The paper focuses on direct effects of subsidy reforms.<sup>6</sup> This is not a major constraint for the case of food subsidies, but is an important limitation for energy subsidies. Given that food subsidies in Libya are subject to a quota system, the share of subsidized food products that could be used in the production of other goods is likely to be negligible.<sup>7</sup> For example, although sugar can be an input to the production of many processed food products, the quota system in place makes it unlikely that sugar used in food production is actually bought at subsidized prices. We will therefore assume that indirect effects for food are relatively small.<sup>8</sup> The treatment of bread in the analysis requires a number of assumptions. We have information on subsidized prices and quantities of flour (and yeast) for bakeries, both of which are supposed to be used in making bread, but we only have household expenditure data on bread. We translate the flour subsidy into a bread subsidy as follows. We estimate that 1kg of bread requires 1 kg of flour, and given disparate prices of bread across bakeries in Tripoli we assume that a 100-grammes baguette is sold for 5 Libyan cents. Therefore, the price of a kilogram of bread is 0.5 Libyan dinars. We are therefore able to map the household expenditure on bread into first a quantity of bread (using the 5 Libyan cents per 100-gramme baguette) and then into a quantity of flour, and present these information under the heading “Flour_bread” in the tables below.

While it is reasonable to assume that indirect effects are small in the case of food products, they are likely to be significant in the case of energy products. This is because energy subsidies in Libya are universal and very large in magnitude, and energy products are an important input in a number of production processes. Thus, the effect of increasing energy prices on consumer prices is likely large, particularly if producers pass on the associated increases in production costs to consumers. However, input-output data for the Libyan economy were not available and indirect effects could not be estimated.

The survey data suggest that Libyan households are large and their aggregate consumption is a low share of GDP (Table 5). Libya has a small population, estimated at just below 6.4 million people and about one million households. Aggregate annual household expenditure is estimated at 12.5 billion LYD, implying that annual expenditure per capita is about 1,967 LYD. Households that belong to the bottom two quintiles (the poorest households) are very large in size, at 9.5 and 7.4 members per household, respectively. On average, these household sizes are larger than those in neighboring countries. For example, household size in Morocco is 6.5 for the first quintile and 5.9 for the second quintile, while in Tunisia these figures are 5.8 and 5.0, respectively. Aggregate household expenditure is only about 12% of GDP.<sup>9</sup> This is atypical of the North African region, where surveys indicate that household expenditure is usually around two-thirds of GDP; but it is not totally surprising when we look at comparative data for

> 6 Direct effects represent the impact of subsidies via subsidized products consumed by households. Indirect effects represent the impact of subsidies via non-subsidized products consumed by households that use subsidized products as a production input. 7 Anecdotal evidence suggests that because not all households actually take advantage of the quota system for their food purchases, some of the surplus subsidized food ends up being used as cattle feed, or input to the production of sweets in bakeries for the case of sugar and flour. However there are no data available to quantify these observations and if animal raising and bakeries are household activities, these effects would be captured in the direct effects estimations. A share of subsidized food products is reportedly smuggled and sold illegally in supermarkets, thereby depressing market prices, so some effect from removing subsidies on these products may filter through to market prices, but that effect is likely very small.

> 8 We note here that this paper’s analysis does not capture the administrative costs of subsidies, which may be large given the system of quotas administered through cooperatives.

> 9 Although no data are available, hydrocarbons are believed to constitute about two-thirds of GDP in Libya. This suggests that estimated aggregate expenditure could be about 35 percent of non-oil GDP.

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