over time. This approach may be easily followed in Libya since it was implemented in the past between 2007 and 2010 with only three food items subsidized, flour, rice and semolina. Yet another possibility, given the generous caloric content of the quotas, could be to start reducing the quantities of all food items under the quota system gradually before eliminating subsidies altogether at a later point in time.<sup>26</sup> Energy subsidies save households about 26% of annual expenditure and their elimination would also significantly impact poverty. Table 29 summarizes the aggregate results for analysis of energy subsidies. Household expenditure loss would reach 6% under scenario 1 and 19.9% under scenario 2. These magnitudes are much larger than the ones seen in the case of food subsidies, given the much larger subsidized component underpinning energy prices in Libya today, compared to that in food prices. Subsidy reform would reduce government spending by about 1.9% under scenario 1 and 3.9% under scenario 2 (but this would be a partial impact on the government budget since factors like indirect effects and effects on productive sectors are not incorporated in the analysis, nor are other factors like smuggling). The impact on poverty would be very high with a rise in poverty from 8.5 percent under the international poverty line (or 14.4% under the national line) to 11.2 percent (or 18.2%) under scenario 1 and to 21.7% (or 30.4%) under scenario 2. This rise in poverty would also be accompanied by a rise in inequality of 3.2 percentage points.

**Table 29: Summary of Aggregate Results for the Case of Energy Subsidies**

||**Pre-**<br>**reform**|**Scenario**<br>**1 (30%**<br>**reduction**<br>**in**<br>**subsidies)**|**Scenario 2**<br>**(Elimination**<br>**of subsidies)**|
|---|---|---|---|
|Total real household expenditure (bn LYD)|12.53|11.79|9.29|
|Household expenditure loss in real terms (% of pre-reform)|n.a.|-6|-19.9|
|Total subsidies (bn LYD)|2.49|1.74|0|
|Incidence of subsidies (% tot exp.)|19.9|14.8|0|
|Change in government spending following reform (bn LYD)|n.a.|-1.22|-2.49|
|Savings to the government following reform (% govt. exp.)*|n.a.|1.9|3.9|
|Poverty headcount (%, international poverty line)|8.5|11.2|21.7|
|Poverty headcount (%, national poverty line)|14.4|18.2|30.4|
|Inequality (%, Gini)|30.2|30.8|33.4|

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

Clearly, energy subsidy reform would have a huge impact on the Libyan economy, which calls for gradualism. Full liberalization would imply price increases of between 7 and 10 times the existing prices, in a context where alternatives (such as more efficient production processes for electricity, or public

> 26 Indeed, as already mentioned, the current basket of subsidized products provides more than twice the amount of adult calories intake as recommended by the WHO or FAO. If we consider that the majority of household members in poor households composed of 6-7 individuals are children, this suggests that the amount of calories allocated within the quota system is anywhere between two and three times the calories needed. This would justify a reduction in quotas based on the level of individual calorific needs—quotas could be cut by half, for example. This would be equivalent to reducing food subsidies by half, which would save more than 1% of government spending.

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