**Table 17: The impact of the electricity subsidy reform on the government expenditures correcting** **<u>for measures, mln. JD</u>**

||Pre-Reform|Scenario 1|**Post-R**<br>Scen<br>flat|**eform**<br>ario 2<br>prog.|Scenario 3|**Change**<br>**redu**<br>**expe**<br>Scenario 1|**(negati**<br>**ction in**<br>**nditures**<br>Scen<br>flat|**ve value**<br>**govern**<br>**or savi**<br>ario 2<br>prog.|**s mean**<br>**ment**<br>**ngs)**<br>Scenario 3|
|---|---|---|---|---|---|---|---|---|---|
|Subsidies|477|473|3|86|315|-4|-473|-391|-162|
|Transfers *|0|1|316|217|70|1|316|217|70|
|Total budget|477|473|319|303|385|-3|-158|-174|-92|

Source: Authors’ calculations based on extrapolated HEIS 2010 data. <u>Notes: Population quintiles based on consumption per capita before the reform. * Universal transfers assumed.</u>

# **4. Simulation of Subsidies Reform, Indirect Impact**

## **4.1 Petroleum products**

We now turn to the simulation of indirect effects of the rise in petroleum product prices combining a Jordanian Input-Output (I/O) table with HIES data. The baseline data for the producer price shocks are in table 18 below. The Jordan I/O table (2010) does not have disaggregated-by-type petroleum product statistics. Therefore, to capture the likely impact on economy-wide prices (of petroleum product subsidy removal), we use disaggregated production figures from the state-owned refinery as expectation proxy of the industry-wide petroleum-product mix. The gasoline shock to the petroleum sector is a price increase of 2.9 percent, which is equal to the change in price in gasoline (from table 6 above) multiplied by gasoline’s expected share (20.6 percent) in industry’s total petroleum product usage. Similarly, the diesel shock – at 10.5 percent – is equal to the change in price in diesel multiplied by diesel’s expected share in industry’s fuel mix .<sup>9</sup>

**<u>Table 18: Expected producer price increase in the Jordan fuel sector</u>**

||Price increase, pre- to<br>post-reform period (%,|Expected share in total<br>industry fuel|Expected magnitude of<br>producer price increase|
|---|---|---|---|
|Petroleum Product|fromtable 6)|consumption(%)|in fuelsector|
|Gasoline|14|21|2.9|
|Diesel|33|32|10.5|
|Source: Araaret al. (2013),|Jordan PetroleumCo.LTD|. annual report2012, autho|rs’calculations.|

Results of the simulations (table 19) show that the relation between direct and indirect effects varies significantly across products and across quintiles. Indirect effects are approximately 77 percent of the total for diesel but only 14 percent for gasoline.<sup>10</sup> The difference is directly attributable to household consumption patterns. Even though the diesel price increase is over 3 times larger than the gasoline price increase and economy-wide prices rise more after the diesel subsidy is eliminated, households purchase so

> 9 The indirect impacts on households of these two producer price changes are calculated separately and independently and holding all other controlled producer prices – including those of the other petroleum products – fixed. Industry is not expected to use significant amounts of LPG or kerosene.

> 10 The most accurate estimates for direct effects remain those provided in the previous section and we will disregard estimates of direct effects using I/O data. What is of interest here is the relative share of indirect effects over total effects.

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