Title_  Petroleum Subsidy Reduction and Poverty in Nigeria: A Choice between Maintaining the Subsidy or Providing Infrastructural Services Equivalent to the Deadweight Loss

Author_ Matthew Oladapo Gidigbi, Kehinde Mary Bello

Pages 70-81

Abstract_ Government interventions in energy pricing can either aggravate or alleviate overall poverty, complicating efforts to reduce the burden of subsidies on developing country budgets. This issue is particularly acute for Nigeria, where a large subsidy on Premium Motor Spirit (PMS) consumes a considerable portion of the country’s resources and is subject to large scale corruption and misuse, yet where there continues to be a high rate of poverty incidence and a large indigent population sensitive to any increase in the price of fuel. This study assesses the choice between maintaining the PMS subsidy and redirecting those resources to the additional provision of infrastructure services, proxied by the deadweight loss. Annual data covering the period of 1981-2016 were sourced from the Nigerian National Petroleum Corporation (NNPC) Monthly Financial Operations, the NNPC Annual Statistical Bulletin, the Central Bank of Nigeria Statistical Bulletin and Annual Reports. Vector Autoregression was used to regress poverty incidence on the subsidy and the deadweight value from the subsidy. The study found barely any difference between the contributions of both variables to poverty reduction, with the according coefficients 0.02 and 0.01 percent respectively. Empirically, maintaining the subsidy is the slightly better choice in terms of poverty reduction. This sup- ports the view that the PMS subsidy is important for the indigent due to the susceptibility of such households to income shock. However, greater health investment appears to be an effective intervention, and improving primary health could significantly reduce poverty incidence in the country.

Keywords_ Poverty incidence, Petroleum subsidy, Energy reforms, Education, Health, Efficiency loss