A recent study has revealed that the removal of fuel subsidies, rather than the increase in money supply, is the primary factor driving Nigeria’s skyrocketing inflation rates. Eric Ismail Otaokhia, an economist from Ahmadu Bello University, Zaria, shared these findings in a research paper published in Bullion, a publication by the Central Bank of Nigeria.

In his study titled “Do Fuel Subsidy Shocks Prolong Price Instability in Nigeria?” Otaokhia highlighted the negative impact of fuel subsidy removal on Nigeria’s economy. The Nigerian government made the decision to eliminate fuel subsidies in June of last year, leading to a ripple effect on the country’s cost of living.

Contrary to popular belief, the surge in broad money supply (M3) has not been the main driver of inflation in Nigeria. Otaokhia’s research indicates that while an increase in money supply does not necessarily result in prolonged inflation, the removal of fuel subsidies poses a significant risk to economic stability.

The study revealed a pattern of prolonged inflation following the elimination of fuel subsidies, disrupting price levels and hindering the coordination of fiscal and monetary policies aimed at achieving price stability. On the other hand, an increase in money supply did not lead to a substantial and lasting rise in inflation rates.

Nigeria’s inflation rate rose to 31.70 per cent in February 2024, up from 29.90 per cent in January of the same year. These figures underscore the challenges faced by the country in managing inflation amidst policy changes and economic reforms.

As Nigeria grapples with rising inflation, the study’s findings shed light on the complex interplay between fuel subsidies, money supply, and price stability. It is clear that addressing the issue of fuel subsidies is crucial in maintaining economic balance and ensuring a stable cost of living for Nigerians.