Assessing the compensation and reinvestment plans for fuel subsidy rationalization in Nigeria: A dynamic computable general equilibrium approach

Abstract

Ending subsidies on fossil fuels is vital for tackling the climate crises and promoting a transition to cleaner energy systems. However, ensuring a successful subsidy reform requires a detailed understanding of its potential impacts and measures to ameliorate those impacts. This study employs a dynamic computable general equilibrium model to examine the impact of fuel subsidy rationalization in Nigeria and evaluate the proposed compensation and reinvestment plans of the government in minimizing welfare losses and reviving economic activities. We found that a complete, one-off removal of fuel subsidies results in severe economic headwinds and significant welfare losses. While the proposed compensation and reinvestment plans of the government brought positive welfare gains and undid many economic headwinds, it was not the optimal policy pathway in terms of resource allocation. Our result showed that a balanced allocation of resources between compensation and reinvestment that implements three-quarters of the total expenditure in 2024 and the remaining one-quarter in 2025 offered better outcomes. We recommend practical measures to implement the proposed plan to minimize fallouts and maximize economic, social, and environmental gains.