied by the domestic pump price of Premium Motor Spirit (PMS), and inflation in Nigeria over the period 1981 to 2024. Energy subsidies were first introduced in the 1970s as a means of shielding Nigerian consumers from the volatility of global oil prices and of ensuring that energy remained affordable for low-income households. Over the subsequent decades, however, these subsidies evolved into a severe fiscal burden. Official estimates place the annual cost of the subsidy regime at approximately USD 3.9 billion, a figure that rivalled or exceeded allocations to critical social sectors such as health and education. Between 2000 and 2022 alone, cumulative expenditure on fuel subsidies exceeded USD 30 billion. The complete removal of the subsidy in May 2023 under the administration of President Bola Tinubu produced an immediate and sharp increase in the pump price of petrol, which rose from ₦185 per litre to more than ₦1,024 per litre by 2024. Headline inflation accelerated correspondingly, reaching a yearly average of 33 percent in 2024 and peaking at 34.8 percent in December of that year.
The research adopts the Asymmetric Price Transmission (APT) theory as its principal theoretical lens and employs a quantitative time-series design based on the Nonlinear Autoregressive Distributed Lag (NARDL) model. This modelling strategy is particularly well suited to the Nigerian context because it allows positive and negative price shocks to exert differential effects on inflation in both the short run and the long run. The empirical specification controls for three key macroeconomic covariates: real Gross Domestic Product (GDP), general government final consumption expenditure (GEXP), and broad money supply (M2). The results confirm that energy subsidy reforms exert a statistically significant influence on inflation. Positive PMS price shocks — that is, increases in the domestic pump price — are found to possess a strong and persistent inflationary impact. By contrast, negative price shocks (reductions in the pump price) display a statistically insignificant disinflationary effect. The latter finding is consistent with the well-documented “rockets and feathers” pattern, in which retail prices rise swiftly when costs increase but decline only slowly, if at all, when costs fall. Short-run dynamics further reveal that the full inflationary impact of a fuel-price increase is delayed and intensifies over a two-year horizon, constituting a powerful second-round effect that permeates the economy through higher transportation and production costs.
The study concludes that energy-price shocks are the dominant long-run drivers of inflation in Nigeria, superseding the influence of money supply, government expenditure, and real output growth. Although the removal of subsidies is fiscally necessary, the policy is inherently inflationary and economically disruptive in the short to medium term. Policy recommendations therefore emphasise the need for sustained and carefully targeted social safety nets lasting at least twenty-four months, stronger market regulation to ensure that cost reductions are passed through to consumers, and priority investment in supply-side infrastructure — particularly domestic refining capacity and transportation networks — so as to mitigate the cost-push channels that amplify inflationary pressures.