Retail energy prices, exchange rate and food price inflation in Nigeria: SVAR Approach

Food prices in Nigeria have experienced significant increases due to rising fuel costs, unstable exchange rates, and socio-political challenges. This study examines the effects of fuel prices and exchange rate changes on food inflation using a Structural Vector Autoregressive (SVAR) model, which provides insights into both immediate and long-term impacts. Monthly data from June 2015 to May 2024 shows a stable long-term relationship between food inflation, energy prices, and exchange rates, making it clear that these factors are key drivers of inflationary trends in Nigeria. Our findings reveal that increases in fuel prices, particularly for petrol and diesel, drive up the cost of food production and transportation, with noticeable impacts appearing within three to six months. Similarly, shifts in exchange rates raise the cost of imported foods, with effects becoming evident in about two to ten months. Recent economic reforms, such as the fuel subsidy removal in 2023, have intensified inflationary pressures, exposing structural weaknesses in Nigeria’s food supply chain, including poor infrastructure and insecurity. The study recommended a direct approach to tackle food inflation, we recommend the creation of a Food Price Stabilization Fund (FPSF), which would help manage extreme price volatility caused by energy price fluctuations and exchange rate changes among others.