Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Mariam Raouf • 2017 IFPRI Egypt Seminar Series: Opportunities of Energy Subsidy Reform

92 views

Published on

IFPRI Egypt Seminar Series provides a platform for all people striving to identify and implement evidence-based policy solutions that sustainably reduce poverty and end hunger and malnutrition. The series is part of the United States Agency for International Development (USAID) funded project called “Evaluating Impact and Building Capacity” (EIBC) that is implemented by IFPRI.

Published in: Government & Nonprofit
  • Be the first to comment

  • Be the first to like this

Mariam Raouf • 2017 IFPRI Egypt Seminar Series: Opportunities of Energy Subsidy Reform

  1. 1. Phasing Out Energy Subsidies as Part of Egypt’s Economic Reform Program Expected Impacts and Policy Implications Mariam Raouf*, Askar Mukashov+, Manfred Wiebelt+, Clemens Breisinger* *International Food Policy Research Institute + Kiel Institute for the World Economy This study was funded by the World Bank
  2. 2. Country context • In order to address long-standing economic challenges, in 2016 the Government of Egypt (GOE) put in place a major economic reform program to restore macroeconomic stability and to promote inclusive growth • The economic reform program included the floatation of the currency, energy subsidy reform (starting in 2014) and the introduction of a value added tax • Egypt also expanded its social safety net, incl. the introduction of a national cash transfer program (in 2015) and the reform/expansion of food subsidies
  3. 3. What does the literature tell us? Expected impacts of energy subsidy cuts: • Positively affect the government budget, trade balance (for net energy importers), energy use efficiency, and investments in alternative energies • Negatively affect economic sectors (through higher input costs) and households in the short-run (through higher prices, labor market effects) Expected impacts of devaluation: • Positively affects the balance of payments, competitiveness of domestic industries and services (incl. tourism) • Negatively affect economic sectors (through higher import costs) and households in the short-run (through higher prices for imported goods, labor market effects) But, these impacts are country specific and depend on, among others: • Macro: Import and export intensities • Sector: Energy intensities • Household: consumption and employment patterns • Policies (public expenditure patterns, labor markets, etc.)
  4. 4. Key questions and how we address them • Key questions addressed in this presentation: • What are the estimated impacts of energy subsidy reform and the devaluation in Egypt on economic sectors and different types of households? • How do these estimated impacts vary under different assumptions, especially regarding short/long term and labor market flexibility • To what extend did the expansion of the social safety net help to mitigate some of the expected negative welfare effects on households? • How can the ongoing reform be complemented to be even more effective? • Methodology: • Literature review • Key database is a 2012/13 SAM estimated by CAPMAS • A dynamic computable general equilibrium model (DCGE) for Egypt, estimating total impact from 2014-2025
  5. 5. Structure of the presentation 1. Flowchart with key transmission channels 2. CGE models: what they can and cannot do 3. Scenarios 4. Selected results 5. Conclusions
  6. 6. Flowchart of CGE model Firms Product Markets Factor Markets Rest of the World Households Government Saving/INV Factor Costs Wages Demand for Intermediate Inputs Sales Revenues Private Consumption Taxes Domestic Private Savings Government Recurrent Expenditure Gov. Savings Investment Expenditure Import Payments Export Receipts Foreign Savings Domestic Demand for Final Goods Transfers
  7. 7. From flowchart to Egypt DCGE model: Key data and assumptions • Based on 2012/13 SAM of CAPMAS • Trade-focused dynamic computable general equilibrium model (DCGE) model à la Dervis et al. (1982) with product differentiation on supply and demand side (IFPRI: Diao, Thurlow 2013). • Scenarios have been discussed and implemented during three CGE training courses with the Ministry of Planning, Monitoring and Administrative Reform • We reflect energy price changes, devaluation and changes in social protection as observed during 2014-2017 in the model • From 2018 to 2022 we assume that all energy prices adjust to world market prices (=phase out of all subsidies), social protection measures remain constant
  8. 8. What can CGE models do and what not? • CGE models do not: • Serve as a projection tool for predicting macroeconomic indicators or economic growth • Replicate exactly the observed development path of a country (macro indicators, GDP by sector, etc.) since such indicators are determined by a mix of thousands of interdependent policies, internal and external events • Include financial markets • CGE models can: • Capture direct and indirect economic effects • Link macroeconomy with households • Isolate and estimate the impacts of specific policies or policy packages such as energy subsidy reform, i.e. compare a situation with and without a specific set of policies or policy packages As a CGE model is best compared to a virtual laboratory of the (Egyptian) economy to test the likely impact of policies under different assumptions and time horizons.
  9. 9. From flowchart to DCGE: Key data and assumptions Results from all simulations are presented in the paper Savings - Investment closures a) Energy subsidy savings used to finance investment exclusively b) Energy subsidy savings finance both public investment and consumption Scenarios i) Short-term time horizon (low labor mobility) ii) Short and long- term time horizons (high labor mobility) i) Short-term time horizon (low labor mobility) ii) Short and long- term time horizons (high labor mobility) Base (reference) Baseline scenario (BASE) Baseline scenario (BASE2) Baseline scenario (BASEa) Baseline scenario (BASE2a) Energy subsidy reform Energy subsidy reform (ESR1) Energy subsidy reform (ESR21) Energy subsidy reform (ESR1a) Energy subsidy reform (ESR21a) Energy subsidy and devaluation reform Energy subsidy and devaluation reform (ESR2) Energy subsidy and devaluation reform (ESR22) Energy subsidy and devaluation reform (ESR2a) Energy subsidy and devaluation reform (ESR22a) Energy subsidy, devaluation, and food subsidy reform Energy, food subsidy, and devaluation reform (ESR3) Energy, food subsidy, and devaluation reform (ESR23) Energy, food subsidy, and devaluation reform (ESR3a) Energy, food subsidy, and devaluation reform (ESR23a) Energy subsidy, devaluation, food subsidy, and cash transfer reform Energy, food subsidy, devaluation, and cash transfer reform (ESR4) Energy, food subsidy, devaluation, and cash transfer reform (ESR24) Energy, food subsidy, devaluation, and cash transfer reform (ESR4a) Energy, food subsidy, devaluation, and cash transfer reform (ESR24a)
  10. 10. Estimated (macro) economic impacts The increase in energy prices and devaluation negatively impacts the macroeconomy in the short-run, but accelerates economic growth in the longer run • High labor mobility reduces the negative impacts and can turn negative impacts into gains, even in the short term • Higher energy prices lead to a redistribution from consumption to investment • Exports increase and imports decrease, mainly driven by the impact of devaluation Short-term (2014-17) Long-term (2014-25) Low labor mobility High labor mobility High labor mobility Absorption -3.0 -0.3 0.3 Private consumption -4.6 -2.6 -4.0 Fixed investment 2.6 3.9 25.0 Government consumption 0.9 10.9 0.0 Exports -1.1 1.0 3.5 Imports -3.0 -1.6 -3.3 GDP at market prices -2.6 0.4 2.0 Net indirect taxes -11.8 -10.4 -11.2 GDP at factor cost -2.9 0.0 1.6
  11. 11. Estimated sector-level results Economic sectors are affected differently from energy subsidy reform and devaluation in the short-term. In the longer-term, more economic sectors are expected to benefit. • Mining and construction are the main sectors that benefit from reforms and higher investments, especially in the short run and with more labor mobility. • For other sectors, the direction of impacts depends mainly on the energy use intensity and import/export orientation • In the long run, aggregate agriculture, industry and service sectors benefit, but with differences across sub-sectors • Sub-sectors that tend to benefit most are: fishery, clothing, leather, wood, paper, chemicals, hotels and restaurants as well as financial and business services. Short-term (2014-17) Long-term (2014-25) Low labor mobility High labor mobility High labor mobility Agriculture -3.0 -0.5 1.5 Industry -2.3 -0.9 2.3 Mining 0.1 0.2 2.6 Manufacturing -5.3 -3.0 -4.4 Agro-processing -2.7 -1.2 -0.2 Other manufacturing -5.7 -3.2 -5.0 Utilities -6.4 -3.5 -7.5 Construction 1.4 2.7 21.5 Services -3.4 0.8 1.0
  12. 12. Estimated household-level impacts Despite these overall gains and positive impacts on the economy, the impact on household consumption in the short and longer-term is projected to be negative • Income effect: Household welfare is negatively affected due to reduced income generation in the private sector, especially for households working in energy and import dependent sectors. Remittances (in non EGP) help households to cope with devaluation • Consumption effect: Households that are more dependent on imports and energy intensive goods tend to be hit harder  Because of these income and consumption effects, rural households are more negatively affected compared to urban households. Short-term (2014-17) Long-term (2014-25) Low labor mobility High labor mobility High labor mobility All households -5.3 -3.3 -7.1 Rural households -5.6 -3.9 -10.1 Poor households -4.0 -2.7 -8.5 Med. inc. households -4.8 -3.3 -9.7 High inc. households -7.5 -5.3 -11.6 Urban households -4.9 -2.6 -3.9 Poor households -7.6 -5.6 -13.2 Med. inc. households -4.3 -2.3 -3.9 High inc. households -4.2 -1.6 0.1
  13. 13. Social protection results The increase in food subsidies and the introduction of the cash transfer program helps mitigate the negative impact on the poor -2.0 -1.5 -1.0 -0.5 0.0 RuralpoorUrbanpoor Without additional social prtection With social protection • The social protection helped to mitigate the negative impacts on poor households, especially in rural areas • The larger impact on rural poor is because the cash transfers were focusing on rural areas during 2014-2017. Average annual change in household welfare during 2014-2017 (%)
  14. 14. Summary and recommendations Policy • Phasing out energy subsidies by 2022 is expected to benefit the economy • However, there are several measures that would likely accelerate the positive impacts of reform • Further improve business climate • Improve labor market flexibility, incl. through education • Targeted social protection measures should be continued and scaled up in parallel to phasing out energy subsidies to mitigate impacts on households Research • Availability of data has substantially improved over the past years and this trend should continue • CGE models are one of several tools in an economist’s toolbox that can help making evidence-based and informed decisions

×