Macroeconomic and Welfare Effects of Alternative Fuel Subsidy Switch and Policy Draw-backs in Nigeria

Abstract: The purpose of this research is to examine the impact of premium motor spirit (PMS) subsidy reform and the deviant price increase on macroeconomic and household responses in Nigeria.  The study employed a computable general equilibrium framework, using the Nigerian input-output table, 2011 as base of analysis. Results showed that subsidy reallocation policy favoured all households. The incidence of 14% PMS mark-up price contributed to the maximum income earnings and expenditure of urban agricultural households by 2.89% each than other households. Consequently, mark-up price contributed more (₦22.35 billion) to social welfare loss in response to total subsidy withdrawal reallocation policy, than on phased-out subsidy reallocation policy (₦20.46 billion). Also, mark-up price favoured most macroeconomic aggregates excluding export and government spending. Thus, fuel subsidy reallocation could effectively curtail price shocks at any rate of subsidy withdrawal, provided the fuel market system is devoid of its pump price excesses.