FUEL SUBSIDY PAYMENT AND INFLATIONARY PRESSURE IN NIGERIA

With the increasing level of inflation currently plaguing the Nigerian state, this study examines whether fuel subsidy payment can engineer lower level of inflation, as well as providing empirical explanations for the factors responsible for rising prices of goods and services. With regards to the latter, in examining the relationship between fuel subsidy payment and inflationary pressures, the study controlled for the contributory roles of exchange rate and money supply. To achieve this, the study examined the short- and long-run effect of fuel subsidy payment on inflation from 2000 to 2023. The unit root, bounds test and autoregressive distributed lag (ARDL) methods were applied. The study used data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletins, United Nations Conference on Trade and Development (UNCTAD), and Nigeria Extractive Industries Transparency Initiative (NEITI) databases. The ARDL results shows that fuel subsidy payment had positive and insignificant effect on inflation in Nigeria. The study found that exchange rate depreciation and increased money supply are contributors to inflationary pressures in Nigeria over the long run, with their individual long-run impact found to be insignificant. In the short run, the study established that fuel subsidy payments, exchange rate depreciation and increased money supply have significant contributory effects in stoking inflationary pressures in Nigeria. The implication of these findings is that, fuel subsidy payments has not translated into reduced price levels and this can be attributed to the high level of corruption that characterize the subsidy payment scheme. The study recommends the effective monitoring of the subsidy payment scheme and stabilization of the exchange rate in order to achieve the goal of price stability.