large industrial bakeries may use subsidized flour, but overall these effects are expected to be small. Household businesses such as small street restaurants and cafés and small bakeries run by households are captured in household consumption and therefore already accounted for in the direct effects. Instead, subsidized sugar, which is used as an intermediary product by the food industry, will be considered as well as diesel, which is used by commercial transport. In addition, we will consider the elimination of subsidies on electricity, as this sector functions as inputs to other sectors. Recall that water is not considered as a sector that is subsidized by the state and will not be considered here.

With input-output tables, price shocks can only be applied to sectors rather than individual products. For goods with linear pricing (gasoline and diesel), the price shock for the sector (petroleum) is estimated as an average of the price shocks of gasoline and diesel resulting from the elimination of subsidies. For goods with non-linear pricing (electricity and water), the price shock is estimated as the increase in average tariffs weighted by the number of households consuming in each block. Table 14 describes the price increases considered for the simulations.

**Table 14 – Baseline information - Simulation of Subsidies Removal (Indirect Effects)**

||**Unit**|**Subsidi**<br>**zed unit**<br>**price**|**Unsubsidize**<br>**d unit price**|**Shar**<br>**e in**<br>**I/O**<br>**secto**<br>**r(%)**|**Price**<br>**increas**<br>**e (%)**|**HBS**<br>**Sector**|**Corresponding**<br>**I/O Sector**|
|---|---|---|---|---|---|---|---|
|Diesel<br>Sugar|L<br>Kg|9.89<br>5.82|10.69<br>8.67|38.6<br>1.6|3.12<br>0.78|Petroleum<br>Food|D23-Oil Refining<br>A001-2<br>Agriculture|
|Electricity|kWh|1.04|1.56|100|49.95|Electricity|E001 Electric<br>energy|

Source: Estimated from baseline prices and household data.

Note that it is not possible to compare these simulations with the simulations on direct effects provided before for various reasons. The simulations in this section do not cover all products simulated in the direct effects section; they include both direct and indirect effects; they consider a joint shock to different sectors; the impact is estimated on consumption items that are more aggregated than individual products as in the direct effects section and, for goods like water and electricity, we cannot simulate price shocks for individual tariffs’ blocks with an I/O table. However, it is possible to gauge the relative importance of indirect effects if simulations are run one at a time.

Consider diesel for example. This product is mostly consumed by commercial transport and only moderately by households. We should therefore expect shocks to this product to have large indirect effects and small direct effects. The elimination of subsidies on diesel would result in a price increase to the petroleum sector of 3.12% and this increase has indirect effects that account for 87.8% of the total effects (Table 15). As predicted, indirect effects are much greater than direct effects for a product like diesel. If we consider instead a product that is mostly consumed by households such as sugar and we repeat the exercise, we find direct effects for only 2% of the total (recall also that industries using sugar as a production input have to reimburse the equivalent of the government subsidy).

The ratio of direct and indirect welfare effects changes very significantly across products and also across quintiles (Table 15). For diesel, indirect effects are almost 88% of the total while for sugar they are only 2%. For electricity, indirect effects are estimated at 36.5% of total effects. There is also an important difference across quintiles. For diesel, the indirect effects are practically the only effects for the poorest quintile while they become 93.4% for the richest quintile. For sugar, these shares are 1.03% and 2.84% 20