An Assessment of the impact of Petroleum Subsidy on Consumer Price Index in Nigeria

Innocent Okwanya, Ogbu Moses and Job Migap Pristine

The partial removal of fuel subsidy in Nigeria in 2012 has generated a lot of argument in the Nigeria literature. A major policy concern on fuel subsidy reform is its adverse effects on the poor. This paper evaluates the impact of fuel subsidy reforms on consumer price index (CPI) since 1986. The study uses the co-integration and error correction model (ECM) to establish the relationship between fuel subsidy removal and CPI using data of the pump price of premium motor spirit (PMS) and CPI from 1986 to 2014. The study found that although the change in the fuel price does have short term impact on CPI, the short run impact is 12 percent. Only 0.2 percent of this distortion in CPI caused by such change is corrected within a year. This implies that fuel subsidy reforms will not lower the real household income or increase poverty, but could have permanent impact on the economy. The study opined that gradual removal of fuel subsidy is found to have little impact on the price of retail goods. Fuel subsidy reforms should be embarked upon and the fiscal savings invested in ventures that will increase the income and welfare of poor households.