|Simulation 2:<br>current targeting|TND 817.51<br>millimes|TND 264|3.1 million|13.83|35.46|
|---|---|---|---|---|---|
|Simulation 3:<br>perfect targeting|TND 817.51<br>millimes|TND 420|1.9 million|5.25|34.22|

_Source:_ WB staff calculations using SUBSIM.

These simulations indicate that the complete use of fiscal savings from the energy reform would not reduce post-reform poverty levels by any significant amount with the current targeting mechanism or via universally benefiting the entire population (table 13, simulations 2 and 1, respectively).The fiscal savings accruing from a universal transfer reform (simulation 2) would bring down post-reform poverty levels by 2.5 percentage points—or some 272,000 persons. Using the current health card targeting mechanism (simulation 1) would reduce post-reform poverty by an additional percentage point, to 13.83 percent of the population. A perfect and costless targeting of fiscal savings (simulation 3) would lead to a post-reform poverty incidence reduction of 12.5 percentage points, up to 5.25% of the population. Despite the slash in poverty incidence, the fiscal resources freed from the current level of energy subsidies would not be sufficient to completely eradicate poverty in Tunisia. Neither would it be sufficient to make a notable dent on consumption inequality as measured by the Gini coefficient. The three compensation initiatives would fully reverse the initial increase in inequality following the subsidy reforms. However, the reduction in inequality would by no means be large. The best results, accruing from the perfect targeting scenario, indicate gains of 3 percentage points in the Gini coefficient with respect to the post-reform Gini. In relative terms, the compensation mechanisms simulated after the reform would improve inequality by less than 10%.<sup>10</sup>

# **6. Conclusion**

Energy subsidies have played and continue to play a pivotal role in Tunisian social development policy making. Their fiscal implications are substantial, consuming about 5% of the country’s GDP, and, as this analysis shows, their distributional impacts are also considerable. But subsidies have also played an important role in appeasing social tensions. An overhaul of energy subsidies in Tunisia must strike a very delicate balance to improve fiscal and equity considerations without increasing social tensions. The strategy followed so far has been one of progressive reduction of subsidies coupled with an expansion of the non-subsidy elements of social protection. This paper presents an analysis of the fiscal and distributive consequences of the still vaguely defined next step in that strategy: a uniform increase of 10% of electricity prices; a total removal of LPG, diesel, and gasoline subsidies; and alternative improvements in the current cash transfer system, which were announced at the end of 2014.

A review of Tunisia’s residential energy subsidies helps to understand the implications of the country’s current strategy. In Tunisia, energy transfers are through a system of universal energy sources plus a complex multiblock price schedule for electricity that mixes progressive and regressive features. All in all, the energy price structure results in a regressive and pro-rich 10 In effect, the 3 percentage point reduction in the Gini coefficient in simulation 3 implies an 8% reduction in the post-reform Gini. The reductions in Gini from the other two simulations render even smaller relative improvements.