Thorny, tedious and complex, the reform of energy subsidies is not easy. It is a reform, admittedly, unpopular, given the inflationary situation that weighs down the economy and undermines the purchasing power of citizens. But it is a necessary reform from an economic point of view, because it allows to instil a dose of economic efficiency and to reduce budgetary expenditure.
It must be said that this reform has been stalled for a long time: the revision of the hydrocarbon subsidy system was put on the table in 2013. Since then, each government has been content to hand over the hot potato to the next and the debate around the question has not has not been followed by real implementation measures. This delay in the implementation of the reform continues to cost the economy dearly and its consequences are felt at the level of the state coffers. With the outbreak of the war in Ukraine which caused an unprecedented surge in the prices of petroleum products, the expenses for offsetting hydrocarbons literally exploded and became unsustainable. According to the report of the 2022 amending finance law, hydrocarbon subsidy expenditure increased by nearly 4.7 billion dinars to 7.6 billion dinars, once morest 2.9 billion initially forecast by the LF 2022 and once morest 3.3 billion dinars in 2021 (an increase of 129%). This colossal increase in the budget allocated to energy compensation is mainly due to the rise in the price of a barrel of oil, the depreciation of the dinar once morest the dollar as well as by the suspension of the fuel price adjustment mechanism which has only been activated 4 times over the past year.
They are the richest who benefit the most
Today, the government is called upon to set foot in the stirrup and accelerate this reform since it is an essential condition for the release of the Tunisian file with the IMF. “We must speed up the activation of this reform, which is the most important, because the expenses for offsetting hydrocarbons are the expenses that weigh the most on the State budget. This reform is essential, because it is expensive for the economy. The subsidy benefits wealthy social strata who are not supposed to benefit from it”, underlined Ferid Belhaj, vice-president of the World Bank for North Africa and the Middle East, on the airwaves of a private radio.
Compensation reform is not only defended by donors but also by several economists and economic actors who plead in favor of economic efficiency: the abolition of the subsidy puts an end to the distortion of the allocation of resources and overconsumption. A note from Itceq dating from 2017 explains, in this sense, that “the subsidy system put in place today favors those who consume the most. It is the wealthiest, industries, hotels, etc. who benefit the most from the system”. The distribution of the beneficiaries of the energy subsidy by standard of living is proof of this. Indeed, households with the lowest incomes benefit from 13% of the subsidies, while households with the highest incomes monopolize up to 29%.
Compensate the poorest
Various experiences around the world have revealed that social acceptance remains the most difficult point of this reform, which will not be without consequences for households. The results of a simulation, carried out by Itceq in 2017, showed that the total elimination of the energy subsidy significantly increases poverty. The poor and lower middle classes would, in this case, be the most affected by this decision. This is why the progressive approach is essential. The study recommends, in this sense, to adopt an energy subsidy elimination policy gradualist which must be accompanied by a reduction or use of electricity consumption.
Abundant in this same direction, the economist Fethi Nouri believes that if the abolition of the hydrocarbon subsidy is today essential to achieve economic efficiency, it is, however, essential to put in place “an energy shield” especially in a situation of inflationary crisis. According to the economist, households and businesses that bear the full brunt of the consequences of exogenous shocks need occasional subsidies that can be distributed in the form of direct cash transfers to households that need them most. Moreover, the various experiences around the world highlight the importance of introducing mitigation measures that should accompany the gradual elimination of the subsidy. “All the studies point to the fact that general price subsidies are regressive and reinforce the perception of a vested right to this subsidy, which must be taken into account in the reform. In other words, general price subsidies result in an increase in the income of the richest social categories that is proportionally greater than for the poorest categories, since the richest consume more of the subsidized good.
The literature insists on the need to pay attention to the negative effects on the poorest, highlighting the fact that many reforms fail prematurely because of fears inspired by their perverse effects on energy consumers”, mentions a World Bank report on reforming energy price subsidies and strengthening social protection.
The following steps
If the abolition of the energy subsidy is an unavoidable step which conditions the release of the IMF loan, what will be the policy adopted by the government, which should be subjected to a real tightrope walker’s exercise? According to the report on the State budget for the year 2023, hydrocarbon subsidy expenditure fell to nearly 5,660 million dinars. This amount was set according to the objectives of the reform program which aims to gradually lift the energy subsidy. The government will therefore regularly use the fuel price adjustment mechanism (which allows a price increase capped at 7%), until real prices are reached. It will also continue to adjust the prices of petroleum products not affected by this same mechanism.
Finally, increases in electricity and natural gas tariffs will be made in the coming period, while taking into account low-income households. For bottled gas, the lifting of compensation will be gradual over four years. Direct cash transfers should be granted to the families who need it the most, through monthly allowances. According to Rachid Ben Daly, Director General of Hydrocarbons at the Ministry of Industry, Energy and Mines, liquefied gas is classified as a commodity, which explains the gradual approach and orientation towards the establishment of the direct cash transfer system.
To give an overview of the weight of the LPG subsidy on the State budget, the official indicated that the distribution of monetary transfers to all Tunisian households allows the State to generate a shortfall equivalent to the one-third of the spending on the bottled gas subsidy. The real price of the gas bottle, currently marketed at the price of 8.8 dinars, being around 35 dinars, the overall cost of subsidies from the bottled gas soared to 1.2 billion dinars in 2022.