The federal government’s subsidy reforms, rather than the expansion of money supply, are a major driver behind the persistent core inflation in Nigeria.
This is according to a study by Eric Ismail Otoakhia of the Department of Economics, Faculty of Business School, Ahmadu Bello University, Zaria, which was published in the latest edition of Bullion, a publication of the Central Bank of Nigeria (CBN).
Titled ‘Do Fuel Subsidy Shocks Prolong Price Instability in Nigeria?’, the study delves into the economic repercussions of Nigeria’s approach to handling fuel subsidies.
The paper examined the ripple effects that follow the removal of fuel subsidies on the nation’s price levels from December 1996 to August 2023. By adopting a dynamic autoregressive model, the study aimed to quantify the impacts of these changes on economic stability.
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The findings pointed to the counterproductive effects of subsidy reforms on the cost of living, highlighting the challenges faced by fiscal and monetary policy coordination in ensuring economic stability.
According to the study: “The removal of such subsidies, when accompanied by income redistribution and increased government spending on public investments, inevitably leads to a persistent increase in the price level.
“The findings of this paper have shown that government actions in handling fuel subsidies are counterproductive to fiscal and monetary policy coordination in ensuring a stable cost of living.”
The study, however, noted that fuel subsidies have been a double-edged sword, offering relief against the rising cost of living by stabilizing fuel prices, yet posing sustainability challenges amidst Nigeria’s significant infrastructure needs and escalating debt levels.
Nigeria’s broad money supply (M3) surged to a new historic high of N95.56 trillion as of February 2024 despite the hawkish tightening stance of the Monetary Policy Committee (MPC).
The figure represents a staggering 79.29% surge from the N53.3 trillion recorded in February 2023, showcasing a substantial year-on-year growth of N42.26 trillion.
