hypothetical subsidy reform similar to the reform currently being considered by the Tunisian government.

This analysis follows an earlier distributional study of energy subsidies in Tunisia using SUBSIM, a subsidy reform simulation methodology developed by Araar and Verme (2012). This paper, however, makes two contributions to the earlier analysis. First, it updates existing estimates (reported in World Bank [2013]) by including the most recent structure of energy prices and the most recent proposal of subsidy changes considered by the Tunisian government. Second, this analysis includes a detailed simulation of the distributional effects of alternative compensating cash transfer schemes financed from the fiscal savings accruing from the subsidy reform.

To better understand the implications of the reforms, section 2 starts with the evolution of energy subsidies in Tunisia. Section 3 follows with an outline of the current structure of energy subsidies in Tunisia. Section 4 reports the most updated information on the socioeconomic patterns of energy subsidies, that is, how consumption, spending and subsidy benefits of residential energy differ across different socioeconomic groups. Section 5 analyzes the distributive impacts of a simulated subsidy reform that partially removes residential electricity subsidies and fully removes those of diesel, gasoline, and liquefied petroleum gas (LPG). It separates direct and indirect effects and reports both distributional and fiscal effects. The impacts of fiscally neutral policies are estimated using current and new targeting mechanisms to compensate for the immediate negative welfare effects following the hypothesized subsidy reform. Section 6 concludes with a review of the three proposed scenarios and their impacts on poverty and inequalities.

# **2. The Evolution of Energy Subsidies in Tunisia**

Tunisia has a long tradition of generous energy and food subsidies. Subsidies deliberately became the backbone of the new social protection strategies of the 1970s in Tunisia. At that time, advocates justified the universal subsidies because of the large size of the informal sector, the high levels of poverty, and the lack of information systems and registries to identify and target the poor. Energy subsidies have not been reformed in depth since that time. However, in the early 1980s, Tunisia went through a painful experience reforming its food subsidies. In 1983, food subsidies reached 3% of GDP, with reported significant leaks to the nonpoor. Overnight, the government announced the doubling of prices of cereals and their products, including bread, semolina, pasta, and couscous (IMF 2014). The rushed decision took the public by surprise, and after a month of widespread protests, the reform was abandoned. Later, during the Ali regime, the government did not attempt any in-depth reform of the subsidy systems in place since the 1970s, managing instead to maintain the generous system throughout both difficult and prosperous times. During 1991–93, the government launched a gradual reform on food subsidies, favoring foods largely consumed by the poor—such as lower-quality bread—and phasing out subsidies on foods consumed by the rich (IMF 2014). A well-timed awareness campaign coupled with increases in minimum wages and strengthening of other social protection programs helped improve the targeting and fiscal burden of food subsidies (IMF 2014).

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