MACROECONOMIC IMPLICATIONS OF FUEL SUBSIDY REMOVAL: EVIDENCE FROM THE DOLLAR EXCHANGE RATE AND CONSUMER PRICES IN NIGERIA

This study explores the macroeconomic implications of fuel subsidy removal on Nigeria’s exchange rate and inflation dynamics. Employing monthly time-series data spanning from January 2018 to December 2024, the analysis utilizes the Autoregressive Distributed Lag (ARDL) and Vector Error Correction Model (VECM) approaches to examine both short-run and long-run relationships among key macroeconomic indicators. The variables considered include the official exchange rate (USD/NGN), consumer price index (CPI), global crude oil prices, government spending (GS), interest rates, and a policy dummy capturing the period of fuel subsidy removal. The empirical findings indicate that the removal of fuel subsidies led to a statistically significant depreciation of the naira and a persistent increase in consumer price levels. These outcomes are attributed to cost-push inflation and increased foreign exchange demand, reflecting the inflationary pass-through from higher domestic fuel prices. The results underscore the importance of coordinated policy responses. While fuel subsidy removal is a necessary step toward fiscal consolidation and efficient resource allocation, its macroeconomic consequences necessitate targeted social protection measures and macroeconomic stabilization strategies. The study recommends policies that enhance domestic refining capacity, stabilize the exchange rate, and support vulnerable households to cushion the adverse effects of energy price liberalization.