total elimination of subsidies would be significantly higher, at 17.7 percentage points, resulting in a postreform poverty rate of over 36%. These magnitudes are commensurate with the magnitude of price adjustments that would be needed under either reform scenario. The products that would explain most of the rise in poverty under the two scenarios are gasoline and electricity. The rise in poverty would also be accompanied under scenario 2 by a rise in inequality, estimated at 3.1 percentage points. These estimates are among the highest when compared with those for other countries in the region such as Morocco, Tunisia, Egypt or Jordan, in part because of the higher level of subsidies in Libya compared to these countries.

**Table 25: Impact of Energy Subsidy Reform on Poverty (Headcount index)**

||Intern<br>Poverty<br>level|ational Poverty<br>Scenario 1<br>Poverty<br>change|Line<br>Scenario 2<br>Poverty<br>change|Nati<br>Poverty<br>level|onal Poverty L<br>Scenario 1<br>Poverty<br>change|ine<br>Scenario 2<br>Poverty<br>change|
|---|---|---|---|---|---|---|
|Pre reform|8.475|.|.|14.44|.|.|
|Gasoline|9.306|0.831|4.010|16.16|1.72|6.77|
|Diesel|8.509|0.034|0.115|14.49|0.05|0.22|
|Electricity|9.687|1.212|5.254|15.97|1.53|6.47|
|LPG|8.674|0.199|0.842|14.83|0.39|1.49|
|Kerosene|8.502|0.027|0.055|14.47|0.03|0.06|
|Post reform|11.156|2.681|13.195|18.46|4.02|17.67|

Source: Libyan Household Consumption Survey 2007/8; Libyan authorities; and Bank staff calculations.

A number of factors can help attenuate the above negative impact of energy subsidy reform. A gradual and sequenced approach to energy subsidy reform, across products and across time, would help make room for simultaneously working on improving public service delivery, so that households and productive sectors are able to gradually adjust to the new economic realities. Besides, the poverty impact of energy subsidy reform measured above is purely monetary, and thus does not take into consideration inevitable substitution patterns that would result when a reform is introduced; these substitutions would be greatly facilitated if the reform were gradual and accompanied by complementary measures to provide other options for citizens in terms of services (such as more efficient electricity production or the introduction of public transportation networks).

The impact of subsidy reform could also be attenuated through cash transfers. A transfer of LYD 243 per capita per year targeted to the first quintile would be sufficient to restore poverty to the pre-reform level of 8.5 percent under the scenario of full subsidy elimination and using the international poverty line of 1.25 USD per person per day (Figure 8). This targeted transfer system would cost the government LYD 471 million per year. Alternatively, because poverty would jump by almost 18 percentage points if all energy subsidies were eliminated, the government may decide to target the transfers to the first two quintiles. The per-capita amount required to bring poverty back to 8.5 percent in this case would be LYD 245, costing the government LYD 845 million per year. Yet another possibility to restore poverty to the pre-reform level would be a universal transfer of LYD 243 per capita per year, costing the government LYD 1.5 billion annually. Given that direct savings from the price increases would amount to LYD 2.5 billion (Table 24), the net gains to the budget from full subsidy elimination _and_ cash compensation to the 28