An Assessment of the Direct Welfare Impact of Fuel Subsidy Reform in Nigeria

Using the Household Expenditure Survey of 2010, this paper measures the direct welfare impact of higher fuel prices on different socio-economic groups in Nigeria. The analysis is carried out by segregating households into 3 different income groups and the welfare impact due to subsidy cut is measured. The results show that the reduction in welfare due to higher price is larger for the middle 40% compared to the top and the bottom 20%. This is due to the fact that the middle income group has a larger budget share on fuel. Fuel subsidies are found to be costly in protecting poor households due to substantial leakage of benefits to higher income group but the welfare loss for the lower income group due to subsidy cut is somewhat higher due to the smaller size of their income. Thus, while subsidy reform is undeniably necessary, our findings suggest that it must be carried out cautiously. Contrary to commonly held views, our study suggests that the reform must be accompanied with strategies and programs to mitigate the welfare loss, not only for the lower income but also the middle income group.