# **5. Simulation of subsidy reforms**

<mark>This section will consider two sets of simulations. The first simulation focuses on the reforms carried out by the Government of Morocco between January and October 2014. This simulation can be considered as an</mark> _<mark>ex-post</mark>_ <mark>evaluation of the 2014 subsidy reforms. These reforms include the elimination of subsidies on gasoline in January 2014, progressive increases in the price of diesel implemented between January and October 2014 and changes to the electricity and water tariffs introduced in August 2014.</mark><sup>7</sup> <mark>More precisely, the progressive increases in the price of diesel included four successive reductions of the unit subsidy from 2.15 MAD per liter in January 2014 to 0.8 MAD in October 2014. The August 2014 reforms of electricity and water included an increase of the number of blocks from four to six for electricity and an increase from four to five blocks for water. In both cases, tariffs have been adjusted and, starting from the third block, the tariffs’ system has changed from Increasing Block Tariffs (IBT) to Volume Differentiated Tariffs (VDT).</mark><sup>8</sup> <mark>Both electricity and water billing include a fixed cost for meter use and management. This cost is not included in the simulations for partially compensating underreporting of utilities’ consumption and estimate quantities consumed from household data that are closer to reality.</mark> <mark>Note that water has no overall subsidies in place. There are cross-subsidies across blocks but the water system as a whole does not require direct transfers from the central budget. Therefore, the simulations carried out for water are meant to estimate the impact of the change in the tariffs’ structure on consumers. Tariffs vary from region to region and it was not possible to obtain water consumption by region while it would be unpractical to report results for all regions. Therefore, the simulations that follow use the tariffs applied to the small centers (“petit centres”) as an illustrative example.</mark> <mark>Table 7 provides the changes in prices and tariff blocks used for the evaluation of the direct effects of these reforms. Unit subsidies have been estimated using data on deficits published by the ONEE. For all simulations and products we use an own price-elasticity of 0.2.</mark> <mark>The second set of simulations is the total elimination of subsidies based on October 2014 prices, the latest prices available at the time of writing. Data in Table 7 provide initial and final prices for these simulations (October, 1</mark><sup>st</sup> <mark>, 2014, unit price and unsubsidized price respectively).</mark>

> 7 The elimination of subsidies on gasoline is based on the unit subsidies estimated by the government at the time of the January 2014 reform. It should be noted that the retail price for gasoline was higher than the import price (see Table 1) and that the difference is mostly explained by taxes on gasoline. Hence, subsidies are estimated net of taxes, which is a common practice (IMF, 2013). Also, the share of taxes in Morocco is lower than in countries like Italy or Germany where this share is well above 50% (OPEC, 2014).

> 8 IBT is when the tariff corresponding to a particular block applies only to the latest block of consumption while tariffs for the previous blocks of consumption apply to the previous blocks. VDT is when the tariffs corresponding to a particular block is applied to all quantities consumed up to that block.

12