Abstract

Nigeria’s extensive fuel subsidy regime has long been a source of fiscal strain and economic distortion. This study examines the macroeconomic impacts and distributional effects of the removal of petroleum subsidies in Nigeria, motivated by the urgent need to alleviate the fiscal burden and curb associated inefficiencies. Key objectives include evaluating implications for macroeconomic stability (growth, inflation, and fiscal balance) and assessing welfare outcomes across different income groups. The analysis employs a computable general equilibrium (CGE) model calibrated to Nigeria’s economy (using a Social Accounting Matrix), supplemented by macro econometric sensitivity checks. The findings indicate that eliminating the fuel subsidy produces a short run spike in inflation and a slight dip in real GDP growth, even as it significantly improves the government’s fiscal position. Over the medium term, the fiscal savings from subsidy removal allow for increased public investment, contributing to improved growth prospects and macroeconomic stability. However, welfare impacts are uneven poorer households bear relatively larger price burdens proportionally, although the richest households lose more of the absolute subsidy benefits. The study recommends targeted compensatory measures, such as cash transfers and transport subsidies for vulnerable groups, to mitigate adverse social effects. These policies, along with transparent reinvestment of subsidy savings, are crucial to ensuring that the reform is both economically beneficial and socially equitable.