# **1. Introduction**

Tunisia’s improvements in monetary poverty have not translated into substantive reductions in disparities and unequal opportunities across individuals and regions. Poverty incidence declined from 35% in 2000 to 15% in 2010 (INS, BAD, and World Bank 2012). Rapid growth rates and generous universal subsidies, especially on energy, food and transport, contributed to that successful poverty reduction, but did not have a similar effect on reducing inequalities. Despite the halving of poverty rates, the Gini coefficient only fell from 0.344 to 0.327 during the same period––a 2 percentage point effect 10 times smaller than that observed for poverty.

Furthermore, drops in inequality where observed _within_ regions while inequality _across_ regions increased, leading to the concentration of extreme poverty in the (typically less well-off) western regions, which increased to 70% in 2010. In the midst of rapid economic growth and significant poverty reduction, the lack of equal economic opportunities may have contributed to the massive protests that ousted Ben Ali from power in Tunisia and ignited political uprisings in other parts of North Africa and the Middle East (MENA).

Subsidies are integral to the story of growth, poverty and disparities in the MENA region, and Tunisia’s tale is no different. IMF (2014) highlights that the generalized price subsidies constitute a critical foundation of the “social compact” in MENA countries, acting as a deliberate cornerstone of social protection in the region. However, those same subsidies can also introduce relative price distortions that typically provoke: overconsumption and underinvestment in subsidized sectors; the crowding out of more productive investments; delays in economic diversification; weaker current accounts and increasing budget deficits; and adverse effects on health and the environment.

In Tunisia too, subsidies constitute a core aspect of its development model (World Bank 2013). Subsidies are pervasively present in critically productive sectors such as agriculture, energy, and tourism. The current social protection model relies on untargeted food and energy subsidies, which have been proven to be unequitable and increasingly expensive. As noted in the following section, subsidies represented some 7% of gross domestic product (GDP) in Tunisia in 2013, but the bottom 40% of the distribution captured only 29 and 34% of energy and food subsidies, respectively (World Bank 2014). This failure to protect the poorest is widely acknowledged in the country, including by the post-revolution government (government of Tunisia 2014), and generally believed to have contributed to past social tensions (World Bank 2013). There are also concerns in terms of governance and transparency. For instance, there are no precise estimates of any hidden subsidies for oil and natural gas generated by the national oil company selling imported crude oil and natural gas at a fraction of international prices to state-owned companies (IMF 2014).

Fiscal and equity concerns have prompted the government of Tunisia to consider changes in its subsidy policy, particularly those regarding energy subsidies. The new proposal forms part of a larger scheme of social protection reform that aims at improving the targeting of public spending. Detailed proposals have not yet been publicly discussed, but the government has announced its intention to partially remove electricity subsidies and completely eliminate other energy subsidies. In this context of uncertainty regarding subsidy reform at a time of a recently elected administration, this paper provides an analysis of the distributive impacts of a 2