Reforming Subsidies in MENA
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Reforming Subsidies in MENA

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Présentation de Paolo Verme, Senior Poverty Specialist, World Bank, à la Conférence Internationale d'Experts sur la mesure et les approches politiques pour améliorer l'équité pour les nouvelles ...

Présentation de Paolo Verme, Senior Poverty Specialist, World Bank, à la Conférence Internationale d'Experts sur la mesure et les approches politiques pour améliorer l'équité pour les nouvelles générations dans la région MENA à Rabat, Maroc du 22 au 23 mai 2012.

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Reforming Subsidies in MENA Reforming Subsidies in MENA Presentation Transcript

  • REFORMING SUBSIDIES IN MENA Paolo Verme World Bank and Department of Economics, University of Torino “International Experts Conference on Measurement and PolicyApproaches to Enhance Equity for the New Generations in MENA” Rabat 22-23 May, 2012
  • SUBSIDIES AS % OF GDP
  • WHAT IS WRONG WITH SUBSIDIES?  Financially unsustainable  Inequitable  Pro-rich  Distort market functioning  Constraint supply  More expensive that social transfers  Increase fiscal risk for governments  Encourage black market => If subsidies are bad why keeping them?
  • WHO IS INTERESTED IN KEEPING SUBSIDIES? Government:  Politically sensitive, Arab spring  Perceived as a basic right in many countries  Buy political consensus Firms:  Reduce production costs  Benefit established monopolies/oligopolies  They can make export-oriented firms more competitive in the short-term Households:  Benefit the poor  Benefit the middle-class  Reduce financial risks for households
  • REFORMING SUBSIDIES – 3 PILLARS Budgetary (Government benefit)  Fiscal savings  More investments  From regressive to progressive expenditure Economic (Firms’ benefit)  Price liberalization  Improved competition  Incentives to domestic production Social (Households benefit)  Increase in social assistance program  Establishment/improvements in targeting mechanisms  Conditional programs
  • THE CASE OF IRAN
  • BACKGROUND Extensive subsidy program, between US$90 billion and US$100 billion per year, 29% of GDP Large number of products, from basic foods (flour, bread, sugar, rice, cooking oil, milk) and petroleum products to electricity, water, and postal and transportation services 70% of subsidies went to the richest 30%. Energy intensity 10 times higher than other countries with a similar population
  • MOTIVATION The stated goal of the subsidy reform is to:  Rejuvenate Irans economy and bring it out of the slump it has been in for so long;  Increase productivity;  More equitable distribution of income. Reduce the Gini index from the historical 0.40-0.45 to 0.35;  Reduce energy intensity in the economy; and…. International sanctions and the budget crisis.
  • PREPARATION State Owned Firm to manage the reform A massive and sophisticated public information program: “The Petroleum Dividend”, improve energy efficiency, people manage the dividend, Demonstrations strongly “discouraged” Little legislative details, government free to adjust Cash benefits deposited in banks prior to reform (80$/person=2 months) with locked bank accounts Universal program, voluntary registration Stockpiling of essential food items in case of shortages Budget savings: 50% to households, 30% to firms, 20% to the budget.
  • IMPLEMENTATION 61 million Iranians (out of a total population of 74 million) registered and the national banks opened 19 million bank accounts for them to receive their cash transfers. Each person is entitled to US$40/month in compensation for the fuel subsidy removal and US$4/month for the removal of bread subsidy. The payments are made on a bimonthly basis to heads of households. Originally, up to 6 members of the family could be claimed All subsidies removed at once with a late night announcement from the President (December 10, 2010) Unlock of bank accounts (December 11, 2010)
  • PRICE EFFECTS Gasoline from 10 US cents to 60-70 US cents/ liter, close to the world price. Gas for home heating and cooking gas usage, 5 folds increase. Water and electricity, 3 folds increase with block tariffs starting at no or low cost for low consumers. Wheat flour 44% increase. Consequently, the price of all four types of commonly consumed breads is rising. CPI inflation rates have accelerated from an average of 10.5 percent in the first 9 months of 2010/11 to 15.8 percent in January 2011, 18 percent in February, and 19.9 percent in March, before slightly declining to 19.7 percent in April 2011.
  • OTHER EFFECTS  Sharp reduction in energy consumption  Sharp increase in use of public transport  Short-term negative effects on production  Poverty reduction (short-term), from 12% to 2% at the $2 per day rate (Djavad Salehi-Isfahani)  Drop in inequality from 0.40 to 0.37 (Djavad Salehi-Isfahani).  Development of the banking sector, millions of new bank accounts  Normalization of markets
  • CONCLUSIONS  Motivation  Budget crisis: Governments reform subsidies when they have no other choice  Energy efficiency/productivity/inequality  Key ingredients:  Strong public debate and public information campaign  Compensations for stakeholders: Government, firms and households  Credible and transparent implementation mechanism  Moderate legislation
  • THE CASE OF ELECTRICITY IN JORDAN
  • BACKGROUND  Electricity system relatively new  Production and distribution publicly managed until 2005  Privatization process 2005-2009  Increase in the number of producers  Increase in the number of suppliers  Total cost = total revenues (2007-2010)
  • 2011-2012 BUDGET CRISIS  Arab spring: disruption of gas supply from Egypt  Electricity producers shift from gas to oil supply  3-4 folds increase in the cost of production of electricity  Surge in current deficit and cumulated debt of the public electricity company
  • ELECTRICITY SUBSIDIES CRISIS Dec. Jan. Jan. Dec. 2012 2010 2011 2011 (Est.) Subsidies (m. JD) 148.7 613.1 1,200 2,200 % govt. exp. 2.6 9.6 17.0 32 % of GDP 0.8 3.1 5.5 10
  • SOME FACTS Electricity prices have sharply increased with the privatization process Electricity tariffs in Jordan are comparable to EU prices Six tariffs blocks, but two blocks capture 88% of consumers First block has very low tariffs but all consumers benefit from these tariffs Rich benefit more from subsidies than the poor Relative expenditure on subsidized products is larger for the poor
  • HOUSEHOLD CONSUMPTION OF ELECTRICITY BY TARIFF BRACKET (KWH) 100 80Household (%) 60 0-160 161-300 301-500 501-750 751-1000 40 20 0 0 200 400 600 800 1000 kWh
  • SIMULATIONS OF TARIFFS INCREASES Poverty headcount increase (%) Revenues Increase Quintiles +30% tariffs +60% tariffs +30% tariffs +60% tariffse=-0.3 1 0.00 0.00 430,838 388,228 2 0.08 0.27 575,581 518,655 3 0.80 2.34 778,808 701,783 4 0.86 2.71 1,025,069 923,689 5 0.00 8.47 1,954,052 1,760,794 Total 0.32 1.45 4,764,348 4,293,149e=-0.6 1 0.00 0.97 388,228 303,007 2 0.27 2.18 518,655 404,804 3 2.34 5.67 701,783 547,733 4 2.71 8.28 923,689 720,928 5 8.47 12.17 1,760,794 1,374,278 Total 1.45 4.02 4,293,149 3,350,751
  • SIMULATIONS OF TARIFFS RESTRUCTURING Current Tariff kWh kWh Structure Reformed Tariff Structure Brackets Tot. Elec. Tot. Elec. Tot. Elec. RevenuesDecile (kWh) Thresholds Cons. Exp. Exp. increase 1 200 17,600,000 651,389 580,950 -70,440 2 231 22,500,000 973,487 1,095,897 122,410 3 258 24,800,000 1,151,561 1,591,071 439,510 4 286 29,600,000 1,450,082 2,359,649 909,567 5 312 34,200,000 1,754,373 3,263,522 1,509,149 6 340 36,900,000 1,988,510 4,092,542 2,104,032 7 377 42,600,000 2,418,612 5,392,826 2,974,214 8 426 48,200,000 2,886,144 6,852,862 3,966,718 9 517 57,100,000 3,641,021 9,010,123 5,369,102 10 Max 80,000,000 6,230,652 13,900,000 7,669,348 Total 394,000,000 23,100,000 48,100,000 25,000,000
  • SIMULATION OF TARIFFS RESTRUCTURING .2 New structure .15 Current structure .1 .05 0 0 500 1000 1500 kWh
  • CONSUMER’S SURPLUS AND DEADWEIGHTLOSS
  • JORDAN FEBRUARY 2012 REFORM From 6 to 12 blocks Increase in tariffs for high consumers  Consumers who use 600kWh or less of electricity per month (89 per cent of households) continued to pay the same tariffs  Consumers above 600 kWh pay gradual increases up to 0.548 JD/kWh (>3,000 kWh/month).
  • CONCLUSIONS  Motivation  Budget crisis: Governments reform subsidies when they have no other choice  Key ingredients:  Restructuring of tariffs  Quickly implemented  Implicit mean price increase  Increase in tariffs only for top consumers