The Role of Fossil Fuel Subsidy Reforms in the Nexus Between Fossil Fuel Consumption and Economic Growth in Nigeria: Evidence fromTwo-Stage Least Squares (2SLS) and Granger Causality Approaches

Abstract

The fossil fuel reformes has become a global imperative strategy to achieve the modern economic growth objectives in the face of rapid changes in industrial revolution, and socio-economic challenges, with focus to the developing economies. This motivated the empirically analysis of the role of fossil fuel subsidy in the nexus between fossil fuel consumption and economic growth in Nigeria from 1973 to 2024. This Study employs a Two stage least squares (2SLS) to resolve the endogeneity problem in the previous studies and also estimate ordinary least squares and Granger causality as a robustness check for the existing studies. Findings reveal that a 1% increase in PMS fuel consumption through the instrumental variables during the partial fuel subsidy removal has increased economic growth by 37.22% whereas, a 1% increase in PMS fuel consumption through the instrumental variables during the full fuel subsidy removal has decreased the economic growth by 0.34% in this study. This study recommends emphasize on premium motor spirit price, exchange rate, number of refineries, and real GDP per capita in the pursuit of fuel subsidy reform to directly and indirectly promotes fuel consumption and economic growth by the Nigeria energy stakeholders, especially the government.