Fuelling Hunger?
Fuelling Hunger?
A new paper on the relationship between fuel price hikes and food prices in Nigeria
Nigeria has been in a decades-long debate about fuel subsidies - and the fiscal and welfare costs. I have argued that Nigerians may think of fuel subsidies as public goods, especially when there has been no investment in the delivery of other forms of public goods. One side of the debate argues that fuel subsidies cost the state too much and affect the ability to invest in other things like education and healthcare. However, others have argued that ending fuel subsidies and people paying high prices have costs that go beyond the pump. The argument goes that high fuel prices cause higher prices for other things like transportation and food, which affect poor people in ways that should not be neglected.
The National Bureau of Statistics in 2019 reported that Nigerians spend over half of their household income on food. So, if fuel price hikes do indeed worsen food inflation, then it can have devastating effects given the high rate of poverty in the country. Since the government appeared to have ended the fuel subsidy regime in May, there has been a scramble to find ways to “cushion the effect on the masses”. What is clear is that providing relief from economic shocks needs to be knowledge-driven and designed with the right incentives to achieve the desired outcome. But what we have seen is that the government's approach has been all over the place, and there is still no evidence of a coherent policy. The first step to designing a good policy in this case is to understand what happens in the economy and different welfare indicators when fuel prices go up.
So, I was glad that the economist Nonso Obikili found it worthwhile to investigate the link between fuel prices and food inflation.
The main conclusion from Dr Obikili's paper is that changes in fuel prices in Nigeria have a statistically significant but short-term impact on food price inflation, but the effect is not permanent. Here is a summary:
National Level:
There is a positive short-term association between changes in fuel prices and food inflation. A shock to fuel prices leads to higher food inflation for about 2 months before correcting.
The effect on food inflation is temporary - fuel price shocks do not have a permanent impact.
There is some evidence of an initial overreaction and then a correction in food inflation in response to fuel price changes.
State Level:
A lagged positive effect of monthly change in local fuel prices on monthly change in local food prices.
Immediate significant positive effect of a large (>5%) monthly increase in local fuel prices on local food inflation.
Of course, there are some caveats by Dr. Obikili on how to interpret these results:
The first is that it does not model a general relationship between changes in fuel prices and food prices but examines statistical associations between the two. This implies that if the statistical relationship changes then the results may not be applicable. The results may also not be applicable for very large increases in fuel prices beyond those witnessed in the data used.
A second limitation, which is in some part due to the results being a simple test of statistical association, is that it does not incorporate all other government actions to manage food prices during periods of fuel prices increases. This may change the observed association between fuel prices and food prices. On a theoretical basis it may change the scale of the positive effects through transport costs and the negative effects through income-driven demand reduction.
I have some general thoughts here. The first and most obvious is that studies like this are most welcome and the government should be sponsoring a few more so that policy decisions are driven by knowledge and evidence. Secondly, if the findings of the study hold true, then a cash transfer program to temporarily smoothen the household consumption of the most vulnerable would have been the most effective 'palliative' from the government.
Instead, we made a mess of the whole thing by giving state governors money. Thirdly, (again this is dependent on whether the findings of the paper hold under varying conditions), responding to shocks like fuel price hikes by permanent income shocks like minimum wage increases may have more fiscal costs than benefits in the long run, and are also possibly inflationary. Lastly, my personal impression from the paper's addendum is that we need to pay more attention to trade policies and agricultural productivity policies if we are serious about tackling food inflation.