EXAMINING THE RELATIONSHIP BETWEEN FUEL SUBSIDIES AND GOVERNMENT BUDGET DEFICITS IN NIGERIA
Enemona Negedu Ameji, Ilemona Adofu and Aisha Ogiri
Volume 4 Issue 1
Abstract
The study investigates the impact of fuel subsidies on government budget deficits in Nigeria over the period 2000:Q1–2022:Q4 using annual time series quarterly data. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to estimate the relationship. The results indicate that fuel subsidy payments have a statistically significant positive effect on budget deficits in both the short and long run. In the short run, a 1% increase in subsidies increases the deficit by 0.27% immediately. The long run estimates reveal a proportionally larger impact, with a 1% permanent rise in subsidies expanding the fiscal deficit by 0.69%. This suggests the expansionary effect of subsidies is amplified over time. The findings provide clear empirical evidence that fuel subsidy expenditures have consistently contributed to larger budget deficits and growing public debt in Nigeria. Overall, the time series analysis validates long-standing calls for reforms to the fiscally unsustainable subsidy regime. Gradual, phased reforms are recommended to mitigate short-term impacts. Fiscal rules limiting procyclical spending could also prevent deficits during oil booms. Further reforms will likely reduce budgetary imbalances over the medium to long term. Keywords: Budget Deficits, Fuel Subsidies, Energy Policy, Fiscal Policy, and Time Series Analysis
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