The Dual Burden of Reform: Analysing the Impact of Fuel Subsidy Removal on Household Welfare and Inflation in Nigeria

Abstract: This study investigates the dual impact of Nigeria’s 2023 fuel subsidy removal on household welfare and inflation, with implications for green investment. Using monthly time-series data from 2019 to 2024 and a Vector Error Correction Model (VECM), the analysis tests two null hypotheses: that subsidy removal has no significant effect on (1) household welfare and (2) inflation. The results reject both hypotheses, revealing that subsidy removal acts as a strong costpush inflationary shock, which in turn drives a significant and persistent decline in household consumption expenditure (welfare proxy). Cointegration confirms a long-run equilibrium among subsidy policy, inflation, exchange rates, and welfare. The inflationary pass-through is amplified by exchange rate depreciation, while welfare losses are regressive, disproportionately affecting low-income households. The study concludes that without robust compensatory mechanisms, including targeted social transfers, inflation control policies, and transparent reinvestment of fiscal savings into green infrastructure, the short-term social costs of subsidy reform may undermine its long-term fiscal and sustainability objectives. Recommendations are anchored in an integrated policy framework that reconciles macroeconomic efficiency with household resilience.