Analysis of The Effect of Oil Subsidy Withdrawal On the Economic Growth of Nigeria

Abstract

The issue of price deregulation in the downstream oil sector of Nigeria through gradual subsidy withdrawal has generated a heated debate in the country with the government claiming that it will guarantee long term stability in produ� supply and price. This will translate into economic growth and development Others/ especially the organised labour; claim that deregulation will lead to higher product prices/ higher cost of production/ and cut of jobs and will bring about recession in the economy. Therefore/ this thesis employs Vector Auto regression Model using Variance Decomposition Impulse Response Function and Granger Causality tests to assess the effect of price deregulation through gradual subsidy withdrawal in the downstream oil sector of Nigeria on four macroeconomic variables which are/ GDP, Inflation Unemployment and Minimum wage. The research finds evidence that changes in oil price/ as a result of subsidy withdrawal is the major source of variation in GDP, Inflation and Unemploymen� while it is not found to be a significant source of variation in minimum wages. The result also reveals that there is positive impact of oil price changes on GDP and Inflation but negative impact on Unemployment and Minimum wages at the beginning of the observation period which became positive in the later stage of the observation. Finally the Granger causality test indicates unidirectional causality running from Petroleum prices to GDP and from Inflation to Petroleum prices while there is no evidence of causality on Minimum wage and Unemployment The result of the granger causality test is an v indication that the positive effect of changes in petroleum prices on GDP is not as a result of increased economic activity but a result of increased government spending due to increased revenue available to it as a result of subsidy withdrawal. The study suggests that countries wishing to deregulate their downstream oil sectors should evolve ways that will reduce the impact of the policy on cost of production, protect jobs, control inflation and protect real wage. This will mitigate economic recession and promote growth.